H.F. 1466 (Smith); S.F. 1304 (Pogemiller) mandates that the consulting actuary retained by the Legislative Commission on Pensions and Retirement conduct an additional actuarial valuation of a single restructured teacher retirement plan and fund, with the cost of the additional valuation report shared by the four teacher retirement plans.

As of July 1, 2002, the actuarial condition of Minnesota’s four teacher retirement plans, the Teachers Retirement Association (TRA), the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), and the St. Paul Teachers Retirement Fund Association (SPTRFA), is 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 teacher pension plan assets compared to their July 1, 2002, market value, as follows:

If the investment markets rebound to their late 1990’s values in the next year or two years, the current statutory smoothing process used to calculate the actuarial value of 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 potential benefit increase or related decisions.

H.F. 1466 (Smith); S.F. 1304 (Pogemiller) mandates an additional actuarial report by the consulting actuary retained by the Legislative Commission on Pensions and Retirement, paid for by the four teacher retirement plans, on one potential option for a restructuring of the four plans into a single plan and fund.

The proposed legislation raises several pension and related public policy issues for Commission discussion and consideration, as follows:

1. Lack of Need in Law for Report. The policy issue is the appropriateness of a legislative mandate for a special actuarial report when the four applicable teacher retirement plans are permitted under current law and the current Commission contract with Milliman USA, its consulting actuary, to request and obtain any supplemental actuarial work at their cost, that they desire. The proposed legislation thus mandates something that the parties can undertake voluntarily. The proposed legislation does not provide any authority that does not already exist under current law or Commission practice.

2. Appropriateness of Mandatory Study of Only One Potential Outcome. The policy issue is the appropriateness of mandating an actuary cost estimate of the results of only one potential teacher retirement plan restructuring scenario, when many potential teacher retirement plan restructuring scenarios exist. The proposed legislation, if recommended by the Commission, would represent a de facto favoring of one approach to the potential reconfiguration of the four Minnesota teacher retirement plans. The Commission, however, has only been presented with the broadest outline of a restructuring proposal, has not seen the proposal in detail, and has not identified or analyzed the policy implications of that restructuring outline. The restructuring outline may favor one of the four retirement plans, or one group of the four retirement plans, and favorable action by the Commission may subsequently be argued to be a precedent for a particular reconfiguration approach to short-circuit a more thorough Commission analysis of its options.

3. Appropriateness of Restructuring Approach When 2001 Report Requirement Was Not Fulfilled. The policy issue is the appropriateness of pursuing the February 15, 2002, proposal submitted by the four teacher retirement plans in response to First Special Session Laws 2001, Chapter 10, Article 11, Section 20, when that February 15, 2002, report failed to comply with the mandate of the 2001 law and no subsequent official work on the mandated report has occurred. First Special Session Laws 2001, Chapter 10, Article 11, Section 20, provided:

The February 15, 2002, report by the four teacher retirement plan administrators presented a limited agreement on the broad approach to a restructured teacher retirement plan, but did not present a detailed proposal, did not present the required proposed legislation, and did not present a detailed schedule and timetable for the completion of a restructuring. In presenting the report to the Commission during the 2002 Session, the four teacher retirement plan administrators acknowledged their failure to meet the 2001 mandate and promised to continue work to complete the mandate for presentation to the 2003 Session Commission. The four administrators have not provided the Commission staff with any supplementary report as promised.

4. Appropriate Manner in Which Study Contents Will Be Assembled. The policy issue is the most appropriate manner in which the details of the study will be assembled. Since the February 15, 2002, report is substantially incomplete, the proposal to be submitted for actuarial costing is uncertain and will need to be further developed. The current contents of the February 15, 2002, report dwell on the legal status of the proposed restructured plan and the size of its governing board, which have no impact on the actuarial valuation of a restructured plan. The specific benefit accrual rates, final salary averaging period, vesting periods, ancillary benefit levels, and post retirement adjustment mechanisms will drive any actuarial calculations. Policymakers should be involved in detailing out the proposal, and if the Legislature is not the party to do so, the task force assembled for the 2001 report would probably be the best alternative to detail the specific plan elements that generate actuarial cost. Amendment LCPR03-162 requires that the task force for the 2001-2002 study be the consultative body.

5. Lack of Allocation Method for the Cost of the Actuarial Study. The policy issue is the failure of the proposed legislation to specify the manner in which the cost of the required actuarial report is to be allocated between the four retirement plans. Absent the presentation of a convincing argument for a more appropriate allocation method, and equal allocation between the four plans would appear to be the fairest method. Amendment LCPR03-159 requires an equal allocation of the cost.

6. Appropriate Fiscal Agent for the Payment of the Cost of the Supplemental Actuarial Study. The policy issue is the identification of the entity which should service as the fiscal agent of the payment of the cost of the supplemental actuarial study and its allocation between the four plans. While the commission has served this function in the past, the Commission’s budget for special actuarial projects has been so seriously impacted by recent budget reductions and is unlikely to be restored for the upcoming biennium, the Commission will not be able to perform that function for this study. The sponsor of the proposed legislation has been indicated as the Minneapolis Teachers Retirement Fund Association (MTRFA), so it would be appropriate to utilize MTRFA as the fiscal agent for the study. Amendment LCPR03-160 requires the MTRFA to serve as the fiscal agent for the proposed study.

7. Appropriateness of Imposing the Cost of an Additional Study When Retirement Plan Costs Are Currently High. The policy issue is the appropriateness of mandating an additional study on the four teacher retirement plans, with its corresponding cost, when the administrative costs of the four teacher retirement plans are very high. The following indicates the administrative expenses of the four teacher retirement plans as indicated in the July 1, 2002, actuarial valuation, in gross and per member:

Amendment LCPR03-161 clarifies and revises the style and usage of the proposed legislation without intentionally changing the intent of the proposed legislation.