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Ask Laurie

TRA Executive Director Laurie Hacking would be happy to answer your general questions about public pensions and TRA. To submit a question, e-mail AskLaurie@minnesotatra.org and she'll answer it here. Questions might be edited for clarity.

Please do not send personal information via e-mail. If you have a question about your personal circumstances, contact TRA and ask to connect with a counselor.

 

Q. Regarding a potential merger of St. Paul and Duluth teachers into TRA: If those retirees have been drawing pensions above and beyond those that have been typically paid out in smaller, outstate districts, then shouldn't there be an adjustment in what St. Paul and Duluth retirees will receive? And shouldn't there be more parity across the state in teacher and district contributions and in the monthly benefits among all teachers statewide? Taking the Duluth and St. Paul funds into TRA should not deliver any more illness to outstate teachers than has already been visited on them when they absorbed the ailing Minneapolis teacher’s retirement fund only a few years ago.

A. Actually, both the St. Paul and Duluth funds have had a lower formula multiplier than TRA has had. St. Paul and Duluth have had a 1.7 percent multiplier while TRA has had a 1.9 percent multiplier for years of service beginning in 2006. The 2013 pension law will increase the formula multiplier to 1.9 percent for the St. Paul and Duluth funds but only for future years of service. The two local funds have also had lower COLAs than TRA. TRA provides a 2 percent COLA while Duluth has paid no COLA since 2010 but will begin paying a 1 percent COLA in 2014. St. Paul has paid a 1 percent COLA for several years now. Contributions made by school districts covered under TRA will be 7.5 percent by July 1, 2014. The Duluth school district will be at that same level, 7.5 percent, by 2014. The St. Paul school district’s contribution rate is gradually rising to 10.34 percent by 2017.

With respect to possible consolidation of DTRFA into TRA, the new pension law enacted during the 2013 legislative session requires a detailed study of possible merger of both the Duluth and St. Paul Teacher Funds into TRA. The study requires a detailed actuarial and financial analysis of merger options. The TRA Board of Trustees has made clear its position on any potential merger. As fiduciaries responsible for the financial health of the TRA fund, the board will insist that TRA assets be protected and any consolidation do no financial harm to TRA. The board has stipulated that if either of the funds is merged into TRA, the merged entity must come in fully funded, meaning it must bring sufficient assets and the future contributions or state aid necessary to fully fund the liabilities TRA is assuming.

The TRA board will continue to advocate in the best interests of TRA members and retirees.

Q. Why is there a flat 2 percent increase for retirees when the state average for active teachers has been lower than that for the past several years? Why isn’t the yearly payout flat with no increase all the time to allow more teachers to be eligible for “Rule of 90”? Let me guess:  Someone reaching “Rule of 90” came up with the idea. Yes, I believe I am a little bitter about this. I was hired in August 1989.

A. I understand your frustration and disappointment with the lower level of benefits received by teachers hired after July 1, 1989. Be assured that as part of 2010 financial sustainability package, retirees were asked to sacrifice to help stabilize the TRA fund. Retiree annual increases have been suspended for two years; retirees received no increases in 2011 or 2012. They will begin receiving lower increases (2 percent instead of 2.5 percent) beginning in January 2013. The TRA board will continue to work to maintain a financially viable system for all active and retired teachers.

Q. Why hasn't TRA permanently frozen any additional increases to all TRA retirees who retired on or before the year 2000? It is a complete joke. I have been retired since June of 2009 and have received a meager 1.25 percent increase so far.

A. You are correct that TRA members who retired before 2000 received much larger increases than TRA members who retired subsequent to that date. This has certainly caused hardships for more recent retirees, and the TRA Board of Trustees is sensitive to that.

In crafting the 2010 pension reforms, the TRA board did consider measures that would have treated pre- and post-2000 retirees differently. Legal and financial concerns, however, dissuaded the board from pursuing differential treatment. There was concern that a court challenge could have undone the reforms. Plus, the savings needed to stabilize the system were very significant, and imposing limits on the annual benefit increases for only the pre-2000 retirees would not have yielded the savings needed to address TRA’s funding gap. In addition to the annual increase reforms, the TRA board also recommended a sizable increase in contributions for current TRA members and their employers. Contribution rates for this group are scheduled to climb 0.5 percent per year until 2014, when the rate reaches 7.5 percent. This combination of measures helped create a balanced, shared-sacrifice reform package.

Q. What happens to pension funds that are in domestic or foreign banks that go bankrupt? If a person is receiving a pension and TRA has financial issues, does it affect retirees as well as those who are working? According to the PEW Center, pension funds have a $757 billion shortfall for this year alone. What will happen to TRA? The total pension benefits that are due this year are over $1 billion. With only $110 million being contributed this year, how will TRA fund the other $900 million?

A. The State Board of Investments (SBI) invests TRA's assets along with the assets of the other two Minnesota statewide retirement systems (the Public Employees Retirement Association and the Minnesota State Retirement System). SBI is responsible for about $50 billion in retirement assets. The SBI’s experienced staff is responsible for overseeing professional money managers and has an excellent track record. SBI’s returns have exceeded the median returns of both private and public pension funds for long periods of time. For example, since 1980 the SBI has earned an average return of over 10 percent per year. SBI is nonetheless subject to the ups and downs of the financial markets. When the banking or housing industry run into trouble, this causes losses for all investors. Fortunately, the SBI is broadly diversified in its investments and does not concentrate pension assets in any one industry, company or country. This helps cushion the portfolio from downturns. (More at http://www.sbi.state.mn.us).

TRA has $16.7 billion in assets and pays about $1.5 billion annually in benefits. We receive about $500 million annually in contributions and related revenue. Contributions, however, are not our main source of revenue. Investment earnings typically represent about 75 percent of our annual revenue. For example, in fiscal year 2011, TRA had investment income of nearly $3.4 billion and in fiscal year 2010, we had investment income of $2.1 billion. Investment income varies from year to year and in some years it is negative (producing losses). Nevertheless, over time investments have produced significant income to the fund.

The TRA Board of Trustees is vigilant about monitoring the financial status of the fund and has recommended corrective measures to the state legislature when needed. After the large market losses in 2008-2009, the board determined that changes needed to be made in benefit and contribution levels in order to improve the long-term viability of the fund. In 2010, the legislature adopted the TRA board's shared sacrifice recommendations, which reduced annual benefit increases for retirees while gradually increasing contributions made by teachers and their employing school districts. Those 2010 reforms greatly improved TRA's long-term financial health. In FY 2009, TRA had a funding ratio of just under 60 percent. As a result of those reforms, by the end of  FY 2012, TRA's funding ratio had improved to 72 percent. We hope to see more financial improvement in the future, but this progress will depend upon future financial market conditions. The TRA board will remain vigilant about monitoring the fund and will make further recommendations if warranted.

Q. What do you think about public pension funds basically assuming they can always earn a 7.5, 8 or 8.5 percent return on investments?

A. There’s a lot of chatter in the media about pension funds’ investment returns and whether they’re realistic. You might be surprised to learn that Minnesota’s State Board of Investment returned an average annual 10 percent on our investments over the past 30 years and 8.8 percent over the past 20 years. Pension funds are in for the long haul.

Just as you can’t expect a 401(k) to make enough for you to retire on if you put everything in low-risk investments, pension funds have to have a mix of stocks/bonds/alternatives in order to generate good returns over time. We’re going to be paying our retired teachers and other public employees for years to come – largely with earnings on investment and their own contributions made during their working years. We don’t overreact to short-term volatility and vague feelings of pessimism (or optimism, for that matter).

Q. Can you talk a little about your big investments – the investments that are helping you hit that 7.5, 8 or 8.5 percent return?

A. The Minnesota State Board of Investment’s portfolio is about 45 percent domestic stocks, 15 percent international stocks, 18 percent bonds, 20 percent alternative investments (such as real estate) and 2 percent cash. This portfolio brought a return of 15 percent in 2010 and 23.3 percent in 2011. This year, it’s looking like 2.4 percent. That’s how market cycles go; it’s important not to overreact. For a portfolio such as ours, investment firms surveyed last year by our State Board of Investment projected an average 8.36 percent return over the next decade.

 

 

 

 

 

 

 

 

 

 

 

 

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