The Legislative Commission on Pensions and Retirement (LCPR) reviewed a multitude of bills this session and passed the 2015 Omnibus Retirement Bill on April 8. In addition to lowering the rate of return assumptions for most of the major plans, the omnibus bill includes various firefighter relief association reforms, aid payment reductions to the Publican Employees Retirement Association (PERA) for the 2010 Minneapolis Employees Retirement Fund (MERF) merger, and various pension provisions for individuals and small groups.
The actuarial rate of return assumptions for Minnesota State Retirement System (MSRS), PERA, and the St. Paul Teachers Fund are reduced from the current ‘select and ultimate’ blended rate between 8.5% and 8%. The bill lowers the assumed investment rate of return to 8%, which is recommended by all plan actuaries. The consequence of this change is the plans’ assumed pension liabilities may increase and the plans may appear to be less funded compared to a higher assumed rate of return. Potentially, increased contribution rates, increased state aid, or cost of living adjustment (COLA) reductions could be necessary, although the major plans anticipate these revenue enhancements will not be necessary if the rate of return is only reduced to 8%.
The bill also decreases the assumed rate of inflation, which lowers payroll assumptions for the plans. MSRS testified this change will have less of an impact on retirees and active members if the assumed rates are lowered now, before COLA increases for MSRS retirees would be triggered in June. The Teachers Retirement Association (TRA) is not included in the lowered rate of return assumption because they would prefer to wait until after an experience study is completed to determine the effects of a lower assumed rate of return on the plan and its members.
Currently, COLA increases are triggered for pension plans when the funding ratio of plans are at high levels, typically over 90% funded based on market value. This bill would trigger a corresponding decrease in COLAs if the market value is below 85 percent for two years or below 80 percent for one year.
A provision to reduce aid payments to PERA for the 2010 MERF merger was incorporated into the omnibus bill. The MERF fund within PERA has performed well, so the state aid and employer (Minneapolis, Minneapolis ISD 1, Hennepin County, etc.) supplemental contributions to PERA can be lowered and still cover the unfunded liability of MERF, according to a recent actuarial study. Currently $27 million per year is contributed by the city, et al., and up to $24 million is contributed by the state through 2031. The provision requires the state to provide $16 million and the employers to pay $21 million in annual supplemental aid for a reduced total of $36 million. This change saves the state $16 million in the FY16-17 biennium. (S.F. 1398)