Summary of H.F. 282 (Beard); S.F. 213 (Larson)

H.F. 282 (Beard); S.F. 213 (Larson) provides a 25 percent ad hoc post retirement adjustment (to be computed on the original annuity amount at the time of retirement) for certain active and retired members of the Teachers Retirement Association (TRA). The eligible members are retired and active TRA members who retire after January 15, 1998, who were TRA members during the 1968-1969 school year and were not covered by the TRA Improved Money Purchase Program (IMP), or who terminated TRA coverage before the 1968-1969 school year and later returned as active TRA members and were eligible to elect various forms of defined contribution and defined benefit TRA coverage available under Minnesota Statutes 1971, Section 354.55.

The authors may wish to offer an amendment, LCPR04-154, which would revise the bills to provide a benefit adjustment of 45 percent of the difference, if positive, between the single life annuity amounts at the time of retirement of a formula (high-five) annuity and an Improved Money Purchase benefit on that same date. The eligibility group is expanded slightly by revising the retirement date indicated above from January 15, 1998, to January 1, 1998.

Background Information on the Improved Money Purchase Program and Other Election Options

Some TRA members who taught in 1969 are covered by a savings clause which gives them access to a defined contribution annuity (referred to as an Improved Money Purchase (IMP) annuity), if that annuity provides a higher benefit than a TRA defined benefit annuity (which is referred to in TRA statutes as a formula annuity). It was long presumed that the formula annuity would always provide the higher annuity and that the savings clause had no real value, but due to extraordinarily high returns in the 1990s which boosted the value of IMP benefits, many individuals covered by the savings clause have received an unexpected windfall at retirement, with benefits in excess of that provided by the formula plan.

H.F. 282 (Beard); S.F. 213 (Larson) is an effort to boost the benefits of TRA members who taught in 1969 or in the early 1970s and who do not have access to the savings clause. They do not have access to the savings clause because decades ago they actively elected coverage other than the IMP. The bills would provide a 25 percent increase in the annuity of these individuals, as of July 2003. This is not equivalent to an IMP benefit – the 25 percent increase might be lower or considerably higher than an IMP benefit, depending on the individual and the condition of the investment markets over time.

To better understand the bills, it is necessary to provide a review of the benefit options available in TRA law in the late 1960s and early 1970s, as follows:

1. Nature of Early TRA, MSRS, and PERA Plans. The Teachers Insurance and Retirement Fund (TIRF), the predecessor to the Teachers Retirement Association (TRA), was created in 1915. TRA was established in 1935 to replace the bankrupt TIRF. The pension plans provided by the TIRF and the early TRA plan were quasi defined contribution plans, and were referred to as "money purchase plans." In a pure defined contribution plan, the value of the benefit is determined by the accumulated contributions and the investment income earned on those contributions, and there can be no unfunded liability. TRA’s money purchase plans were primarily defined contributions plans, but unfunded actuarial accrued liability was created in TRA due to provisions of law which added to the value of the money purchase annuity, including various disability and other supplemental benefits, and due to assuming liabilities from the old TIRF plan.

   In contrast, 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-General), were defined benefit plans from their inceptions, in 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.

   The early MSRS and PERA defined benefit plans were quite modest by current standards. For covered salary, the early MSRS and PERA programs used a flat dollar amount retirement benefit, then (1957-1973) used a career average salary rather than the high-five average salary. When career average salary is used to compute a benefit for a long-service individual, that salary base is more typical of the salary received by the individual in mid-career, 15 years or more prior to retirement. When the high-five average salary is used, which was first adopted in 1973, the benefit is based on the salary received by the individual a few years prior to retirement.

2. TRA Plan Changes, 1969: New and Revised Programs. TRA’s money purchase plan had been revised several times prior to 1969, but by 1969 there was growing concern that the plan continued to provide inadequate benefits. In response to complaints from the teacher unions and others about the inadequacy of TRA retirement benefits, the 1969 Legislature created alternative benefit programs in TRA and the various member groups were allowed to elect one of the programs or a combination of programs. These elections were to occur no later than June 30, 1972. These alternative benefit programs were as follows:

   1. The Improved Money Purchase Program (IMP). The IMP replaced the prior money purchase program. For Coordinated members, the money purchase plan in prior law was revised by requiring, for purposes of computing the annuity, a doubling of value of employee contributions plus investment earnings credited prior to July 1, 1957. For both Basic and Coordinated members, the monthly payments payable under the annuity were to be computed assuming that annuity assets, prior to payout, earned a 3.5 percent return, rather than a three percent return. That interest rate assumption change allowed higher monthly benefits for any given level of reserves.

   2. Career Average Salary Formula Program. A Career Average Salary Formula Program was established in TRA to parallel the MSRS-General and PERA defined benefit plans. The salary used in the computation was the career average salary rather than the high-five as currently used for Minnesota pension plans. The accrual rates, the percent of the career average salary received per year of service, varied depending upon whether the individual was a Basic or Coordinated member. They also varied depending upon whether this was the only retirement option chosen by the teacher, or whether the teacher chose this option in combination with another of TRA’s new plans. The accrual rates also strongly favored long service, with a very low rate for each of the first ten years of service, increasing with each decade of service, reaching their highest level only after the teacher had provided 40 or more years of service.

   3. Variable Annuity Program. The Variable Annuity Program is another defined contribution program. However, while the rate of return credited to the money purchase program presumably was the rate of return earned on TRA assets (a portfolio composed of a combination of cash, bond, and stock investments under State Board of Investment (SBI) management), any assets in Variable Annuity Program Accounts were to be invested solely in stock investments.

3. Plan Elections by 1968-1969 TRA Members. TRA members (both Basic and Coordinated) who rendered service during the 1968-1969 school year and any member who had at least 20 years of service credit as of July 1, 1969, were allowed to elect coverage by one of the above programs or a combination of these programs as specified below. The IMP was the default option. Teachers were instructed to complete the election form only if they wished to have coverage other than the IMP. The options were as follows:

1. Improved Money Purchase Program. Teachers in this group would be covered by this option unless they elected other options as specified below.

2. Career Average Salary Formula Program.

3. Variable Annuity Program. This option was open to Coordinated members only.

4. Combined Improved Money Purchase Program and Variable Annuity Program. Under this option, the employee contributions and corresponding employer contributions would be divided between these two defined contribution programs. Four-sevenths of the contributions were placed in the Improved Money Purchase Program, and the remaining contributions were directed to the Variable Annuity Program.

5. Combination Career Average Salary Formula Program and Variable Annuity Program. This option combined a defined contribution program and a defined benefit program, with four-sevenths of the contributions going to the formula program and the remainder to the Variable Annuity Program.

4. TRA Plan Changes, 1969: Plan Elections by New Hirees. The legislative changes in 1969 created somewhat different options for the post-1969 hirees than for existing employees. The IMP was closed to post-1969 hirees. The default option for the post-1969 hirees was the Career Average Salary Formula Program. These hirees were asked to complete an election form only if they wished to have some other available option. The available options for this group were as follows:

   1. Career Average Salary Formula Program. This defined benefit plan was the default option.

   2. Variable Annuity Program.

   3. Combination Career Average Salary Formula Program and Variable Annuity Program. This option combined a defined contribution program invested entirely in stock with a defined benefit program, with four-sevenths of the contributions going to the formula program and the remainder to the Variable Annuity Program.

5. TRA Plan Changes, 1973 and Later: Move to High-Five Average Salary Defined Benefit Plan, Consequences. The 1973 Legislature replaced the TRA Career Average Salary Formula Program with the High-Five Average Salary Program. The legislation also made similar revisions in MSRS, PERA, and other major plans, and provided ad hoc benefit improvements to those already retired in an effort to raise the monthly benefit paid to retirees.

   The shift from career average salary to the high-five average salary for computing benefits under Minnesota’s larger public defined benefit plans dramatically improved the benefit levels provided by those plans. TRA members who a few years earlier had chosen the pure IMP or Variable Annuity options became dissatisfied because their decision to elect those programs was based on comparisons to the less generous Career Average Salary Formula Program. To address the concerns of these TRA members, laws were enacted which moved all TRA members into the High-Five Average Salary Program or a combination of the High-Five Average Salary Program and the Variable Annuity Program. Specifically:

   1. TRA members previously covered under the IMP Program and who performed teaching service after June 30, 1972, were transferred to the High-Five Formula Program as of July 1, 1973. These transferred members retained rights under a savings clause to an IMP Program benefit calculation if that produced a larger benefit. This Improved Money Purchase Program savings clause applies only to TRA members who taught during the 1968-1969 school year or who were on an approved leave of absence. That savings clause, which remains in current statute as Section 354.55, Subdivision 17, reads:

Teachers who retire after June 30, 1973 and who failed to make an election pursuant to Minnesota Statutes 1971, Section 354.145, subdivision 1, clause (1) and subdivision 2, clause (1) shall have their annuity at retirement computed under section 354.44, Subdivision 2 or 6 [the IMP or formula annuity, respectively], whichever is larger.

2. TRA members who were previously covered under either the Combined IMP and Variable Annuity Program or the Total Variable Annuity Program and who performed teaching service after June 30, 1972 were transferred to the Combined High-Five Average Salary Formula Program and Variable Annuity Program. The Commission staff is not aware of any savings clause relating to this provision.

The Combined High-Five Average Salary Formula Program/Variable Annuity Program continued in existence until 1989, when all Variable Annuity Program assets were transferred to the High-Five Average Salary Formula Program. The 1989 omnibus pension bill (Laws 1989, Chapter 319, Article 9, Sections 1 to 4) transferred all Variable Annuity Program accounts to the High-Five Average Salary Formula Program and specified that the annuities of these members would be computed solely under the defined benefit plan provisions. The Commission staff is not aware of any savings clause in law that would provide members, who had accounts that transferred in 1989, with a full or partial benefit from the Variable Annuity Plan or Improved Money Purchase Plan if that prior plan happened to provide a benefit greater than that payable to the member from the full defined benefit program.

For those individuals who retired in 1989 or earlier, all retiree assets relating to Variable Annuity Program annuities also transferred in 1989. From that date forward, post retirement adjustments on the benefit computed under the Variable Annuity Program annuities are generated by SBI’s Post Retirement Fund.

The 1989 termination of the remaining Variable Annuity Plan Accounts was desired by TRA administrators, presumably with the support of the various teacher unions and other interest groups covered by the pension plans, because these groups concluded that the 100 percent defined benefit plan approach would provide a superior benefit. The House Floor Amendment that constituted the 1989 omnibus pension bill was assembled by TRA, PERA, and MSRS administrators, and administrators from other Minnesota larger public plans. The Commission was provided with a general overview of the broad changes sought by TRA, PERA, MSRS, and other pension systems, but the Commission never reviewed language and took no formal position on the proposal. The 1989 omnibus pension bill originated as a major delete-everything amendment added by the House near the end of the session to a minor Duluth Teacher Retirement Fund Association (DTRFA) bill. The Senate passed the omnibus pension bill on the last day of the Session.

Groups of TRA Members Actually or Potentially Included in the Pre-1969 Teacher Benefit Plan Coverage Issue

TRA members who would be covered by H.F. 282 (Beard); S.F. 213 (Larson), or who could demand a similar special benefit increase if H.F. 282 (Beard); S.F. (Larson) were to pass, include the following:

1. Active Members Who Elected the Career Average Formula Program 1969-1972. The group includes TRA members who were teaching in the late 1960s and early 1970s 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). This group, which is covered by H.F. 282; S.F. 213, contends that they are similar to the IMP savings clause group and are equally deserving, justifying an IMP-like benefit or comparable equitable treatment. They are comparable to the IMP group by providing service during the same period, by providing comparable length of service, and by making comparable member contributions.

2. Active Members Who Elected Variable Annuity Program in Whole or in Combination with Other Programs. This group, which also appears to be covered by H.F. 282; S.F., includes TRA members who were comparable to the first group noted above, but who elected variable annuity coverage in whole or part. This group can make arguments comparable to the above, and in addition might contend 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 IMP savings clause extension or comparable equitable treatment.

3. Pre-1998 Retirees Who Would Have Been Eligible Under H.F. 282; S.F. 213 if Retirement Had Occurred After January 15, 1998. H.F. 282 (Beard); S.F. (Larson) applies to individuals in certain groups who retire after January 15, 1998. Some individuals who retired before that date may believe they could obtain larger benefits under the TRA IMP savings clause, or under some provision providing comparable treatment, than they are currently receiving.

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 IMP 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, which is not covered under H.F. 282 (Beard); S.F. (Larson), includes current active members who recently purchased prior service credit that included the 1969-1970 school year, when the IMP savings clause originated. The group argues that the factors that prevented them from providing teaching service during or before the 1969-1970 school year (such as a break in service due to maternity, or a leave, or providing military service during that period) should not prevent them from having the advantages of the IMP savings clause or comparable treatment.

Impact of 1973 TRA Improved Money Purchase Program Savings Clause

The savings clause enacted in 1973 (Minnesota Statutes, Section 354.55, Subdivision 17, which appears on page 3) is applicable to TRA members who taught or were on an approved leave during the 1968-1969 school year. The savings clause extends, to individuals who were transferred from IMP coverage to the full formula annuity, a right to receive an IMP benefit if the value of that option is greater than the formula annuity.

The value of an IMP benefit is determined by investment market returns. Because of the substantial investment returns during the 1990s compared to moderate wage inflation (the economic factor that drives the formula annuity benefit), the IMP benefit provides a larger retirement annuity for some TRA members covered by the IMP savings clause. Thus, the savings clause that was put in place in the early 1970s, but not used for over 20 years, is now being utilized.

In 1999, TRA requested that Buck Consultants, the actuarial firm retained by TRA, provide an estimate of the cost of the savings clause, given only the active and deferred members eligible for that coverage under current law. The cost of the higher annuities paid to the existing retirees was not included. The report indicated that 3,811 current active TRA members and 1,057 deferred members were potentially eligible. Because the estimates require a comparison of the value provided by these two alternative benefits at the assumed future retirement date, the actuary made assumptions about future investment rates of return up to the assumed retirement date, because those assumed rates of return will impact the value of the IMP benefit. The actuary concluded that the savings clause in current law may add an additional $237 million in liability if TRA assets earn 8.5 percent per year. If the average rate of return during the five years prior to 1999 was earned, which was 14.80 percent annually, $514 million in liability would be added. Extending the savings clause to other groups, or providing an ad hoc benefit increase for the non-savings clause group, as H.F. 282 (Beard); S.F. (Larson) would do, will further add to these liabilities.

Recent Proposals/Actions Attempting to Boost Benefits of Non-IMP TRA Members

The current bills are the most recent effort to address the claimed grievance of 1960s-1970s TRA members who were not covered by the IMP savings clause. This general issue has been before the Legislature for several years. The first instance discussed here occurred in 1999.

1. During the 1999 Legislative Session, companion bills H.F. 2285 (Kalis); S.F. 2239 (Larson): Extension of Improved Money Purchase Plan Option to TRA Members Who Elected Another Option, were introduced. These bills would have allowed current teachers who became TRA members on or before January 1, 1969, and who elected coverage other than the IMP, to have access to an IMP benefit if that provides a higher benefit than the defined benefit plan. The Commission reviewed the situation created by the IMP savings, and the bills (H.F. 2285 (Kalis); S.F. 2239 (Larson)) requesting comparable treatment for those not covered by the IMP savings clause, at the Commission’s July 1999 interim meeting.

   TRA’s retained actuary, Buck Consultants, was asked to estimate the cost of H.F. 2285 (Kalis); S.F. 2239 (Larson). Their report, which concluded that about 4,000 teachers would be eligible under the 1999 bills, predicted a cost ranging from $417 million in additional liability assuming 8.5 percent investment returns, to $759 million assuming a continuation of 14.80 percent investment returns. These liabilities would be in addition to those imposed by the savings clause in current law, as indicated previously, for the group currently eligible.

2. In 2000, at the Commission’s February 28, 2000, meeting, the Commission again reviewed H.F. 2285 (Kalis); S.F. 2239 (Larson), but in the form of a delete-everything amendment which would have capped TRA’s cost at $350 million. Mr. Gary Austin, TRA’s Executive Director, testified that the TRA Board was not in favor of expanding eligibility for an IMP-like benefit unless the total cost of those additional benefits was financed by an outside source. Hank Stankiewicz and Greg Burns, representing Education Minnesota, stated that their membership voted overwhelmingly not to support the type of change provided by 2285 (Kalis); S.F. 2239 (Larson). The Minnesota Department of Finance also opposed the legislation. The Commission voted and recommended that the bills should not pass.

3. In 2002, companion bills S.F. 3456 (Larson); H.F. 3713 (Molnau) were introduced. These bills were similar to the proposed 2000 legislation discussed above, but TRA’s maximum liability would have been capped at $300 million rather than $350 million. These bills were not heard.

4. Court Action During the 2002-2003 Biennium. The claim of the pre-1969 teachers who are not covered by TRA’s IMP savings clause has been litigated in Jacobson v. TRA, CX-00-2097. The Ramsey County District Court concluded that the plaintiffs were time barred from pursuing the potential cause of action. The Minnesota Court of Appeals affirmed that decision, 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.

Discussion and Analysis of H.F. 282 (Beard); S.F. 213 (Larson)

H.F. 282 (Beard); S.F. 213 (Larson) provides a 25 percent ad hoc post retirement adjustment (to be computed on the original annuity amount at the time of retirement) for certain active and retired TRA members. The eligible group are retired and active TRA members who retire after January 15, 1998, who were TRA members during the 1968-1969 school year and who were not covered by the IMP, or who terminated TRA coverage before the 1968-1969 school year, did not take a refund, and later again became active TRA members and were eligible to elect various forms of defined contribution and defined benefit TRA coverage available under Minnesota Statutes 1971, Section 354.55.

Individuals who are covered by the IMP savings clause received an unexpected windfall when the value of an IMP benefit began to exceed the value of a formula annuity, due to the impact that unusually strong investment markets in the late 1990 had on computed IMP benefits. H.F. 282 (Beard); S.F. 213 (Larson) are the most recent legislative bills which attempt to enhance benefits to the non-IMP group. Unlike earlier bills, which would have computed an IMP-like benefit for the groups covered by the bills, possibly with a cap, the current bills would instead increase each annuity by 25 percent.

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

1. Remedy Inconsistent with the Claimed Harm; Windfalls. The groups seeking a benefit enhancement have contended in the past that that it is unfair that the IMP benefit was not extended to them, although in the past they rejected the IMP. The proposed remedy, a 25 percent increase in their formula annuity, does not accurately address the claimed harm. The difference between an individual’s formula benefit and the benefit he or she would have received if eligible for an IMP benefit depends on the specific circumstances applicable to the individual (when the individual commences service, the timing and length of any breaks in service, the salary history of the individual, and the date of retirement). For some, a 25 percent increase in the formula benefit might worth less than an IMP benefit, while for others, it might be worth considerably more. The present bills may be before the Commission because the Commission, the Legislature, and the courts have rejected arguments that the IMP should be extended to certain non-IMP teachers. Thus, the present proposal is a fallback proposal, and is flawed because the proposed solution does not fit the claimed harm. Taking action on the current bills may merely validate a perceived grievance, an action which will obligate the Legislature to eventually provide further benefit adjustments and further funding. Taking action on this proposal may lead to further proposals which would allow teachers to have an IMP benefit, or 125 percent of a high-five formula annuity, whichever is greater.

2. Potential Windfall Issue, Active Members. The potential for providing a windfall is heightened by including active members (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. Investment returns, which drive IMP benefits, were negative for a few years prior to 2003 and may be modest in the near future. A 25 percent increase computed on a formula annuity could be considerably higher than an IMP-like benefit. For some currently active teachers, it is quite possible that when they retire a formula plan annuity will have more value than an IMP benefit. Providing these individuals with a 25 percent increase on their formula annuity, in lieu of offering an IMP-like benefit, would be unnecessary. There would be no basis for a claim that they have been harmed by not being eligible for an IMP benefit.

3. Validity of Inequality Contention/Need for Remedy. 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 IMP were treated unfairly and unequally and have been denied justice by not now having access to an IMP benefit, although they previously rejected that benefit, or to some comparable benefit. 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 IMP savings clause, and that equity demands that unincluded pre-1969 teachers have the same or similar benefit advantages as the IMP teachers. A related argument is that the Variable Annuity Program was abolished in 1989 without affected TRA member consent, and that elimination caused harm which deserves to be remedied.

   Whether proponents of the potential legislation made the same or greater contributions than teachers with access to the TRA IMP savings clause is not an argument to which the Commission has given credence in the past, since pension programs are large averaging pools involving all types of cross subsidies. The issue of some members subsidizing other members has never alone been sufficient to spark remedial legislation.

   Regarding the use of a savings clause, the IMP 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 IMP selectors with a savings clause to accompany their mandatory transfer to the formula plan follows normal legislative practice. If there was a 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.

   Although it may now be claimed that the elimination of the TRA Variable Annuity Program in 1989 caused harm, the Legislature was reacting to years of complaints from teachers who chose the Variable Annuity Program option in the 1960s or 1970s. By the 1980s, these same teachers were complaining that the Variable Annuity benefit would be inferior to a formula benefit. They wanted the Legislature to relieve them of the consequences of having elected Variable Annuity benefits. In 1989, the Variable Annuity Program elimination and the transfer to the formula annuity program were viewed as a desirable benefit improvement and was sought by TRA and its membership. Language containing the elimination of that program was never presented to the Legislative Commission on Pensions and Retirement during the 1989 Session and was belatedly added to the House Floor Amendment that became the 1989 Omnibus Retirement Bill.

   Finally, as noted previously, the claim of the pre-1969 teachers who are not covered by the IMP savings clause has been litigated in Jacobson v. TRA and was rejected by the courts. The Ramsey County District Court concluded that the plaintiffs were time barred from pursuing the potential cause of action. Although the case was decided on a procedural issue 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.

4. Violation of Equity. The Commission may conclude that the current request is similar to previous legislative requests by these TRA groups, which the Commission recommended not to pass. The current request may violate notions of equity by requesting that Commission revisit old issues on which it has already decided.

5. Actuarial Cost of the Potential Proposed Legislation. The policy issue is the actuarial cost to be borne by TRA if the proposed legislation is 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. After H.F. 282 (Beard); S.F. 213 (Larson) was introduced last year, TRA had an actuarial cost estimate prepared 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 was $405 million, as indicated in more detail below. It may be necessary to revise the assumed retirement date given the passage of another year, and the July 1, 2003, actuarial valuation is now available. The passage of another year might lead to some revision in the following cost estimate, but presumably not a substantial revision. The proposal has a considerable cost.

*January 16 through December 31, 1998

The results of the estimate can be incorporated into the most recent TRA actuarial valuation results to provide a rough estimate of the impact of the proposed legislation. When the actuarial cost estimate was done last year, it was assumed that the retiring active members had an average salary of $57,000. The following actuarial presentation assumes a salary for these individuals of $59,850, which follows from assuming a five percent salary increase. This is roughly consistent with the table in the most recent actuarial report, which in part indicates the current salary of active members nearing retirement age.

While the above table suggests that TRA would remain fully funded (a funding ratio of 100.71 percent) and would have a slight contribution surplus (sufficiency) of 0.94 percent of covered payroll or about $29 million, a cautionary note needs to be raised about the actuarial numbers provided above. Minnesota Statutes, Section 356.215, Subdivision 1, paragraph (f), defines the actuarial value of pension plan assets by utilizing a five-year smoothing technique. Given troubled investment markets in the last several years, that methodology substantially overstates the actual current market value of TRA’s portfolio. Reliance on the actuarial value of assets as now defined in law will cause problems for policy makers unless there is a sustained recovery of the investment markets. The stock market was strong in Calendar Year 2003 following three years of heavy losses. If the markets do remain strong in the foreseeable future, 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 is not sustained, the actuarial value of assets process will have only postponed the recognition of a long-term market correction. 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.

The following compares the July 1, 2003, TRA actuarial value of assets to TRA’s market value on that same date, and recomputes the funding ratio. When market value is used, TRA is only 94 percent funded, and rather than having a surplus which lowers TRA’s contribution requirements, TRA has an unfunded liability to be amortized which adds to the contribution requirements.

The above result follows from the latest TRA actuarial valuation, but using market value rather than the actuarial value of assets. The results above do not incorporate the proposed benefit improvements under H.F. 282 (Beard); S.F. 213 (Larson). The following table shows TRA’s actuarial valuation data including the impact of H.F. 282 (Beard); S.F. 213 (Larson), and using the market value of assets rather than the actuarial value. The resulting funding ratio would be 92 percent. TRA would have $1.353 billion in unfunded liability, creating an amortization requirement boosting the total required contributions to 11.57 percent of payroll. Given the ten percent of payroll contributed to the fund under law, the plan would have a contribution deficiency of 1.57 percent of payroll.

6. Funding of Benefit Improvement, Conflict with Pension Policy Statement. The policy issue is the inconsistency of this proposal as drafted with the Commission’s Principles of Pension Policy. That policy document states, under "Funding of Post-Retirement Adjustments," that ad hoc post retirement adjustments should 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 to cover the cost, or to surcharge TRA employer and/or employee contributions, or to use a combination of both approaches.

7. Precedent. The primary precedents for the proposed 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, 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 were granted ad hoc post retirement adjustments because of their perception that they suffered a grievance when retirement annuities for new retirees after July 1, 1973, roughly doubled compared to the benefit levels payable to the pre-July 1, 1973, retirees. That increase followed from the change from career-average-salary retirement annuity formulas to use of the high-five average salary formulas. The 1915 law pioneer teachers were granted ad hoc post retirement adjustments because of their perception of a grievance when their retirement annuities were reduced by 50 percent following the financial collapse of the Teachers Insurance and Retirement Fund in 1931. Full benefits were 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.

8. Pressure for Benefit Enhancements from Other Groups. H.F. 282 (Beard); S.F. 213 (Larson) provides a benefit enhancement to individuals who individuals who, decades ago, actively elected a benefit plan other than the IMP. Members who had the IMP savings clause received an unexpected windfall due to the investment markets of the 1990s, and the contention is that fairness requires that others, who did not have the IMP savings clause because they did not want the IMP, should receive a comparable benefit. If these bills are recommended to pass, other groups within TRA or other plans may request further benefit adjustments. If any teacher active in the late 1960s is to receive an enhanced benefit, either through the IMP savings clause or H.F. 282 (Beard); S.F. 213 (Larson), teachers who began their careers in the mid 1970s or later may seek similar adjustments. One group who might seek a post retirement increase like that proposed in H.F. 282 (Beard); S.F. 213 (Larson) is TRA retirees who taught in the 1960s and early 1970s but who retired before January 15, 1998. The current bills would increase the annuities of retirees only if retirement occurred after January 15, 1998. Bills drafted in previous years to address the concerns of TRA groups who seek higher benefits, something comparable to those covered by the IMP, covered relevant TRA members who retired after June 15, 1996. Any expansion of coverage will increase the cost.

9. 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 to 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 to 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. Perhaps this base is used because in prior testimony on previous bills dealing with this pre-1969 teacher group Gary Austin, TRA’s Executive Director, indicated that this proposed base was acceptable.

Potential Amendments for Commission Consideration

1. Amendment LCPR04-002 makes changes in the bills to provide clarity and to update the effective date. Language is added stating that TRA’s Executive Director must identify eligible individuals by October 1, 2004, with any benefit increase first payable on November 1, 2004, for existing retirees. Language is added to clarify that this is not a one-time benefit. Rather, the increased benefit is payable for life or for the duration of the selected optional annuity, whichever applies, and is included in the base for determining future post retirement increases. Retroactive payments and payments to an estate are not authorized. Any individual eligible for an IMP benefit is not eligible for the increase proposed under these bills. The effective date is changed from July 1, 2003, to July 1, 2004.

2. Amendment LCPR04-003 is an alternative to LCPR04-002 or LCPR04-004. This amendment places controls on the amount of the increase (page 1, line 12) and the cost of the increase (page 2, line 2). The 25 percent increase is revised to a percent increase to be specified, and total cost of the increase cannot exceed an amount to be specified. If the cost of the increase is greater than the permitted ceiling, the increase must be prorated. The increased annuities for existing eligible retirees commence on November 1, 2004, are payable for life or for the duration of the selected optional annuity form, and are part of the base for further post retirement increases. Retroactive payments and payments to an estate are not authorized. TRA is required to report to the Commission and various legislative committees on the additional annuity amounts payable. The bill is effective July 1, 2004, rather than on the same date in 2003.

3. Amendment LCPR04-004, an alternative to LCPR04-002 and LCPR04-003, is comparable to LCPR04-003 except that the additional benefit being offered is an IMP benefit, if it provides a higher annuity than a formula benefit. Presumably, the real desire of those covered by the current bills is to receive an IMP benefit. However, the Commission may wish to be aware that this general approach has been taken in past bills and the Commission recommended that those bills should not pass. Thus, taking this approach would contradict the actions of previous Commissions. If the Commission does wish to use this amendment, the Commission may wish to insert an amount into the blank on page 1, line 35, setting a maximum cost.

4. Amendment LCPR04-154, an amendment that the bill authors may wish to offer, would revise the bills to provide a benefit adjustment of 45 percent of the difference, if positive, between the single life annuity amounts at the time of retirement of a formula (high-five) annuity and an Improved Money Purchase benefit on that same date. The eligibility group is expanded slightly by revising the retirement date indicated above from January 15, 1998, to January 1, 1998.