July 10, 2006  

Minneapolis TRFA Merger/Benefit Restructuring

Senate File 1057
(formerly House File 2847, Article 3)

Briefly, what is Senate File 1057?

Senate File 1057 (formerly House File 2847) is a bill that provides a solution to the Minneapolis TRFA funding issue. Senate File 1057 provides for a total consolidation of the Minneapolis TRFA into the Teachers Retirement Association (TRA), effective July 1, 2006.

Senate File 1057 provides for a benefit improvement of 0.2 percent in the formula multiplier (1.7 percent to 1.9 percent) for all TRA Coordinated members for all service after July 1, 2006.

Senate File 1057 also provides various methods of funding to cover the costs associated with the consolidation and benefit improvement.

What is the TRA Board of Trustees’ position on Minneapolis TRFA’s funding difficulties?

The TRA Board of Trustees has reviewed MTRFA merger proposals many times. Their longstanding position is that they are not opposed to any merger as long as the merged fund brings sufficient assets and/or future contributions necessary to fund the liabilities assumed. Senate File 1057 provides adequate funding for the MTRFA liabilities assumed in the merger.

What are the positive features of the proposal outlined in Senate File 1057 (formerly House File 2847)?

Senate File 1057 addresses multiple and significant concerns regarding the funding and adequacy of teacher retirement benefits.

Why is the Minneapolis TRFA issue generating intense media coverage at this time?

There is serious concern over the viability of the Minneapolis Teachers Retirement Fund Association (MTRFA) to pay promised benefits. At present, MTRFA has only about 45 cents of assets for every dollar of pension benefits promised and has an unfunded actuarial liability of nearly $1 billion. Actuaries consider this funding level extremely critical. Some experts are predicting that the fund has only enough assets to continue to pay benefit recipients for another five to ten years before the fund balance is completely exhausted.

The funding problems at MTRFA developed over a period of many decades and MTRFA has never been fully funded or even considered strongly funded. The Legislature has periodically passed various reforms and contribution supplements to stabilize its funding status.

Periods of strong investment returns have also temporarily improved their funding status. However, since the downturn in investment markets earlier this decade, the funding status of MTRFA has steadily deteriorated.

Do Minneapolis TRFA members have better benefit provisions than TRA members?

Prior to 1978, all Minneapolis TRFA members were Basic program members and did not contribute to Social Security. As Basic program members, these individuals have their entire retirement coverage through the Minneapolis TRFA fund and do not have Social Security coverage. While the MTRFA Basic formula multiplier is similar to TRA’s, the MTRFA Basic program plan provisions include the ability to retire with unreduced benefits after 30 years of service.

MTRFA members first hired after 1978 have retirement benefits substantially identical to TRA members. Only about 250 MTRFA active members are eligible for the better benefit provisions of the Basic program, while the majority of MTRFA active members have comparable benefits to TRA members.

Why do Minneapolis, St. Paul and Duluth have their own separate teacher retirement associations?

The first class city teacher funds were formed in 1909 and predate the founding of the first statewide teacher plan in 1915. The 1915 TRA Fund was subsequently dissolved and the current TRA Fund was established in 1931.

Although there have been many merger proposals over the years, the four teacher retirement systems have retained their separate identities.

Who is responsible for the funding problem at Minneapolis TRFA?

The funding problems of MTRFA can be attributed to no single cause. In general, a pension fund experiences funding difficulties when its promised benefits are not adequately funded over a period of years.

Pension benefits are funded through a combination of three sources: employee contributions, employer contributions, and investment earnings of fund assets. When the combination of those three revenue sources is not adequate to sustain benefit levels, funding levels suffer.

Longstanding Legislative Commission on Pensions and Retirement (LCPR) policy guidelines state that the annual ongoing expense of pension costs as they accrue should be shared equally between employees and employers. When an unfunded liability develops due to benefit increases or negative investment or actuarial experience, there is no generally-established solution for resolving the deficit.

How many members do both MTRFA and TRA have as of June 30, 2005?

In terms of members and benefit recipients, the merger of MTRFA and TRA would increase the total population of TRA by nearly 9 percent.

Fund	Active	Inactive	Benefit Recipients	Total
MTRFA	4,756	4,981	3,839	13,576
TRA	74,552	29,031	38,957	142,540
Total	79,308	34,012	42,796	156,116
% of Total From MTRFA	6.00%	14.64%	8.97%	8.70%

What is the present financial status of both MTRFA and TRA as of June 30, 2005?

The assets and liabilities of Minnesota public pension funds are calculated annually on June 30. The fair market value of assets represents the actual market value of the plan’s assets. The actuarial value of plan assets is an alternative method of determining plan assets by averaging investment gains and losses (market fluctuations) over the most recent five-year period.

The pension fund liabilities are determined annually by an actuary and represent the present value of monies promised to the fund’s benefit recipients, deferred members, and its active members. As of the most recent valuation date, the MTRFA had an unfunded liability of $973 million.

Comparing the actuarial value of assets to the actuarial liability produces a funding ratio that shows the percentage of assets accumulated to cover the benefits promised to the fund’s members. The accrued liability funding ratio, presented in line E, is considered the most widely accepted measurement in determining the funding health of a public pension fund.

(Dollars in millions)	MTRFA	TRA
A. Fair Market Value of Assets	$745	$17,806
B. Actuarial Value of Plan Assets	$783	$17,753
C. Actuarial Accrued Liability	$1,756	$18,021
D. Unfunded Actuarial Accrued Liability	$973	$268
E. Accrued Liability Funded Ratio	44.6%	98.5%

What is the 2006 Legislature considering to resolve the MTRFA deficit?

Senate File 1057 passed the Legislative Commission on Pensions and Retirement (LCPR) on February 27, 2006. Senate File 1057 would merge MTRFA into TRA on July 1, 2006. All MTRFA members and retirees are transferred to TRA. TRA would assume both MTRFA assets and liabilities.

The unfunded MTRFA liability of nearly $1 billion would be funded over a 30-year period through a combination of increased employer contributions and direct aid payments.

Key features of Senate File 1057 include:

What will be the financial effect on the TRA Fund should the Minneapolis TRFA merger occur?

The combination of assuming the MTRFA unfunded actuarial liability and recognizing the prospective–only benefit formula multiplier increase for TRA members will result in an increased unfunded actuarial liability for the TRA Fund on July 1, 2006.

The TRA unfunded liability will be funded over a 30 year period through the following new revenue sources:

How do my TRA benefits improve under the proposal?

TRA member contributions will increase 0.5 percent on July 1, 2006, from 5.0 percent to 5.5 percent of covered salary. For future years of service beginning July 1, 2006, the formula multiplier is improved 0.2 percent from 1.7 percent to 1.9 percent per year. No formula multiplier improvement is applied for years of service prior to July 1, 2006.

Members who accrue more years of teaching service after July 1, 2006, will experience a greater effect of the benefit improvement at retirement. Generally, any member with service after July 1, 2006 will recover their increased employee contributions through higher retirement benefits within three years after retirement.

What effect does this proposal have on TRA retirees in the Post Retirement Fund?

Current TRA and other Post Fund benefit recipients are unaffected by the addition of MTRFA retirees and their assets and liabilities into the Post Fund.

The retirement benefits for TRA’s approximately 40,000 benefit recipients are paid from the Minnesota Post Retirement Investment Fund (Post Fund). The Post Fund also funds the benefit payments for retirees from the Public Employees Retirement Fund (PERA) and the Minnesota State Retirement System (MSRS).

In total, over 125,000 benefit recipients are paid from the Post Fund with benefit payments exceeding $2 billion annually.

Under Senate File 1057, about 3,900 retirees from MTRFA will be transferred to the Post Fund on July 1, 2006. The amount of assets transferred to the Post Fund for the promised benefits to MTRFA retirees will match the July 1, 2006 funding ratio of the Post Fund. This method was chosen since it requires MTRFA retirees to share the current Post Fund deficit situation with TRA retirees.. After the merger, the Post Fund funding ratio will be unaffected by the inclusion of MTRFA retirees.

What can I do to express my support for this proposal?

Senate File 1057 must pass both the Senate and the House of Representatives and be signed by the Governor for final passage. The Legislature is expected to remain in session until the constitutional deadline for adjournment on May 22, 2006. [Updated: Passed House and Senate on May 21, signed by Governor Pawlenty on June 1.]

We understand that keeping informed of late-breaking legislative news can be difficult. That’s why we suggest you visit the TRA web site for the latest developments.

Go to www.tra.state.mn.us and choose the 2006 Legislative Bill Tracking link to review developing legislation.

When legislation is proposed that may impact TRA, an entry is made under the bill number, and a link to the full text of the proposal is provided.

Contact information for all legislators can be found on the Senate and House of Representatives web sites (www.senate.leg.state.mn.us and www.house.leg.state.mn.us) should you wish to contact them with your opinion regarding a proposal. These sites also offer a wealth of information including daily meeting schedules, committee membership, and bill tracking.

All pension-related proposals are heard by the Legislative Commission on Pensions and Retirement (LCPR) (www.commissions.leg.state.mn.us/lcpr) before they are included in the Omnibus Pension Bill. The LCPR web site publishes the list of bills that have been proposed for inclusion in the pension bill, along with Commission meeting dates and times.

For a review of state government processes, you may want to visit www.house.leg.state.mn.us/hinfo/govser
/govser.htm. The Minnesota State Government Series includes information on lawmakers, the legislative information, and a guide to how a bill becomes a law.

As the session progresses, keep an eye on the home page of our web site for articles detailing action taken on proposals, effects on TRA members, and, at times, the TRA Board of Trustees’ position regarding proposed legislation.

For your convenience, all of the links provided in this article are available by going to the 2006 Legislative Bill Tracking page on our web site.

If you do not have access to the internet and need additional information, feel free to contact a Customer Service Representative at 651.296.2409 or 800.657.3669.

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