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Teacher Pension Reform Proposal. TRA Financial status Investment returns Current financial status Funding ratio history Contribution rate history Teacher Pension Reform Proposal Funding Stability Benefit Reforms. Fund Returns Exceed 8.5% in Long-Term But Not Short-Term.
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Teacher Pension Reform Proposal TRA Financial status • Investment returns • Current financial status • Funding ratio history • Contribution rate history Teacher Pension Reform Proposal • Funding Stability • Benefit Reforms
Fund Returns Exceed 8.5% in Long-Term But Not Short-Term State Board of Investment Returns (for periods ending 6/30/2008) 8.5% Actuarial Required Return for Full Funding Returns since 7/1/08: - 21% Source: State Board of Investment FY 2008 Annual Report
TRA Has Weathered Funding Problems in PastFunding Ratio History 100% 52% 82% * Funding ratio = ratio of assets to benefit liabilities Note: Beginning in FY07, rule change required market value of Post Fund to be included in funding ratio.
Extra Contributions and High Returns Helped Address TRA’s Past Funding Problems ’95-99 18%/yr returns EE/ER Rate = 5.5% Funding Ratio ‘83-87 20%/yr returns 1998: EE/ER Rate Cut to 5% 82% 1987: Deficiency eliminated 1995: Employee Rate Rise to 6.5% 52% 1985: Employer Rate Rise to 9%
TRA Contribution Rates Higher in Past Low funding ratio/deficit Full funding reached ER Rate EE Rate
Teacher Pension Reform ProposalGoals TRA Mission: Ensure fund’s financial stability, provide benefits to attract and retain quality teachers, support strong education system which is vital to state’s economic growth • Financial stability >> Puts teacher funds on track for full funding << • Reform benefit structure >> Recruit / retain experienced teachers, part of transforming education system for 21st century<< House File 592/Senate File 506
Teacher Pension Reform ProposalFunding Stability Why Needed? • Investments down: -5% FY2008, -21% (July – Dec 2009) • Funds need more revenue to stay on track for full funding • TRA contribution rates are 5.5% -- lower than 9% in mid-1980s • If not addressed, pension shortfall can impact state’s bond rating • Public pensions are good investment • Pension payments from 3 statewide pension systems provide $3.3 billion in stimulus to state and act as a stabilizer during hard economic times • Public pensions are one of largest economic sectors of state, almost as large as agriculture • Public pensions add 22,500 jobs for state • Add $800 million annually in tax revenue, $80 million more per year than what public employers contribute to the pension systems
Teacher Pension Reform ProposalFunding Stability – Proposal Details • Employer (school district) rates increase from 5.5% to 7.5%, phased in gradually over 4 years, increase school aid to offset costs • For TRA, added incremental costs are $22 million per year for 4 years • TRA employer rates rise gradually beginning July 1, 2011 as follows: • Automatic contribution stabilizer: After 2016, if financial markets improve and contribution increases are not needed, they are suspended or reduced. If a deficit persists, both employee and employer contributions would continue to increase by 0.25% per year until the fund is stabilized.
Teacher Pension Reform ProposalBenefit Reforms Why Needed? • Adequate pensions needed to attract / retain teachers and strengthen education system • MN teacher pensions rank at very bottom compared to other states • Full benefit retirement age for post-89 hires is age 66, highest in nation • Average post-89 teacher retiring at age 60 must have over $200,000 in savings to replace 80%-90% of pre-retirement earnings Key Features: • Improve retirement options for career teachers hired post-1989 • Add incentives for teachers to work longer • Teachers would pay for improved benefits, estimated at 1.9% of pay • Employee rates rise in tandem with employer rates, effective 7/1/2011, phased-in over 4 years • Duluth and St. Paul Teacher Retirement Funds are included in proposal
Teacher Pension Reform ProposalBenefit Reforms – Proposal Details • Formula multiplier increased to 2.1% of high-five salary for years of service after July 2011 – helps all teachers • Retirement penalties lessened for career teachers with 30+ years of service, allowing them to retire at age 62 with adequate benefits • Full benefit retirement age lowered from age 66 to age 65 • Effective date of benefit reforms: July 1, 2011 • TRA employee contributions increased beginning July 1, 2011 as follows:
Teacher Pension Reform ProposalBenefit Impacts TRA Monthly Benefits, assumes Hi-Five of $60,000 -------Hired 7/1/89------- ------Hired 7/1/2009------
Teacher Pension Reform ProposalAdvantages • Puts teacher funds back on path for full funding • 7/1/2011 effective date gives state time to plan financially • Balances current economic realities with financial stability needs • Positive impact on state’s bond rating • Builds on past precedents – employer/employee contributions rise to stabilize fund and teachers pay for benefit increases • Improves pension equity for teachers hired after 1989 • Allows for improved retirement options for career teachers who need to retire while providing incentives to continue teaching • Teacher and school district rates increase in tandem • Balanced package – shared employee/employer responsibility
