Crockett’s Quick Pension Update 2016: Minnesota’s Slow and Quiet Bailout

In brief, the pension omnibus bill contains some good policy changes such as a higher contribution rate for St. Paul Teachers and lower COLAs that are estimated to immediately save $81 million that otherwise would be lost forever—and much more in the future. Unfortunately it also reset the amortization date, pushing it out, yet again, another decade to 2046. Imagine if you did that with your mortgage?

The Teachers Retirement Association, the most troubled fund of Minnesota’s Big Three (TRA, PERA and MSRS), is going to finally join all the other funds in reducing its assumed rate of return/discount rate from a willfully optimistic 8.5% to a stubbornly optimistic 8.0%.

TRA will also drop retirees COLA from 2% to 1% and raise just the employer/taxpayer contribution. Without additional funding from the legislature, however, pensions will crowd out money from the schools’ existing budget for things like instruction. That means schools have made a stink but there was no funding agreement in the offing this year.

You may be wondering, does any of this tie into the Central States pension crisis in the news?

Yes because Minnesota’s funds remain in bad shape even though we have been propping up the Big Three and St. Paul Teachers for years.

Here is a summary of the direct aid taxpayers have been providing for somebody else’s pension. These annual subsidies cut in backroom deals, which no one really knows about except pension insiders, are scheduled to continue for the foreseeable future, and in some cases, in perpetuity:

  • Total direct state/additional aid for ALL pension plans in 2014 was $127.7 million (the latest available totals): $84.7 million in state aid plus another $43 million in “additional employer contributions.” This is what happens when you fail, year after year, to make full annual contributions to cover benefits.
    • Direct State Aid to teacher funds total roughly $45 million (TRA about $20 million though most of that is for merging the Mpls teachers fund in years ago; Duluth Teachers $14.377 million which merged into TRA last year; and St. Paul Teachers $9.8 million plus some additional aid that varies each year).
  • PERA Police and Fire that merged with MERF (the Mpls employer fund) gets $9 million plus an additional $6 million in 2015-16 for MERF liabilities. Starting in 2017 until at least 2031, PERA will get an increase to $16 million for MERF liabilities. Minneapolis has been paying in a lot of cash, too. I wish it was enough but I know better.
  • MSRS has been run better than the other plans for years and does not get any direct aid though like all the plans it has a deficit. It will be increasing its employer and employee contribution, and lowering its COLA among other changes.

And we are seeing pressure to prop up private labor pensions that the government has done business with via collective bargaining agreements.

To wit, the Omnibus this year includes a measure sponsored by Rep. Paul Thissen and Sen. Sandy Pappas that increases the maximum allowable public employer contribution from $5,000 to $7,000 per employee to the Laborers’ National Industrial Pension Fund. The fund is in “critical status.” There are other funds Minnesota does business with, so we may see other increases in contributions to troubled private labor pensions.

To end on a positive note, there is a lot of turnover in the executive directors of the funds because of retirements, and at the Legislative Commission on Retirement and Pensions (LCPR). The new staff at LCPR is talented and brings good private sector knowledge. It remains to be seen if the pension plans, and their boards, can break free from thirty years of bad habits.