1. TRA Established: Nature of Early TRA, MSRS, and PERA Plans.

1. 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 TRA and TIRF were defined contribution plans, at least in large part, 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. 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 defined employee contributions to TRA and which added to the value of the money purchase annuity, due to various supplemental benefits, and due to assuming actuarial accrued liabilities from the old TIRF plan.

2. 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.

3. 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 the high-five average salary is used, first in 1973, the benefit is based on the salary received by the individual a few years prior to retirement. 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. The accrual rates, the percentage of the covered salary the individual receives per year of service, were also modest by current standards.

2. Evolution of TRA Money Purchase Plan: 1957 through 1968.

   In 1957, a TRA Social Security referendum was held on an all-or-nothing basis and was rejected by the TRA membership, except for state college faculty which voted as a separate unit. In 1959, federal law was revised to allow individual Social Security elections, permitting those who wanted Social Security coverage to have that coverage, while those existing TRA members who did not want that coverage remained as TRA Basic members. Following that federal law change, a second TRA Social Security election was conducted in 1959, which led to the creation of the separate Basic programs and Coordinated program, with the TRA Coordinated Plan covering all new hirees and existing employees who elected the Social Security coverage.

   The resulting TRA Basic and Coordinated Plans were money purchase plans. There were improvements in these money purchase plans through 1968, but by 1969, the general approach was deemed inadequate, and the Legislature revised TRA by creating other benefit options for TRA members.

1. TRA Money Purchase Plans: Revisions Due to 1957 and 1959 Social Security Referendums. The 1957 Legislature (through Laws 1957, Extra Session, Chapter 15) revised TRA law to create a new plan which had the effect of providing coverage to post-1959 new hirees and for existing TRA members who elected Social Security coverage under the 1959 election to here as the TRA Coordinated Money Purchase Plan.

   1. TRA Coordinated Money Purchase plan, as of 1957. The key features of the benefit program were:

Contribution rates. The employee contribution rate was set at three percent of salary, up to a maximum salary of $4,800. The employer provided a matching contribution, plus a separate amortization contribution.

Retirement benefit. The retirement benefit was the account value at the time of retirement of all contributions credited to the account plus investment earnings, given the rate of return on TRA assets. This value was then annuitized and paid to the individual in monthly checks throughout the individual’s retirement. The contributions included the member contributions made or credited to the account during the individual’s TRA-covered career (including those prior to July 1, 1957), plus the employer contributions made after the Social Security effective date. Each account was also credited with a portion of any gains created due to the lesser disability or survivor benefits provided under new TRA Coordinated law, since Social Security was now expected to provide some income to TRA disabilitants or survivors.

This chapter of TRA law also included a savings clause which ensured that no one was harmed by the law change. The savings clause specified that any TRA member who had at least ten years of covered TRA service by July 1, 1957 was entitled to a total benefit at least as large as that provided under prior law. If the total benefit provided by the new TRA Coordinated money purchase program plus the Social Security benefit payment was less than the benefit the individual would have received under prior TRA law, TRA had to increase the TRA benefit payment.

In addition to the employer contribution mentioned above, the employer also made employer additional contributions to amortize any unfunded liability in TRA. Unfunded liability would not exist in a pure defined contribution plan, but the money purchase plan was not a pure defined contribution plan. The cost of providing the savings clause may have been one source of unfunded liability. Disability benefit provisions were another. The new plan promised to pay a disability benefit of $90 per month in addition to a disability benefit based on the individual’s account value. Other miscellaneous benefits not based on account values might also create unfunded liability.

2. TRA Basic Money Purchase Plan, as of 1957. The revised TRA Basic member money purchase plan, coinciding with the creation of the Coordinated Plan just described, was specified in Laws 1957, Extra Session, Chapter 16. The key elements of the benefit program were:

Contribution rates. The employee contribution rate was six percent of salary, not to exceed a salary of $4,800. The employer contribution was three percent until June 30, 1959 and six percent thereafter, plus an amortization requirement.

Retirement Benefit. The benefit amount was set at twice the terminal value of the employee contributions plus investment earnings.

2. TRA Money Purchase Plans: As Specified in Minnesota Statutes 1967. The TRA money purchase plans specified in 1967 statutes describe the plan shortly before the substantial 1969 TRA plan revisions. Several changes had occurred since 1957. Key changes were that the $4,800 salary cap on contributions had been removed, and teachers were authorized to make retroactive contributions to the plan based on these excess salary amounts back to 1957. In addition, for purposes of crediting employee contributions to the account, any employee contributions for service after July 1, 1957 plus investment earnings on those contributions were multiplied by 120 percent prior to computing the account’s value for purposes of computing the annuity.

   For basic members, the annuity value continued to be described in law as twice the terminal value of the employee contributions plus investment earnings, but "employee contributions" had in effect been redefined to include the retroactive payments on salary in excess of $4,800, and the effect of multiplying the post-June 30, 1957 employee contributions plus investment earnings by 120 percent.

   Multiplying the post-June 30, 1957 employee contributions plus attributed investment earnings by 120 percent in the Basic and Coordinated Money Purchase Plans, and the retroactive excess salary payments, added unfunded liability to TRA. In addition, various supplemental benefits had been created for both coordinated members and basic members, with special provisions for higher education faculty, further adding to the TRA unfunded liability. The June 30, 1967 TRA actuarial valuation indicates that TRA’s funding ratio was 72 percent.

3. TRA Plan Changes: 1969 New and Revised Programs.

   In 1969, in response to complaints from the teacher unions and others about the inadequacy of TRA retirement benefits, the Legislature created alternative benefit programs in TRA, and various member groups, as further specified below, 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. The Improved Money Purchase Program 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, to parallel the MSRS-General and PERA defined benefit plans, was established in TRA. 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 was to be invested solely in stock investments.

4. TRA Plan Changes, 1969: Plan Elections by 1968-69 Plan Members.

   TRA members (both basic and coordinated) who rendered service during the 1968-69 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 Improved Money Purchase Program was the default option. Teachers in this eligibility group were instructed to complete the election form only if they wished to have coverage other than the Improved Money Purchase Program. 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.

5. TRA Plan Changes, 1969: Plan Elections by New Hirees.

   Because TRA coordinated with Social Security on an individual basis in 1959, all new TRA hirees after that date were coordinated members. The legislative changes in 1969 created somewhat different options for the post-1969 hirees than for existing employees. The Improved Money Purchase Program 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.

6. TRA Plan Changes, 1973 and later, Move to High-Five Average Salary Defined Benefit Plan, Consequences.

   Four years later, 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 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 were on an approved leave of absence. That savings clause, which remains in current statute as Section 354.55, Subdivision 17, reads in its entirety:

   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, 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, 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.

7. TRA Benefit Program Election Results.

   Following the 1969 legislative changes that allowed TRA members to elect among various defined contribution and defined benefit plans, combinations of plans, the TRA actuarial reports began reporting the number of TRA members with each type of coverage.

   The table below provides information from the TRA actuarial valuations from the early 1970s—1970 through 1975. The results reflect the allocation of TRA members among the various options due to elections and the automatic defaults if no election was made. For reasons that are not clear, the actuarial valuations did not provide information on members electing a combination of the Improved Money Purchase Program and the Variable Annuity Program. This was one of the options offered to members by 1969 legislative changes. Information provided in a few of these reports suggests that this option was very rarely chosen. In the data shown in the table, it is possible that the actuaries merged that group into one of the other categories for reporting purposes.

Benefit Program Elections By TRA Members 1970-1975

Year	Members Type	Improved Money  Purchase	Full  Formula	Combination Formula &  Variable	Full Variable	Total
1970	Actives:
	Basic	5,846	86	39	0	5,971
	Coordinated	38,827	6,817	724	1,086	47,454
		44,673	6,903	763	1,086	53,425
	Inactives:
	Basic	1,195	5	0	0	1,200
	Coordinated	8,633	228	0	0	8,861
		9,828	233	0	0	10,061
1971	Actives:
	Basic	5,439	145	51	0	5,635
	Coordinated	34,734	13,961	1,447	1,839	51,981
		40,173	14,106	1,498	1,839	57,616
	Inactives:
	Basic	1,273	5	0	0	1,278
	Coordinated	8,643	1,401	0	62	10,106
		9,916	1,406	0	62	11,384
1972	Actives:
	Basic	2,592	2,537	267	0	5,396
	Coordinated	14,941	25,426	5,228	7,201	52,796
		17,533	27,963	5,495	7,201	58,192
	Inactives:
	Basic	1,008	12	1	0	1,021
	Coordinated	9,490	2,441	66	71	12,068
		10,498	2,453	67	71	13,089
1973	Actives:
	Basic	0	4,237	738	0	4,975
	Coordinated	0	40,419	6,493	7,399	54,311
		0	44,656	7,231	7,399	59,286
	Inactives:
	Basic	0	1,146	4	0	1,150
	Coordinated	0	15,202	120	245	15,567
		0	16,348	124	245	16,717
1974	Actives:
	Basic	0	3,594	731	0	4,325
	Coordinated	0	41,469	13,734	0	55,203
		0	45,063	14,465	0	59,528
	Inactives:
	Basic	0	1,261	15	0	1,276
	Coordinated	0	16,228	377	252	16,857
		0	17,489	392	252	18,133
1975	Actives:
	Basic	0	3,399	727	0	4,126
	Coordinated	0	43,165	13,131	35	56,331
		0	46,564	13,858	35	60,457
	Inactives:
	Basic	0	1,041	13	0	1,054
	Coordinated	0	14,732	534	189	15,455
		0	15,773	547	189	16,509

8. Impact of 1973 TRA Improved Money Purchase Program Savings Clause.

   In 1973, a savings clause was made applicable to TRA members who taught or were on an approved leave during the 1968-69 school years. The savings clause extends to individuals who were transferred from Full Improved Money Purchase Program coverage to the Full Formula Annuity Program a right to receive an Improved Money Purchase Program benefit if the value of that option is greater than the benefit provided under the High-Five Formula Benefit Plan.

   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 provides a larger retirement annuity for some TRA members covered by the Improved Money Purchase Program savings clause. By contrast to the relatively low Improved Money Purchase Program interest rates between 4 and 6 percent during the late 1960s and early 1970s, the Improved Money Purchase Program interest rate has averaged over 12 percent per year during the past 20 years with an astounding average of 18.5 percent over the past three years. The higher than anticipated interest rates coupled with the 120 percent matching have suddenly caused the Improved Money Purchase Program to generate higher benefits than the current Formula Program in some instances. Thus, the savings clause that was put in place in the early 1970s but not used for over 20 years is now being utilized. This has caused several newspaper articles to appear in recent weeks describing large windfall benefits receivable by some TRA members.

   Given the interest rates specified by TRA and other economic and demographic data, TRA requested that Buck Consultants, the actuarial firm retained by TRA, provide an estimate of the cost of the savings clause in current law. A copy of the resulting report or memo, dated June 2, 1999, is attached. The report indicates that 3,811 current active TRA members are potentially eligible for an IMP Program benefit, along with 1,057 additional members who are currently in deferred status. Since the estimates require a comparison of the value provided by these two alternative benefits at a future time—the assumed retirement date—the actuary must make assumptions about future investment rates of return up to the retirement date, because those assumed rates of return will impact the value of the Improved Money Purchase Program benefit. The actuary provides a range of estimates, corresponding to different assumed rates of investment return. These results suggest that the savings clause in current law may add from $237 million to $514 million in additional liability to TRA. The low range estimate, an additional $237 million in liability is based on an assumption that the investment return on TRA assets in future years is 8.5 percent per year. If the average rate of return during the last five years, 14.80 percent, was assumed the added liability would be $514 million.