H.F. 282 (Beard); S.F. 213 (Larson) provides an ad hoc post-retirement adjustment equal to 25 percent of the original retirement annuity amount to current and future retired members of the Teachers Retirement Association (TRA) who were TRA members during the 1968-1969 school year and were not covered by the TRA Improved Money Purchase Program or who were TRA members and terminated TRA coverage before the 1968-1969 school years and did not take a refund from TRA.

1. Initial TRA Benefit Coverage. The Teachers Retirement Association (TRA) was created in 1935, to replace an earlier statewide teacher retirement program that was created in 1915 and that went bankrupt. Initially, TRA provided a money purchase retirement annuity as its only retirement benefit. A money purchase benefit is a defined contribution benefit, meaning that the benefit is determined by the amount of contributions that were accumulated and the investment income earned on those amassed contributions. The other two statewide pension plans, the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General) and the Public Employees Retirement Association (PERA) were defined benefit plans from their inceptions, 1929 and 1931 respectively. Defined benefit plans provide a benefit based on a formula with each year of service producing an increment of the total benefit, typically based on a percentage of covered salary.

2. TRA Improved Money Purchase Savings Clause. In 1969, in response to complaints from the teacher unions and others about the inadequacy of TRA retirement benefits, the Legislature created three alternative benefit programs. These alternative benefit programs were the Improved Money Purchase Program, to replace the prior money purchase program, the Career Average Salary Formula Program, to parallel the MSRS-General and PERA defined benefit plans, and the Variable Annuity Program, another defined contribution program that was invested wholly in equity (stock) investments. TRA members were provided an opportunity to elect between the three programs in 1969, with a deadline of 1973, and were placed in the Improved Money Purchase Program until they elected differently. Subsequent events, principally the 1973 shift to a final average salary defined benefit plan from the career average salary defined benefit plan and the mid-1970s recession, decline in the stock market, and inflation, made the Formula Program the optimal TRA benefit plan and the Improved Money Purchase Program and the Variable Annuity Program were eventually folded in the Formula Program, with the TRA members who never made an election retaining rights to an Improved Money Purchase Program benefit calculation if that produces a larger benefit. This right is the Improved Money Purchase Program savings clause and applies only to TRA members who taught during the 1968-1969 school year.

3. Current Large TRA IMP Savings Clause Retirement Annuities. With the substantial investment returns of the last 10-12 years, compared to moderate wage inflation (the economic factor that drives the Formula Program benefit), the Improved Money Purchase Program benefit can be a larger retirement annuity for the 1,500 to 3,000 TRA members estimated to still be covered by the Improved Money Purchase Program savings clause, enacted in 1974 as Minnesota Statutes, Section 354.55, Subdivision 17. Depending on the past level of pension contributions and the TRA investment returns over the past 30 years (especially the last dozen years), the member account accumulation can produce a very sizable benefit, especially in comparison to a formula benefit, if recent year salary increases have been moderate.

4. Groups of TRA Members Actually or Potentially Included in the Pre-1969 Teacher Benefit Plan Coverage Issue. The TRA members who feel that they are included in the pre-1969 teacher group or who could logically be expected to demand similar treatment if a special benefit increase is granted for pre-1969 teachers and a summary of their various arguments that they are aggrieved by the operation of the TRA Improved Money Purchase Program savings clause, are as follows:

   1. Active Members Who Elected the Career Average Formula Program 1969-1972. The group includes TRA members who were teachers before TRA added its three alternative benefit programs (Formula Program, Variable Annuity Program, Improved Money Purchase Program) in various combinations and who elected the formula program before the 1973 benefit increase (shift from career average salary formula to highest five successive years average salary formula). The group contends that the similarity of their service to that of teachers covered by the TRA Improved Money Purchase Programs savings clause (same service length, same member contributions) and the comparative lack of interest in retirement issues during the 1969-1973 period and the undeserved benefit advantage received by the savings clause group argues that the pre-1969 formula program electees should receive the equal advantage of the Improved Money Purchase Program or comparable equitable treatment.

   2. Active Members Who Elected Variable Annuity Program in Whole or in Combination with Other Programs. The group includes TRA members who were identical to the first group, but who elected coverage in whole or in part by the TRA Variable Annuity Program, a defined contribution plan invested totally in equity (stock) investments, during the 1969-1972 period. The Variable Annuity Program electee group, in addition to the arguments forwarded by the first group, contends that the legislative phase-out of the Variable Annuity Program (1974-1978) and the legislative elimination of the Variable Annuity Program (1989) constituted a legislative take-away of benefits that now can only be rectified by giving them the TRA Improved Money Purchase Program savings clause extension or comparable equitable treatment. This Variable Annuity Program group differ in the extent of Variable Annuity Program coverage that they elected during the 1969-1973 period (from three-sevenths of their total TRA coverage to their total TRA coverage), in whether or not they elected to retain their Variable Annuity Program coverage during the 1974-1978 phase-out of the Variable Annuity Program requested at the time by TRA Variable Annuity Program members, and in whether or not they elected to cease participation in the Variable Annuity Program in 1985, also requested by TRA Variable Annuity Program members.

   3. Current (Pre-1998) Retirees Who, If Currently Active, Would Have Been in the First or Second Groups. The group includes recent retirees who believe that they could obtain larger benefits under the TRA Improved Money Purchase Program savings clause then they are currently receiving. The retiree group makes the same arguments as the first and second groups and additionally argues that retirement should not eliminate them from the advantage of the TRA Improved Money Purchase Program savings clause or in comparable equitable treatment.

   4. Current TRA Active Members Who Missed the 1969 Election Because They Were Not Active or Were on Leave in 1969. The group includes teachers who had a break in service over the 1969-1970 school year and consequently were automatically placed in the TRA formula program by operation of law rather than individual election. The group argues that their similarity to the group covered by the TRA Improved Money Purchase Program savings clause should allow their inclusion in the savings clause or in comparable equitable treatment.

   5. Current TRA Active Members Who Purchased Prior Service Covering the 1969-1970 School Year. The group includes current actives who recently purchased prior service credit that included the 1969-1970 school year, where the TRA Improved Money Purchase Program savings clause originated. The group argues that the factors that prevented them from beginning teaching service during or before the 1969-1970 school year (such as on leave or prior military service) should not prevent them from having the advantages of the TRA Improved Money Purchase Program savings clause.

An expanded explanation of the situation of pre-1969 teachers and of the Teachers Retirement Association (TRA) Improved Money Purchase Program savings clause issue is attached, as Attachment A.

H.F. 282 (Beard); S.F. 213 (Larson) would grant a permanent (for life, or for a survivor’s life if a joint and survivor optional annuity was selected) ad hoc 25 percent of the original benefit amount benefit increase for current and future teachers who were members of the Teachers Retirement Association (TRA) and who taught during the 1968-1969 school year but were not covered by the TRA Improved Money Purchase Program for their ultimate retirement benefit calculation.

The proposed legislation raises the following pension and related public policy issues for Commission consideration and discussion:

1. Appropriateness of the Basis for the Ad Hoc Adjustment; Validity of Inequality Contention. The policy issue is the appropriateness of the special ad hoc post-retirement adjustment. The basis for the special ad hoc post-retirement adjustment is the contention of pre-1969 teachers covered by the Teachers Retirement Association (TRA) that they suffered inequitable pension treatment and thereby merit a special remedial benefit increase. The sponsors of the special ad hoc post-retirement adjustment suggest that the situation of the pre-1969 teachers duplicates or is analogous to the situation of the pre-1973 retirees of the various statewide retirement plans who benefited from a special two-part ad hoc post-retirement adjustment (12 percent on July 1, 1973, and 13 percent on January 1, 1974). The primary argument that has been made by the proponents of the potential legislation is that pre-1969 teachers who elected a benefit program other than the Improved Money Purchase Program were treated unfairly and unequally and have been denied justice. The proponents suggest that they paid as much or more in member contributions than those pre-1969 teachers who were accorded the "gratuitous" benefit of the TRA Improved Money Purchase Program savings clause coverage in 1973 and that equity demands that unincluded pre-1969 teachers have the same benefit advantages as other teachers. In particular, the proponents argue that some pre-1969 teachers were given additional benefits after all pre-1969 teachers were given an opportunity to make an irrevocable benefit program election and that the Variable Annuity Program was abolished in 1989 without affected TRA member consent. Whether proponents of the potential legislation made the same or greater contributions than teachers with access to the TRA Improved Money Purchase Program savings clause is not an argument to which the Commission has given credence in the past, since pension programs are large averaging pools, involve all types of cross subsidies, and the fact that one member could subsidize another member has never alone been sufficient to spark remedial legislation. The TRA Improved Money Purchase Program savings clause was adopted in 1973, when the TRA benefit program election period was shortened and made essentially irrelevant by the improvements that occurred in the formula program that year. Savings clauses are a common legislative device to avoid inadvertently harming some plan participants who have an unusual set of circumstances. Providing actual or potential TRA Improved Money Purchase Program selectors with a savings clause to accompany their mandatory transfer to the formula plan follows normal legislative practice. If there was any problem with the 1973 savings clause, it was the failure of the Legislature to sunset the savings clause at a reasonable date shortly after 1973. The 1989 elimination of the TRA Variable Annuity Program, although never presented to the Legislative Commission on Pensions and Retirement during the 1989 Session and belatedly added to the House Floor Amendment that became the 1989 Omnibus Retirement Bill, followed years of demands by TRA Variable Annuity Program participants that they be moved entirely into the TRA Formula Program, and actually constituted a benefit increase for these teachers in 1989. The claim of the pre-1969 teachers who are not covered by the TRA Improved Money Purchase Program savings clause has been litigated by them, in Jacobson v TRA, CX-00-2097, with the Minnesota Court of Appeals affirming the decision of the Ramsey County District Court that the plaintiffs were time barred from pursuing the potential cause of action, with cert denied by the Minnesota Supreme Court. While the case was decided on procedural issues rather than directly on its substantive merits, TRA had substantive defenses to raise in the event that the case was fully litigated and there is no reason necessarily to assume that the plaintiffs could have prevailed if they had brought their suit in a timely manner. The Commission rejected proposed legislation in 2000, on a unanimous vote, that would have extended the TRA Improved Money Purchase Program savings clause to all pre-1969 teachers based on an assertion that the pre-1969 teachers have an equitable claim to enhanced benefit treatment.

2. Actuarial Cost of the Potential Proposed Legislation. The policy issue is the actuarial cost to be borne by the Teachers Retirement Association (TRA) if the proposed legislation was enacted. The proposed post-retirement adjustment will apply to both current TRA retirees as well as TRA members who may not retire until some time in the more distant future. TRA prepared an actuarial cost estimate for H.F. 282 (Beard); S.F. 213 (Larson), assuming that the TRA active members covered by the special ad hoc post-retirement adjustment will retire on July 1, 2003, the effective date of the adjustment. The estimated actuarial accrued liability increase associated with the special ad hoc post-retirement adjustment is $405 million, broken out as follows:

 

There is a cautionary note that needs to be raised about the actuarial numbers set forth above. Minnesota Statutes, Section 356.215, Subdivision 1, Paragraph (f), defines the actuarial value of pension plan assets, utilizing a five-year smoothing technique that substantially overstates the value of TRA pension plan assets compared to its July 1, 2002, market value, as follows:

 

 

If the investment markets rebound to their late 1990s values in the next year or two years, the current statutory smoothing process used to calculate the actuarial value of TRA assets will appropriately avoid unnecessary volatility in market values, but if the recovery does not occur in the near term, the actuarial value of assets process will have only postponed the recognition of a market correction and during the period in which pension plan assets are overstated, policy makers may be misled about the actual financial consequences of a potential benefit increase such as this proposed post-retirement adjustment.

3. Consistency With the Commission’s Policy on the Funding of Ad Hoc Post-Retirement Adjustments. The policy issue is the conformity of the proposed ad hoc post-retirement adjustment with the Commission’s Principles of Pension Policy, which require that ad hoc post-retirement adjustments be funded separately from the regular plan funding and not simply added to the plan’s accrued liability. The proposed ad hoc increase would be added to the TRA actuarial accrued liability, reducing or eliminating the current TRA funding surplus in doing so. A better funding device under the Commission’s Principles of Pension Policy would be to either provide a State General Fund appropriation for this purpose or to surcharge TRA employer contributions, member contributions, or both sets of contributions for this purpose.

4. Precedent. The policy issue is the existence of a precedent for this type of ad hoc post-retirement adjustment and the potential that the proposed ad hoc post-retirement adjustment will create for other proposed adjustments. The primary precedents for this type of ad hoc post-retirement adjustment are the periodic ad hoc post-retirement adjustments that were granted to the pre-1973 retirees of the various statewide retirement plans, beginning in 1973 (Laws 1973, Chapter 728, Section 25 for TRA) and largely ending in 1989 (Laws 1989, Chapter 319, Article 15, Section 1), and the ad hoc post-retirement adjustments that were granted to the 1915 Law retired TRA members (pioneer teachers), beginning in 1955 (Laws 1955, Chapter 549) and ending in 1967 (Laws 1967, Chapter 654). The 1915 pioneer teachers also were included in the pre-1973 retiree increases. The pre-1973 retirees obtained ad hoc post-retirement adjustments because of their perception that they suffered a grievance when retirement annuities first payable after July 1, 1973, roughly doubled when compared to the benefit levels payable in the year prior to July 1, 1973. The 1915 law pioneer teachers became the object of post-retirement adjustments because of their perception of a grievance when their retirement annuities were reduced upon the financial meltdown of the Teachers Insurance and Retirement Fund to one-half in 1931 and not restored until 1955. In neither instance were there actual legal grievances, but rather political grievances because of the volume and vehemence of complaints from the group or moral grievances because of the merits of their presented case. No ad hoc post-retirement adjustments have been granted to statewide retirement plan retirees since 1989 other than to reflect post-retirement interest rate actuarial assumption changes and, if this requested ad hoc post-retirement adjustment is granted, based on perceived grievances, the adjustment would be a precedent from any other group that feels aggrieved because other similarly situated retirees end up with greater retirement annuities because of the circumstances prevailing.

5. Percentage Amount of the Requested Ad Hoc Post-Retirement Adjustment. The policy issue is the appropriateness of the amount of the post-retirement adjustment. The requested ad hoc post-retirement adjustment provides for a 25 percent increase, paralleling the 1973 ad hoc post-retirement adjustment. The 1973 adjustment, however, was prompted by and was based on the change in the post-retirement interest rate assumption from 3.5 percent to 5 percent that accompanied the 1973 legislation. For pre-1969 teachers who would have gained more than a 25 percent increase if they had been covered by the TRA Improved Money Purchase Program, this post-retirement adjustment potentially may be viewed more as an insult than as a remedy, and hence is incomplete and inadequate.

6. Appropriateness of the Base to Which the Increase Percentage is to be Applied. The policy issue is the appropriateness of using the original annuity or benefit amount as the base on which the percentage increase amount will be applied. The proposed legislation would apply the 25 percent ad hoc post-retirement adjustment percentage to the original retirement annuity or benefit amount rather than the currently payable annuity or benefit amount. To the best understanding of the Commission staff, no prior post-retirement adjustment has been specifically applied to an original benefit base rather than the current benefit base, although post-retirement adjustments granted in the 1950s and 1960s, before regular post-retirement adjustments were utilized, generally were applied to the original benefit amount in fact because the original benefit amount would be the same amount as the current benefit amount. For the applicable TRA retirees who have received their retirement benefits for any length of time, the adjustment will be smaller if applied to the original benefit amount than if applied to the current benefit amount, but the total cost of the adjustment is unlikely to be significantly affected by designating this benefit base. The choice of the benefit base for application of the adjustment amount should be a function of the goal for the adjustment. If enacted, the goal for this adjustment would be to change the perception of some TRA retirees that they were treated unfairly in the amount of their benefit compared to other TRA retirees. If using a smaller base for the adjustment will accomplish this goal, then selecting this base is not problematic.

7. Potential Windfall for Some Retirees. The policy issue is the appropriateness of the proposed ad hoc post-retirement adjustment if it provides undeserved windfalls to some retirees. Without a clear presentation of the substance of the grievance that the affected retirees believe that they suffered, it is difficult for the Legislature to ascertain whether or not it has actually resolved and remedied the issue or has merely validated a perceived grievance that will obligate the Legislature to eventually fund more. The potential for providing a windfall is heightened by including future retirees in the increase. The retirement annuities payable to future TRA annuitants will be affected by many factors unrelated to the pre-1969 teacher issue. If the future economy replicates the late 1970s, when wage inflation accompanied modest investment returns, a future TRA retiree receiving an immediate 25 percent increase on an inflated benefit under this proposed ad hoc post-retirement adjustment will not be treated equitably. Without a clearer understanding of the full range of the benefit amounts currently received by the affected pre-1969 teacher retirees or potentially payable to future pre-1969 teacher retirees, the ad hoc post-retirement adjustment also runs the risk that some retirees will receive much larger increases than they would have received if the TRA Improved Money Purchase Program savings clause had been extended to them, thereby providing those retirees with a windfall and creating further perceived grievances.