| TO: | Members of the Legislative Commission on Pensions and Retirement |
| FROM: | Susan Lenczewski, Executive Director Rachel Barth, Deputy Director |
| DATE: | May 8, 2017 |
| RE: | LCPR17-038: Pension Benefits and Contributions Bill |
Draft bill LCPR17-038 makes changes to current law governing all of the statewide pension plans and the St. Paul Teachers Retirement Fund Association. Generally, the changes can be categorized as follows:
MSRS, PERA, TRA and St. Paul Teachers proposed contribution rate and COLA changes early in the session. The bills are S.F. 1064 (Rosen); H.F. 1288 (O'Driscoll) for MSRS; S.F. 1066 (Rosen); H.F. 1090 (O'Driscoll) for PERA; S.F. 930 (Rosen); H.F. 722 (Murphy, M.) for TRA; S.F. 992 (Rosen); H.F. 1214 (O'Driscoll) for St. Paul Teachers. The Pension Commission considered these bills and heard testimony at meetings on February 7, 14, and 21.
The Governor proposed contribution rate increases and COLA reductions several weeks ago. The Governor's proposal is set forth in S.F. 2233 (Rosen); H.F. 2486 (O'Driscoll). The Pension Commission considered this bill at its meeting on April 18.
In connection with the consideration of these proposals, the Pension Commission began the process of reviewing the array of benefits offered by the plans to determine whether and to what extent the benefits offered by the plans went beyond the plans' core mission of providing public employees with a secure and sustainable retirement income. The underlying premise of this benefit review is that the pension plans' current shortfall in assets as compared to liabilities (i.e., underfunded status) and ongoing annual contribution deficiency cannot be corrected only by increasing contributions and state funding and reducing COLAs for retirees.
Accordingly, the draft bill presents a combination of benefit changes, COLA reductions, contribution increases and direct state aids.
Augmentation: The annual automatic percentage increase to a pension benefit accrued by an individual who leaves public service prior to retirement. For example, under MSRS or TRA, a pension benefit earned by an individual who leaves public service at age 38 is increased by 2% each year, compounded annually, until the former employee applies to receive an annuity at retirement age.
Early retirement reduction: When a member elects early retirement, the pension the member will receive is the normal retirement (age 66) benefit reduced, either using fixed percentages or factors that will result in actuarial equivalence, to reflect early commencement of pension payments. Put another way, the monthly amount a member would have received at normal retirement age is reduced when the member begins to receive the payments earlier, to reflect the fact that the member will receive payments over a longer period.
The plans apply an actuarial or fixed factor reduction, but offset the reduction (so the reduction is less) by augmentation at rates that are higher than regular augmentation rates under the plan. The rate of augmentation for this purpose was not updated when augmentation rates were reduced to 2% or 1% several years ago and are at 2.5% for members who were first employed on or after July 1, 2006, and 3% for members who were first employed before July 1, 2006. This apparent oversight has been highlighted by both MSRS' and PERA's actuary and the Pension Commission's actuary, who have repeatedly recommended that the augmentation rates in the early retirement discount should have been reduced when augmentation generally was reduced. Consistent with the elimination of augmentation, generally, in the bill, the bill also eliminates augmentation as applied in the early retirement reduction, over a five year period.
Postretirement adjustment: Also referred to as the "COLA." The annual automatic percentage increase in the annuity amount being paid monthly to a retiree, survivor, or member receiving a disability annuity. It is not to be confused with "augmentation," which is an annual increase credited to the pension benefit of an individual who is no longer in public employment and is not yet receiving an annuity from one of the pension plans.?
Section 1: Eliminates augmentation for all members of the Legislators plan after December 31, 2017, but does not make any change to augmentation credited to the member's pension benefit up to December 31, 2017.
Section 2: Eliminates augmentation as applied in calculating early retirement benefits for MSRS General. See the definition of "early retirement reduction" on page 2 of this memo for additional explanation. The phase in is over a five year period starting July 1, 2018. Beginning July 1, 2023, an early retirement benefit will be a straight actuarial equivalence to a normal retirement benefit.
Section 3: Lowers the rate of interest rate paid on refunds of employee contributions if a former employee elects to take a refund, from 4% to 3%.
Section 4: Adds clarification regarding the repayment of a refund by a member of an MSRS plan.
Section 5: Corrects a cross-reference.
Section 6: Eliminates augmentation for all members of the MSRS-General and MSRS-Correctional plans after December 31, 2017, but does not make any change to augmentation credited to the member's pension benefit up to December 31, 2017.
Section 7: Eliminates augmentation for all members of the State Patrol plan after December 31, 2017, but does not make any change to augmentation credited to the member's pension benefit up to December 31, 2017.
Sections 8-10: Corrects several cross-references.
Section 11: Repeals the following statutes:
Section 1: Eliminates augmentation as applied in calculating early retirement benefits for PERA General. See the definition of "early retirement reduction" on page 2 of this memo for additional explanation. The phase in is over a five year period starting July 1, 2018. Beginning July 1, 2023, an early retirement benefit will be a straight actuarial equivalence to a normal retirement benefit.
Section 2: Lowers the rate of interest rate paid on refunds of employee contributions if a former employee elects to take a refund, from 4% to 3%.
Section 3: Eliminates augmentation for all members of PERA after December 31, 2017, but does not make any change to augmentation credited to the member's pension benefit up to December 31, 2017.
Section 4: Repeals the following statutes:
Section 1: Removes the reference to the contribution stabilizer provision in Section 354.42, which is being repealed.
Section 2: Eliminates augmentation as applied in calculating early retirement benefits for TRA. See the definition of "early retirement reduction" on page 2 of this memo for additional explanation. The phase in is over a five year period starting July 1, 2018. Beginning July 1, 2023, an early retirement benefit will be reduced by a flat 4% per year for ages 55 through 59 and 7% per year for ages 60 to the normal retirement age of 66. (This provision does not impact members who retire under the "62/30" rule.)
Section 3: Lowers the rate of interest rate paid on refunds of employee contributions if a former employee elects to take a refund, from 4% to 3%.
Section 4: Eliminates augmentation for all TRA members after December 31, 2017, but does not make any change to augmentation credited to the member's pension benefit up to December 31, 2017.
Section 5: Repeals the following statutes:
Section 1: Updates a reference to the investment return assumption.
Section 2: Revises the COLA in the following ways:
Section 3: Eliminates augmentation as applied in calculating early retirement benefits for TRA. See the definition of "early retirement reduction" on page 2 of this memo for additional explanation. The phase in is over a five year period starting July 1, 2018. Beginning July 1, 2023, an early retirement benefit will be reduced by a flat 4% per year for ages 55 through 59 and 7% per year for ages 60 to the normal retirement age. (This provision does not impact members who retire under the "62/30" rule.)
Section 4: Eliminates augmentation for all SPTRFA members after December 31, 2017, but does not make any change to augmentation credited to the member's pension benefit up to December 31, 2017.
Section 5: Lowers the rate of interest rate paid on refunds of employee contributions if a former employee elects to take a refund, from 4% to 3%.
Section 6: Repeals the following statutes:
Section 1: Lowers the investment return assumption to 7.5% for all MSRS plans, PERA plans, TRA, and SPTRFA, effective July 1, 2017.
Section 2: Permits more flexibility in the adoption of mortality improvement scales by the pension plans and makes conforming changes to the section of the statutes that governs the adoption of actuarial assumptions other than the assumptions set forth in the statutes. The revisions permit the use of recent changes in the methodology for determining the appropriate mortality assumption.
Section 3: Resets the 30-year amortization period to 2047 for MSRS plans, PERA plans, TRA, and St. Paul Teachers.
Section 4: Clarifies the Combined Service Annuity provision and adds a conforming change to reflect the elimination of augmentation, generally.
Section 5: Combines each plan's Coverage by More than One Plan provision for a comprehensive and uniform provision.
Section 6: Modifies the COLA for MSRS-General, MSRS-Unclassified, and the Legislators plans in the following ways:
Section 7: This section modifies the COLA for MSRS-Correctional in the following ways:
Section 8: This section modifies the COLA for PERA-General in the following ways:
Section 9: This section removes the provisions requiring automatic increases in the COLA, up to a maximum of 2.5%, when specified funding ratios are met for PERA-P&F.
Section 10: This section modifies the COLA for TRA in the following ways:
Section 11: This section removes the provisions requiring automatic increases in the COLA, up to a maximum of 2.5%, when specified funding ratios are met for the State Patrol plan.
Section 12: This section adds language to maintain the provisions requiring automatic increases in the COLA, up to a maximum of 2.5%, when specified funding ratios are met for the Judges plan.
Section 13: This section modifies the COLA for PERA-Correctional in the following ways:
Section 14: This section requires the Pension Commission to conduct a study before December 31, 2020, on the COLA rates for all the pension plans and make recommendations regarding any modification to the rates and methodology for determining the rates. The Pension Commission is to act on the recommendations during the 2021 legislative session.
Sections 1-43: All the plans pay interest or are paid interest on many different types of payments. Payments on which interest is paid include payments made by rehired members when they repay a previous refund, payments by the employer when it fails to deduct enough from an employee's paycheck, payments by an employee for missed employee contributions during certain leaves of absence, and late payment of employer contributions by an employer. The rate of interest is tied, in most cases, to the investment rate of return assumption.
With the lowering of that assumption to 7.5% many statutory references to interest rates had to be revised. Rather than make that change in numerous places throughout the statutes, a reference to a new section, Minnesota Statute § 356.59, has been inserted to replace specific rates of interest. The new statute is added by Section 40 of Article 6 of the bill, and is a compilation of all the interest rates over different time periods for each of the plans.
MSRS, PERA, TRA, and St. Paul Teachers drop their interest rate to 7.5% effective July 1, 2017.
Note:
"FY18" means the fiscal year July 1, 2017, to June 30, 2018
"FY19" means the fiscal year July 1, 2018, to June 30, 2019
"FY20" means the fiscal year July 1, 2019, to June 30, 2020
"FY21" means the fiscal year July 1, 2020, to June 30, 2021
Section 1: MSRS-General Employee Contribution Rate Increases
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Section 2: MSRS-General Employer Contribution Rate Increases
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Section 3: MSRS-Correctional employee contribution rate increased by 0.5% in FY18 (from 9.1% to 9.6% of salary).
Section 4: MSRS-Correctional regular employer contribution rate increased by 1.55% in FY18 (from 12.85% to 14.4% of salary).
Section 5: New MSRS-Correctional supplemental employer contribution, as follows:
Section 6: State Patrol Employee Contribution Rate Increases
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Section 7: State Patrol Regular Employer Contribution Rate Increases
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New supplemental employer contribution rates are as follows:
Section 8: Deletes the language which ties the employee contribution rate under the MSRS Unclassified Plan to the employee contribution rate under the MSRS General Plan and inserts the current employee contribution rate of 5.5%.
The employee contribution rate under the MSRS Unclassified Plan will be 0.5% lower than the rate under the MSRS General Plan, after the employee contribution increases for the General Plan are fully effective.
Section 9: PERA P&F Employee Contribution Rate Increases
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Section 10: PERA P&F Employer Contribution Rate Increases
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Section 11: TRA Employee Contribution Rate Increases
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The contribution rate each year is rounded to hundredths. The TRA basic member employee contribution increase is also increased by 0.75% over four years (from 11% to 11.75% of salary).
Section 12: TRA Employer Contribution Rate Increases
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The TRA employer contribution rate for basic members is also increased by 1% over four years (from 11.5% to 12.5% of salary).
Section 13: STPRFA employee contribution rate increased by 0.25% in FY22
Section 14: SPTRFA Employer Contribution Rate Increases
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The SPTRFA employer contribution rate for basic members is also increased by 2.5% over four years (from 10.5% to 12.5% of salary).
Section 1: This section requires annual direct state aid payments to PERA P&F, as follows:
Section 2: This section requires annual direct state aid payments to the SPTRFA in the amount of $5 million each October 1. This amount is in addition to a total of $9,827,000 in annual direct state aid payments being made to SPTRFA.