The $7 billion ‘elephant in the room’

The financial health of the Teachers Retirement Association (TRA) affects the fund’s long-term viability and ability to offer the majority of Minnesota educators the retirement benefit they have been promised. The plan supplements Social Security and Medicare benefits by providing teachers with defined pension payments when they retire.

As of the plan’s latest valuation study, TRA says its unfunded accrued liability is $7.1 billion and its funded ratio is at 79.9 percent, or put another way, only 80 cents on the dollar is available to pay teacher benefits.

But it’s an issue that doesn’t receive much attention, making it the $7 billion “elephant in the room,” writes the Minnesota Center for Fiscal Excellence. “If TRA operated under ERISA [Employee Retirement Income Security Act], the federal government would label it ‘at risk’ with such a ratio. Moreover, a preexisting contribution deficiency in the TRA plan already exists.”

TRA’s history of unfunded liabilities and unrealistic assumptions about investment returns on pension assets have put the fund under pressure more than once over the years.

Historical Actuarial Value Funding Ratios for Teachers Retirement Association (TRA), Leading to $7.1 Billion Unfunded Liability in 2024

400% error

A forensic audit of the TRA crowdsourced by a grassroots organization of Minnesota educators found other problems plague the plan, including “underreporting” of “annual fees paid to Wall Street investment managers” and “posting” of “near-impossible gains,” according to Edward Siedle, a former U.S. Securities and Exchange Commission lawyer and independent pension investigator, hired to conduct the audit.

Siedle told the New York Post that TRA has “publicly disclosed less than 10% of an estimated $2.9 billion spent on fees in the past 10 years” and “posted gains claiming it beat its own custom benchmark over periods of one, five, 10, 20 and 30 years by exactly 0.2%,” which, according to Siedle, is “virtually impossible.”

The TRA reported $24.19 million in management fees in 2023. But Siedle estimated the total paid to Wall Street fund managers ranged from $334 million to $467 million, or 5% to 7% of the TRA’s private assets. Even if the fees were only 1%, they would total $280 million — more than 10 times the disclosed fees.

What happened a few weeks after the release of Siedle’s findings? The pensions “quietly (without telling the teachers who brought the misrepresentations to light) increased the amount of disclosed fees paid to Wall Street by an astronomical 400%,” according to a recent update by Siedle. “The teacher pension’s disclosed fees alone skyrocketed from $24 million to $105 million. Using TRA’s flawed method of calculating fees, the State Board of Investment’s disclosed fees would jump from $84 million to an estimated $350 million. In terms of percentages or dollar amounts, that’s quite an error — inexcusable.”

“Even after the 400% increase, the majority of state pension investment fees remain unreported,” Siedle continues. “That amounts to billions that could be used to improve teacher retirement benefits.”

Who is responsible?

Gov. Tim Walz chairs the Minnesota State Board of Investment, which is responsible for monitoring and evaluating the assets of the TRA “with the goal of making sound investment decisions.” State Auditor Julie Blaha and State Attorney General Keith Ellison are also on the board. The TRA gets 73 percent of its revenue from investment income.

The group that hired Siedle, the Minnesota Public Educators for Pension Reform, raised over $78,000 on GoFundMe to pay for the audit and has “complained of ‘inequities,’ including ‘significantly decreased benefits’ for some members,” reports the Post.

One member, teacher Katie Dickerson, noted in her testimony before Minnesota’s Legislative Commission on Pensions and Retirement Committee that “[n]ot only do we have a high contribution rate to TRA, but we…are forced to work many more years unless we are willing to be hit with huge penalties.”

Because Minnesota’s pension plan is not fully portable, teachers who leave the system early cannot even take at least a partial employer contribution with them. As a defined benefit plan, benefits are backloaded, and new teachers’ paychecks are used to protect the payments promised to older colleagues and address unfunded obligations made in the past.

As teachers continue to hand over a percentage of their paycheck, and taxpayers match or exceed that contribution, both parties should be able to trust that the TRA plan and the state of Minnesota are carefully setting contribution rates and wisely investing the funds so that when retirement comes the promised pension is available. I’m not completely confident this trust won’t be broken.