Minnesota Lawyer
Questions were piling up, and progress on a long agenda was beginning to drag during Tuesday afternoon’s meeting of the Legislative Commission on Pensions and Retirement. Commission co-chair Rep. Tim O’Driscoll, R-Sartell, tried to gently encourage commission members to hold their questions or thoughts until a later date.
Rep. Tim O’Driscoll, R-Sartell, co-chair of the Legislative Commission on Pensions and Retirement, speaks during the hearing Tuesday.
(Staff photo: Bill Klotz)
“We’re at the very start of this discussion,” O’Driscoll reminded them.
In fact, at that moment, they were nearly 70 minutes into it. But almost by its nature, a discussion about actuarial tables, amortization periods and contribution percentages — debated and negotiated to the tenth of a percent — is going to take up some time. At one point, a pair of lawmakers involved in Tuesday’s meeting admitted they were unfamiliar with a set of terms and sought a definition.
At another, Rep. Tony Albright, R-Prior Lake, whose professional background is in financial services, expounded about the difference between “defined benefit” and “defined contribution” plans. His comments were directed at Sen. Sandra Pappas, DFL-St. Paul, who thanked Albright, dryly, observing that she had come to know the concepts well during her nine years on the pensions commission.
Though the content of Tuesday’s hearing was occasionally complex, its importance is easily understood. Various retirement funds are on the hook for long-term payouts to the state’s employees, past and present. Agreements made between Minnesota and its workers, or decisions enacted by its investment funds, can mean swings of tens of billions of dollars.
Minnesota’s pension plan was found to have a shortfall of nearly $17 billion as recently as 2013, but state minders believe that gap has shrunk considerably by now. Thanks to a 2010 legislative change, employees and state agencies now contribute a higher percentage to pension plans, and current retirees are receiving smaller increases under the cost of living adjustment, commonly referred to as COLA.
Among other complicating factors, legislators were told Tuesday that future considerations would have to reckon with longer lifespans: Minnesotans are expected to live an average of 81.1 years, virtually tied with Hawaii for the longest lives seen in America. In an analysis presented to the commission on Tuesday, a team from the Retirement Systems of Minnesota, a joint group of the three largest pension pools, said it was adjusting estimates to add another two years to the average life expectancy of retirees.
Mansco Perry, executive director of the Minnesota State Board of Investment, explained Tuesday that his branch oversees about $80 billion in assets, about three-fourths of which is tied up in pension holdings for public employees. Combined, Minnesota’s public pension funds saw a 4.4 percent return in fiscal year 2015, which ended July 1.
That figure is well below the 18.8 percent and 14.2 percent marks it achieved the previous two years, though Perry said it would still leave Minnesota in the “top four or top five” compared to other states. Perry attributed the lower performance last year to disappointing results in international stock holdings, which make up 15 percent of the retirement funds’ investments.
That pension funds would even have such investments is a fairly recent development, Perry said, recalling that at one time large stock portfolios sank all of their resources into indexes like the S&P 500, government bonds and cash holdings.
Now, some 8 percent of Minnesota’s funds are devoted to “alternative” investments, a category that includes equity, debt, natural resources, real estate and other products. Perry said the board ultimately plans to put more than 20 percent of its investments into that category.
“There are really only two things that an investor can do,” Perry said. “They can own something, or they can lend something. There’s just a wider variety of things that we can own, and there’s a wider variety of things we can lend to.”
After his presentation, Perry fielded questions on the topic of “secure choice” investments, which would allow private-sector workers, or small businesses, to contribute to state pension funds and receive the same or similar benefits as public employees.
A provision in the Women’s Economic Security Act (WESA), passed in 2014, called for an exploratory analysis of that idea. That study was initially pushed off, but Pappas said Minnesota Management and Budget (MMB) had contracted the Deloitte consulting firm to conduct the report, with completion expected next spring.
Perry said “a lot of other states” are investigating the risks and rewards of secure choice investments, including Maryland, where he served as the state pension fund director until 2010.
Minnesota has also discussed opening the option to private industry, but Perry said the state is lacking in the “infrastructure” needed to take in contributions and disburse returns. Adding the necessary staff and programs would be “burdensome” for the state, and Perry suggested that states could eventually work together to find an outside firm to handle the money transfers.
“None of those monies can be commingled with the state dollars,” Perry said. “So it would be a new program … and, most likely, we would outsource it to some other entity that is better set up to do that.”
Business advocacy groups, including chambers of commerce in a number of states, have spoken out against adding secure choice options to the private sector, arguing that private businesses already have retirement plans in place for their employees.
With that in mind, Perry said he had recently suggested to a lobbyist that private companies could be able to join the state fund free of cost for a temporary period, and give employees the option to roll their assets over into a private pension.
“I believe that the premise of what we’re trying to do makes a lot of sense,” he said. “I just think we need to broaden our thinking … to make something like that a reality.”
