Summary of H.F. 2773 (Knoblach); S.F. ____ (       )

H.F. 2773 (Knoblach); S.F. ____ (       ) amends Minnesota Statutes, Chapter 354A, the governing law for the first class city teacher retirement fund associations, to implement the following changes:

1. Transfers MTRFA Investment Authority to Special School District No. 1. The Board of Education of Special School District No. 1, Minneapolis, is given the authority to invest the Minneapolis teachers retirement fund instead of the Minneapolis Teachers Retirement Fund Association (MTRFA) Board (Sections 1, 2, 8, 9, and 10).

2. Special School District No. 1 Reimbursement of MTRFA Investment Underperformance. Special School District No. 1, Minneapolis, would be required to make an additional employer contribution equal to the amount by which the MTRFA investments have underperformed the State Board of Investment investment of the various statewide retirement plans, as determined by the State Auditor (Section 3).

3. State Investment of State Contributions to the Minneapolis Teachers Retirement Plan. The direct State aid payable on behalf of the Minneapolis Teachers Retirement Fund Association is required to be deposited with and invested by the State Board of Investment in the Income Share Account of the Minnesota Supplemental Investment Fund unless the State Board of Investment, upon consultation with the Board of Education of Special School District No. 1, determines that a different portfolio mix is more appropriate (Sections 4, 5, 6, and 7).

4. Reduced Threshold for Minneapolis Teacher Administrative Expense Surcharge. Members of the Minneapolis Teachers Retirement Plan would be required to pay a surcharge based on the amount by which the retirement plan administrative expenses exceed $428,381, the current average of $79.91 of the administrative expenses of the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General) and the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) per active member, multiplied by the MTRFA active membership, and indexed over time, rather than the TRA administrative expense percentage of covered payroll (Section 6).

5. Modification of MTRFA Post-Retirement Adjustment Mechanism. The MTRFA post-retirement adjustment mechanism is modified, with a continuation of the annual two percent adjustment and the replacement of the investment performance-related post-retirement adjustment with an indexation to the investment performance-related portion of the Teachers Retirement Association (TRA) post-retirement adjustment mechanism, payable once the MTRFA funding ratio equals or exceeds 100 percent (Sections 11 and 12).

Background Information on Minneapolis Teachers Retirement Fund Association (MTRFA)

The Minneapolis Teachers Retirement Fund Association (MTRFA) was created under Laws 1909, Chapter 343. The Legislature authorized the creation of a teachers retirement fund for Minneapolis by the teaching body with the consent of the City Council. The school authorities formulated the plan for the formation and incorporation of a retirement association, which was submitted to the City Council for approval. A majority of all teachers were required to approve the plan before the retirement association was created. The association was incorporated on September 17, 1909. Under the bylaws of the association, any amendments required the approval of the City Council of the City of Minneapolis. The law provided that up to 0.1 of a mill property tax could be levied in the City of Minneapolis to pay for the pension fund.

The Legislature created the first statewide teachers pension fund, the predecessor to the Teachers Retirement Association (TRA), in 1915. The Minneapolis Teachers Retirement Fund Association (MTRFA), the St. Paul Teachers Retirement Fund Association (SPTRFA) and the Duluth Teachers Retirement Fund Association (DTRFA), referred to as the first class city teacher pension funds, remained separate funds from the predecessor of the statewide TRA fund when it was created in 1915.

In 1924, the Minneapolis teachers pension plan was restructured to address major pension funding problems. Under the restructuring, the defined benefit plan for existing retirees remained unchanged. However, teachers with 20 or more years of service were able to elect between the old defined benefit plan or elect the new defined contribution plan, and teachers with less than 20 years were moved into a defined contribution plan for all future service. In addition, all senior teachers were now required to become members of the pension plan. The Legislature increased the property tax levy limit from .2 of one mill to 1.5 mills.

In 1952, the pension benefit formula changed from a defined contribution (pension is based on the individual’s account plus interest) plan to a defined benefit plan. The defined benefit plan provided a formula annuity equal to 1.667% of average salary for the teacher’s high five consecutive salary, payable at any age with 30 years of service or at age 60. The funding for the pension plan continued through the property tax. The amount levied was based on a percentage of payroll plus an amount to cover administrative and a portion of unfunded annuity payments, as certified by the retirement fund board. The school district, as a legal entity separate from the City, was established in 1953.

In 1967, State aid for teacher retirement plans was enacted. The Minneapolis teachers pension plan received State aid equivalent to the funding provided to the statewide TRA. The local property tax levy otherwise to be certified for the Minneapolis teachers pension plan was reduced by the amount of the state teacher retirement aid.

In 1975, the local property tax levy authority was eliminated and the employer contribution was based on a percentage of payroll. The MTRFA was funded by the State of Minnesota, with payment made directly to the retirement fund from the State’s general fund, initially based on the state aid provided to the statewide TRA and eventually based on a specified percentage of covered pay. The 1975 legislation also interrupted a pending benefit increase and the Legislative Commission on Pensions and Retirement was directed to study teacher retirement benefit levels. The 1975 benefit increase was approved by the Legislature in 1976.

The MTRFA coordinated program for teachers with Social Security coverage was created for new members hired after July 1, 1978 and any existing members who elected the program. The coordinated program was patterned on the statewide TRA coordinated program. Before 1978, MTRFA was a "basic" program, meaning that its members had retirement coverage solely by the local retirement plan and without Social Security coverage by virtue of the Minneapolis teaching service. A Social Security referendum was conducted in 1978 for MTRFA basic program members who desired Social Security coverage to elect to have Social Security coverage, to be supplemented by the MTRFA "coordinated" program. The MTRFA coordinated program substantially replicated the coordinated program of the Teachers Retirement Association (TRA). All newly hired Minneapolis teachers after July 1, 1978, automatically were covered by Social Security and the MTRFA coordinated program. When a person was entitled to federal Social Security program coverage, the statute of limitations on correcting past omitted contributions is three years. The level of state funding for the MTRFA Basic Program was increased by approximately 1.1 percent of covered payroll in 1979.

In 1985, the State funding was converted to a categorical education aid to the school district. The direct payment of employer contributions by the State was replaced by employer contributions from the school district. In 1987, the categorical teacher retirement and Social Security aid was folded into the general education aid program.

Since the mid-1990s, the Legislature has made a considerable effort to address the MTRFA contribution deficiency by creating new State aid programs, which has resulted in many millions of State dollars paid directly to the MTRFA. In 1993, a supplemental $2.5 million annual State contribution to the MTRFA was enacted, to match additional contributions by Special School District No. 1 and by the City of Minneapolis. In 1996, some State funding from local police and paid firefighter relief associations was redirected to MTRFA if Special School District No. 1 and the City of Minneapolis make additional contributions to MTRFA ($1 million each in 2003 and thereafter). In 1997, an additional annual State contribution to MTRFA was also enacted, which provided $13.3 million in 2003.

Background Information on the MTRFA Funding Problem

The Minneapolis Teachers Retirement Fund Association (MTRFA) is the worst funded large Minnesota public pension plan and has been so for decades. The following summarizes the funded condition and financial requirements of MTRFA every five years for the last 30 years as indicated in the official actuarial report for the plan:

If the market value of assets, rather than the actuarial value of assets, is used to determine the funded condition and the financial requirements of MTRFA, the current funding situation of the retirement plan is worse, as indicated for fiscal years 2002 and 2003 as follows: