Watch WEBCAST of the March 21
State Government Innovation and Veterans Committee meeting.
(Discussion on SF0813 begins about 2 minutes into the video)
Update: March 23, 2011
A proposal to increase TRA member contributions to 9.0 percent was not included in the State Government Omnibus Bill. At the beginning of the Senate State Government Innovation Committee hearing on March 22, Chairman Mike Parry announced that the 3 percent contribution increase for members, along with the 3 percent decrease for employers (SF0813) will NOT be included in the bill.
Under the proposal, TRA members would have contributed an additional $126 million in additional contributions, while TRA employers would contribute $126 million less. While the total contributions of dollars to TRA would stay the same, costs of the TRA plan would actually increase by an estimated $21 million annually.
Employer contribution dollars are a key source of the financing of TRA benefits. When a TRA member terminates teaching service and requests a refund of their employee contributions, the employer contributions made on behalf of that person remain in the TRA Fund to help finance benefits of other members. The proposal would reduce employer contribution dollars into TRA beginning July 1, 2011. With fewer employer contributions dollars available, TRA would require another funding source (estimated $21 million annually) to offset the reduction in employer contributions.
Senator Parry said that while “pension reform” would not be included in the state government funding bill, he expected to pursue the pension reform issue once the Defined Benefit Plan Alternative Study is completed by the three statewide retirement systems this summer.
Under current law, TRA member and employer contributions are scheduled to increase from 5.5 percent to 6.0 percent on July 1, 2011. The following shows the scheduled rate changes passed into law in 2010:
|Employers – Coordinated||5.50%||6.00%||6.50%||7.00%||7.50%|
|Members – Coordinated||5.50%||6.00%||6.50%||7.00%||7.50%|
Check back often as we will post legislative developments as they occur.
March 22, 2011
The Minnesota State Senate is considering a proposal (SF0813) that would increase TRA member pension contribution rates by 3%, while cutting the employer contribution rate by the same percentage. In defending the bill, one of its sponsors, Senator Mike Parry (R-Waseca) stated, "We're just asking them, our good government employees, to take more responsibility for their own retirement." The bill is also sponsored by Senators Gretchen Hoffman (R-Vergas), Dave Thompson (R-Lakeville), Roger Chamberlain (R-Lino Lakes) and Scott Newman (R-Hutchinson). Hearings on the bill are expected soon. Senator Hoffman said the plan would help address the state’s budget crisis, by saving the state $50 million every two years. "This is not an attack on any workers," said Hoffman, “it's a personal responsibility thing. We talk about it in the private sector all the time."
Under the proposal, as of July 1, 2011, TRA member contributions would immediately increase from 6% to 9%, while employer contributions would decrease from 6% to 3%. No benefit plan changes would accompany this dramatic shift in contributions. This is not a temporary measure. Under the bill, in future years, member contribution rates would continue to rise to 9.5% on July 1, 2012, to 10% on July 1, 2013 and to 10.5% on July 1, 2014. TRA member and employer contribution rates were scheduled to rise under the 2010 law to stabilize the system. This 3% shift to members would be added on to the already-scheduled increase in TRA contribution rates. Members of the Minnesota State Retirement System (MSRS) and Public Employees Retirement Association (PERA) would see a similar 3% contribution shift to their members under the bill. The proposal also fails to include a sunset provision or future equalization of contribution rates when state revenues improve.
In Fiscal Year 2012, TRA members would be expected to contribute an additional $115 million to the Teachers Retirement Association, while employer contributions would decrease by a similar amount. By July 1, 2014, member contribution rates would rise to 10.5%, over twice the national average, while employer rates would be set at 4.5%. The rise in employee contributions would result in members shouldering nearly the entire cost of their earned retirement benefit.
Public employees covered by MSRS, PERA and TRA have already sacrificed pension benefits as a result of last year’s pension reform package, which lowered pension costs by $5.9 billion for the three statewide systems. When the pension systems faced financial challenges last year due to the severe market downturn, public employees stepped up to the plate to sacrifice to address those problems. The reforms last year were supported by retirees, most public employee unions, as well as public employer groups, and received strong bi-partisan support in the State Legislature. (TRA 2010 legislative summary)
Contributions made by public employers in Minnesota are already among the lowest in the nation when compared to other state pension systems. The average public employer contribution rate in the country is 9.4%, compared to 2011 employer contribution rates of 5% for MSRS, 7.25% for PERA, and 6% for TRA. Minnesota’s pensions are already cost effective from the employer’s perspective.
TRA members have consistently taken responsibility for funding their pensions. For years they have been contributing half of the costs of their pension. This is a larger share than what is paid by employees in other states. The average public employer contribution in other states is 9.4% while for public employees in other states, it is 5%. (Source: NASRA Public Fund Survey, FY 2009) The 3% shift proposal is more drastic than what was passed in neighboring Wisconsin, where employees have been asked for the first time to pay for half of their pensions. TRA members have been contributing half of their pensions for many years.
The proposed 3% shift will increase pension costs for TRA because it increases the contributions that are eligible to be refunded to members who leave employment while simultaneously reducing the employer contributions retained by the retirement fund when a member leaves. The proposal does not address this newly created funding gap, nor does it improve TRA’s overall funding structure. The 3% proposal will also lower tax revenue to the state since it would increase employee pension contributions, which are not included as taxable income.
This bill would have more long term negative impacts on public education than just the impact of the 3% contribution increase. The proposal could provide an incentive to teachers to leave public employment for private sector positions. The result would increase teacher turnover, hurt efforts to attract top-notch public employees, and result in less experienced teachers educating our children. The proposal is also likely to provide an incentive for late-career public workers to retire earlier than normal, increasing costs for the state pension programs.
Follow developments, as SF0813 is scheduled to be heard by the State Government Innovation and Veterans Committee in the near future.