The Minnesota Legislature’s pension commission — the primary group for screening, shaping and fixing laws that govern the state’s multi-billion-dollar pension system — has no leadership and only half of its membership and hasn’t met since August.
That is raising concerns because the commission has acted as the gatekeeper for pension legislation, according to Don Betzold, the former DFL senator who chaired the commission in 2009-10.
Traditionally, the group evaluates the often-complex pension proposals, he said, because it has access to the staff and actuarial assistance.
During his time, “I said any bill introduced after March 3 was not even going to be considered,” said Betzold, who served on the commission for 14 years. “If you make a small mistake, it could be a billion-dollar mistake.”
As of Wednesday, 18 pension-related bills were alive in the current session. Larry Martin, executive director of the commission, said he and his staff have analyzed all of them, been responding to requests for help from legislators on them and met with the two new Senate appointees to the commission. Asked if the lack of leadership on the commission is a significant concern, he said it could become so next month.
Martin said he views his job as working not just directly for the commission, but for the full Legislature.
The bills include a proposal that would shift an estimated $343 million in annual contributions to pensions from state and local governments and schools to their employees.
Betzold since said many of these proposals likely could be pushed into the 2012 session.
The commission’s actuary has not looked at the impact of the proposal to shift contributions, but the actuaries for the state’s three major pension plans have done so.
The pension panel, known formally as the Legislative Commission on Pensions and Retirement, consists of five members from the state Senate and five from the House of Representatives. The commission reorganizes at the start of each biennium. The Senate has named its five members, but the House hasn’t. By law, the chair of the commission shifts to a House member in the current biennium.
Missing the deadline
State law delegates the House speaker, currently Rep. Kurt Zellers (R., Maple Grove), to appoint the House members “at the commencement of each regular session of the Legislature for a two-year term beginning Jan. 16 of the first year of the regular session.” This year, that date was Jan. 4.
MinnPost asked Zellers for comment on March 17 and was referred to legislative assistant Margaret Van Heel. She passed the request on to Jodi Boyne, director of public affairs for the House GOP Caucus.
“They will be named this week,” Boyne said Monday. Asked why the delay, she said the new GOP legislative leadership was faced with a heavy load of about 150 appointments to commissions and agencies.
The commission operates with a staff of four employees. Martin, its longtime executive director, joined the staff in 1974 as deputy director and became its executive director in 1978. In 1982, he left to head Pennsylvania’s pension commission and then returned in 1986 to the Minnesota executive director post.
“Is it going to cripple the process? No,” Martin says. There has been less pension legislation so far this year than last, he adds. One bill, which would expand the commission to 14 members, passed the House this month 126 to 5.
By this time last year, the commission had seven meetings. However, the panel had to oversee a major “sustainability package” in 2010.
Mark Haveman, executive director of the Minnesota Taxpayers Association, has been monitoring the state’s pension situation closely. He describes the commission staff’s analytical capabilities and role in pre-screening bills as critical. “This is exceedingly complex stuff, but the stakes are high,” Haveman said.
He added that Gov. Mark Dayton likely would veto such bills as the GOP-backed proposal to require workers to shoulder substantially more of the cost of funding the system.
The swing to GOP control on the pension commission will come as tightening fiscal situations in Minnesota and other states lead elected officials to focus more closely on pensions and other benefits for public employees.
Soon, the commission could have that and much more to think about.
Last year’s “legislative fix” mandated the three major public pension plans to do a study of whether to switch to a defined contribution plan from a defined benefit plan. Most of Minnesota’s public employees have defined benefit plans, which guarantee specified pensions regardless of fluctuations in the size of the investment pool used to fund the plans or other changes. Defined contribution plans, similar to 401(k) accounts, provide individuals with personal accounts without guaranteeing the benefit levels.
Private sector employers have been moving to defined contribution plans in recent years in order to lower the costs of providing retirement benefits. A minority of Minnesota public employees are in defined contribution plans now. Advocates of these plans have suggested that more of the state’s government employees move to defined contribution plans.
Various forms of defined contribution plans have been proposed over the years in Minnesota.
Leaders of the three plans expect to release a draft of their study early in April and the final report in June. Then the commission is likely to look at the study.
Also, James Nobles, the state’s legislative auditor, says that this spring, the Legislative Audit Commission could initiate a new study of the pension system, given various concerns that have been expressed.
Shift in viewpoint certain
In the 2009-10 biennium, when the DFL had lopsided majorities in the Legislature, DFLers held eight of the 10 seats on the pension commission. The GOP landslide in last November’s election handed control of both legislative chambers to the Republicans for the first time in 38 years.
Three of the five Senate appointees for the new commission are Republicans. At least three of the House members are certain to be from the GOP, giving the Republicans a minimum of six seats on the panel. The Republican members appear likely to look more favorably on pension proposals that tighten benefits for public employees.
Last year, the DFL-controlled Legislature did some of that, when a critical need to shore up funding led the state’s three major public pension plans — the Public Employees Retirement Association (PERA), the Teachers Retirement Association (TRA) and the Minnesota State Retirement System (MSRS) — to swallow hard. Working with the pension commission, they came up with a fix that cut benefits and boosted contributions by employees and governments. The 2010 Legislature approved the package in its closing hours.
The three funds estimate that the total amount of the proposed contribution shift to public employees from their employers at $343 million annually, but they cite their actuary’s estimate that this amount would be reduced by $68.5 million annually because employees would be entitled to pull far larger contributions from the system, should the legislation pass as now proposed. In addition, they cite an estimate that the bill would reduce tax revenue to the state by about $20 million annually.
Combined, the plans represent more than 600,000 employees and retirees. The fix, along with improved returns on the plans’ investments and a lower increase in pay for public employees than had been expected, has improved the condition of their plans.
The pension commission keeps a close watch on the retirement system. Using data from the various plans, its staff reports annually on their condition by two principal measures: their funding ratios and their deficiency or surplus. The former measures their assets as a portion of their liabilities. The latter is the difference between annual funding requirements and contributions as a percentage of covered payroll.
According to the staff’s latest report, issued in January for data based on the market value of the funds’ assets as of last June 30, PERA’s funding ratio rose to 66.0 from 53.8 percent a year earlier.
TRA’s ratio rose to 67.5 percent from 59.8 percent, and Lauri Fiori Hacking, the teacher plan’s executive director, said the ratio has turned up sharply since June 30. At MSRS, it rose to 75.0 percent from 65.1 percent. These ratios are higher by another measure that smoothes out market values over a number of years.
By the second yardstick, PERA had a deficiency of 1.76 percent at June 30, down from 6.73 percent a year earlier. TRA’s deficiency dropped to 7.59 percent from 11.1 percent, and is projected to fall to 3.59 percent over the next four years. The MSRS deficiency fell to 3.90 percent from 15.1 percent.
Directors of all three big plans stress that the condition of their funds has continued to improve since June 30, thanks to in large part to improving investment returns and the continuing impact of last year’s legislative fix.
Another issue for the pension commission is whether to urge legislators to reduce the assumed rate of return on the funds’ investments. This pivotal assumption is used to calculate the levels of contributions to the fund by public employees and their governments.
Contributions from employees and governments provide only 30 percent or so of the money needed to fund the Minnesota plans. The rest comes from returns on their investments. The plans assume an 8.5 percent return. That puts them at the high end of the range-of-return assumptions for large public pension plans, according to the surveys by retirement administrators. One of the most recent surveys, of 126 funds, shows only 12 at the highest rate (8.5 percent), 17 at 8.25 percent, 59 at 8 percent and the rest between 7 percent and 8 percent.
Huge swings in pension liabilities hinge on this assumption, hence high-stakes arguments about what the assumed rate of return should be are escalating. Joshua Rauh, a finance professor at Northwestern University, argues that the assumption should be based on a “riskless rate of return” based on Treasury bond yields — currently about 4 percent. Using that measure, he calculates the unfunded liabilities for state and local pension funds at more than $3 trillion. At 8 percent, the size of the hole falls to $1.3 trillion.
Asked about Rauh’s estimates, which have been widely cited nationally, the TRA’s Hacking called it misleading to base return assumptions on such a low assumption. “It would be totally wrong to do that,” she said. “It does not reflect what expected rate of return really is.”
The three funds’ actuary, Mercer, has recommended lowering the 8.5 percent. The directors say they are studying that recommendation, but they note that the returns have been improving. That’s an argument for staying at the 8.5 percent assumption. In Minnesota, the assumption has been set in law at 8.5 percent since 1989 and can’t be changed without legislation.
Last month, the funds’ three directors provided GOP legislative leaders with estimates of how much more annual contributions would be required from employees, governments or a combination of the two if the assumption were lowered to 8 percent based on an actuarial study using data as of last June 30. The total was about $250 million in additional contributions annually.
The actuary for CALPERS, California’s mammoth retirement system, recommended that it come down from 7.75 percent to 7.5 percent. Last week, the system rejected that proposal, which would have required fiscally pinched governments to contribute more to fund pensions there. The lower the assumption, the less the funding from investments and the more employees and governments must come up with.
Dave Beal, a longtime business columnist and former business editor for the Pioneer Press, can be reached at email@example.com.
An initially posted version of this story reported incorrect funding and deficiency ratios for the Teachers Retirement Association’s fund.