The pensions bill provided sustainability measures to ensure the long-term stability of the major pension plans would continue. The bill increased contribution rates for public employees and employers, eliminated augmentation of deferred annuities, and reduced cost-of-living-adjustments (COLAs). The Republican-controlled Legislature decided to roll these pension reforms into Special Session Senate File 3, which included objectionable language to prohibit local governments from establishing their own labor standards regarding sick and safe leave in addition to higher citywide minimum wages. That bill, along with the pension reforms, was vetoed by the Governor. (Special Session S.F. 3)
VETOED: Pensions Bill
Governor Dayton’s 2017 pension recommendations included increased contributions from state agencies, local governments, and employees (excluding TRA teachers) to improve the funding deficiencies of the various plans. The Governor’s proposal emphasized the need for a ‘shared sacrifice’ approach to improving the funding ratios of the plans. The Governor recommended $68 million for the next biennium to school districts for pension adjustment revenue to offset the costs of increased TRA employer contributions of .5% of payroll in 2018 and 1% in 2019. The Governor proposed $22 million for state agencies to offset increased MSRS employer contributions of .5% of payroll.
Cost of living adjustments (COLAs) are automatic increases to retiree benefits that are provided to make sure the actual values of pensions do not decline over time and help to offset cost of living increases. The bill reduces COLAs for all major plans:
- For MSRS-General, COLAs are reduced from 2% to 1% for five years, then 1.5% thereafter.
- For MSRS-Correctional, COLAs are reduced from 2% to 1.5%.
- For PERA-Correctional, COLAs are reduced from 2.5% to 1.5%.
COLAs for Early Retirees
The bill also eliminates the ability for early retirees to receive COLAs until they reach normal retirement age. DFL senators successfully delayed the implementation of these COLA delays until 2023 but this proposal has the potential to increase the number of early retirements before the law goes into effect, which could further exacerbate Minnesota’s teacher shortage. Not allowing early-retiring teachers to collect COLAs may reduce their benefits by up to 20%.
All of the major plans require increased contributions from employees and employers, phased-in over the next four years. These particular increases were not approved by the various pension boards, are not the same as the pension sustainability proposals presented to the LCPR, and are opposed by numerous stakeholders if not accompanied by state aid. The contribution increases and their savings to plans (but costs to employees and employers) for next biennium are as follows:
- MSRS-General Employees: .5% increase
- MSRS-General Employers: .75% increase
- MSRS-Correctional Employees: .5% increase
- MSRS-Correctional Employers: 3% increase
- State Patrol Employees: .5% increase
- State Patrol Employers: 4.5% increase
- PERA P&F Employees: 1% increase –State aid provided
- PERA P&F Employers: 1.5% increase ($19.5 million)
- SPTRFA Employers (St. Paul teachers): 1.25% increase
When employees leave public service before retirement, the major Minnesota pension plans provide a modest 2% annual increase, in most instances, to their deferred benefit or annuity. Deferred members may not retire for many years and they are no longer contributing to their public pension. Augmentation is intended to compensate for inflation, which erodes the value of their deferred benefit. The Republican plan phases out all augmentation over a period of six years. If inflation increases in the future, the value of deferred members’ benefits will be more negatively affected. The bill also reduces the rate if a former employee seeks a refund of their employee contributions.
The bill reduces the assumed investment rate of return for all plans to 7.5%. This is the assumed growth of pension assets based on investments undertaken by the State Board of Investment over the amortization period of the plan. The plans’ actuaries have recommended lowering the assumed rate of return because of larger economic factors, although it should be noted that the Board of Investment has never had a lower investment return than 8% in any 30-year period in the history of the state. The reduction is opposed by TRA because their investment rate is currently at 8.5% and a 1% reduction will have a more negative affect on the unfunded liabilities of the plan than the other plans that are currently at 8%.
The bill provides $9 million in the next biennium to PERA Police and Fire and $5 million annually to SPTRFA to assist in the unfunded liability of the plans. About $11 million is provided to MSRS to pay for the employer contribution increases required in the bill.