2022 Pensions

There were three attempts at passing pension-related omnibus bills this session.  The first, an omnibus policy bill passed easily near the end of session. The other two bills, the State Government Finance Bill, which had Pension funding foundered along with most other Omnibus Bills. Then, there was a last-minute attempt to pass just the Pension portions of the bill which also failed to make it onto the floor in either body.

The Pension Policy Omnibus Bill

The Pension Policy Omnibus bill is the only Pension bill that passed this session.  It contained a short list of “individual provisions” which rectified some errors and issues for individual pension members. Due to Minnesota pension law, the only way to fix some problems is by special bills.  In terms of general policy here is a list of provisions:

  • State-wide Volunteer Firefighter Plan (SVF)
    • The SVF plan will now offer 3 different vesting schedules that the associations will chose when they join the plan.
    • If a firefighter retires within the first 5 years of an association joining the SVF, they will use the benefit level in effect at the time of their retirement.
    • Various administrative changes recommended by the State Auditor’s working group.
  • Advanced Practice Nurses are incorporated into chapters that govern the various pension funds.
  • Administrative changes to the State Board of Investment’s compensation plan.
  • A study of the adequacy of Police Disability benefits
  • Service Credits for Teaching in other States –Teachers who teach outside of Minnesota and subsequently move here, will be able to purchase service credit for those years outside of Minnesota up to 5 years.
  • Technical Corrections

Unsuccessful Funding Provisions

There was an attempt at making some significant funding changes to the pension funds.  These were a combination of reducing employee contributions by workers, increasing the COLA from 1 to 1.5% for retiree payments and bringing the assumed rate of return on the funds from 7.5 to 7%.  Since all of these things would increase the unfunded liability, there was also a plan to appropriate $152,274,000 from the General Fund and put it into the funds.  The first path these changes took was through provisions in the State Government Finance Omnibus bill.  When that bill did not make progress in the Conference committee, Senator Julie Rosen, the chair of the Pension Commission moved a standalone bill, SF 3541 to try to get them passed. This also failed.  It is worth noting that the amount appropriated would not have fully covered the cost of these changes to the pensions and that more funding would have been required over time.

Pension Basics

Minnesota’s public sector pensions are an important part of the state’s financial picture.  Since the 1930s Minnesota has given state workers retirement benefits that include an employee contribution, and an employer contribution, with the funds invested by the State Investment Board (SBI) (the 5 constitutional officers) advised by a larger group called the State Investment Board Advisory Council and the Executive Director of SBI.

Why are they so important? The financial health of the Pension funds, along with the state’s bonds are what the credit agencies look at when they give the state it’s credit rating and thus determine its ability to borrow money.  Specifically, what they look at are how well are the pensions funded, do they have enough money to pay for the benefits that have been promised, given the actuarial and investment assumptions that are used. 

Here are the funding ratios for the different state pension funds as of July 30, 2021

PERA Correctional 118.97%
MSRS General 111.46%
PERA Police & Fire 105.60%
PERA General 97.85%
MSRS State Patrol 96.57%
TRA 92.03%
MSRS Correctional 89.27%
St. Paul Teachers 74.90%
MSRS Judges 70.69%

(There is one other fund, the old legislator pension fund, which was closed in 1989 when new legislators were moved to a defined contribution 401k type of retirement system.  This fund has a 0% funding ratio because the legislature appropriates money to pay these obligations every year directly from the general fund.)

The funds with ratios marked in green were fully funded as of that date. The ones that are not had “unfunded liabilities” which means they did not have enough money to pay out to all of their members according to the actuarial and investment assumptions.  Actuarial assumptions include how long the member and or their spouse will continue to live and receive benefits. Investment assumptions include the return on investment of the funds managed by the State Investment board.

What happens if they run out of money to pay their members?  The short answer is, they won’t.  Any deficiency will be made up by Minnesota Taxpayers.  As such, the state has put more money into the funds continuously over the last few decades.  This year’s attempt was just one more bump to shore up the pensions.

What about Pension Reform?

There have consistently been calls for looking at transitioning the state away from Defined Benefit (where workers pay a portion of their salary in but get a payment every month when they retire for the rest of their lives) vs. a defined contribution plan, (where workers pay in, and can access and move those funds, if they leave state employment.)  Several states have done this successfully but there are costs to the transition.  Unions strongly oppose changing from defined benefit to defined contribution plans.  Republicans are divided on the issue.

Pension Policy at a crossroads.

Retirements and redistricting will impact policy on the Legislative Commission on Pensions, which sets policies and hears all bills relating to pensions.  On the senate side, Senator Julie Rosen is retiring. She has long been a champion of the defined Benefit Pensions and has always supported increasing funding. In addition, Senator Sandy Pappas is being challenged by 2 people in her district.  In the house, Rep. Mary Murphy has been moved into a more evenly divided district in an area that has been trending Republican. If they do not return it will likely be up to a new generation of legislators to decide on the future of Minnesotans pensions.

 

Investment Policy at a crossroads

Mansco Perry, the current director of the State Investment Board is retiring after 10 years at the helm of SBI.  His track record in investment success was good, although the stock market has been pretty kind in the last decade to big institutional investors like the State of Minnesota, when assets are prudently managed, as they have been by Perry.  Governor Walz is currently working on naming a replacement after a national search.  Both Perry and his predecessor Howard Bicker were serious green eye shade guys, who avoided politics and treated fads like ESG and boycotts as just another compliance issue, that still took a back seat to return on investment.  And the pensions have a statutorily required average return on investment of 7.5% over the next 15 years.  In reality, they require a return much greater than average to stay whole as they pay out their funds over time.  The statutory return assumption will be revised from time to time to reflect the investment environment.  If we are heading into a bear market as some believe, this will make it harder to get the kind of returns that will be necessary to keep the pensions going and prevent the state from having to put more money into them from the General Fund.