Focus on New Laws: Pension Funding and Sustainability

A new law addresses pension funding and sustainability for the state’s major pension systems, including the Public Employees Retirement Association.
(Published Aug 27, 2018)

The 2018 omnibus pension bill, signed into law on May 31, requires $27 million in additional state funding this biennium and $113 million in the 2020-2021 biennium. It also makes changes in pension benefits for active members and retirees and, for some plans, increases employer and employee contributions to stabilize the state’s major public pension plans.

The 245-page law, Chapter 211, is estimated to reduce the state’s pension liabilities by $3.4 billion immediately, with an additional reduction of $2.7 billion over the next 30 years.

PERA General Plan

Changes to the General Plan include:

  • Reducing the investment return assumption from 8 percent to 7.5 percent for all pension plans.
  • Eliminating future augmentation of pension benefits for all former members.
  • Lowering the refund interest rate from 4 percent to 3 percent for former members of a public pension plan.
  • Resetting the amortization period for the major state pension plans to a new 30-year period ending in 2048.

The employer and employee contribution rates for participants in the General Plan will remain unchanged. Employers will continue to contribute 7.5 percent of each participating employee’s salary, while the employee will contribute 6.5 percent. These contributions are in addition to Social Security/Medicare contributions of 7.65 percent from the employee and employer.

Under the General Plan, the new law removes the current retiree cost-of-living adjustment (COLA), which provides for a 1 percent annual COLA and automatic COLA when specified funding ratios are met. It replaces it with a new COLA that is equal to 50 percent of the increase announced by the Social Security Administration, with a minimum increase of at least 1 percent and a maximum of 1.5 percent. The annual COLA for early retirees is also eliminated.

PERA Police & Fire Plan

For the PERA Police & Fire (P&F) Plan, the new law:

  • Increases the employer and employee contribution rates.
  • Freezes the retiree COLA at 1 percent.
  • Requires the state to make an annual direct state aid payment of $4.5 million on Oct. 1 of 2018 and 2019.
  • Increases the direct state aid amount to $9 million annually until 2048.

The table below shows the contribution rates for employees and employers through 2020.

Table: PERA Police & Fire Contribution Rate Increases

Participants and employers for personnel in the PERA P&F Plan do not contribute to Social Security, but for personnel hired after March 31, 1986, the employee and employer each contribute 1.45 percent to Medicare.

Volunteer Fire Relief Associations

Specific to Volunteer Firefighter Relief Associations (VFRA), the new law provides default procedures for allocating special fund assets or liabilities after a joint powers fire department dissolves. Under the new law, any remaining assets in the trust fund cancel to the general fund of each municipality that was a contracting party to the joint powers agreement.

The new law requires that when a VFRA that had provided a lump sum benefit of $9,500 or more as of June 1, 2018, dissolves, any remaining assets after paying out benefits must go to either: (1) the municipality, if the municipality paid a required contribution to the VFRA during the 10 years preceding the June 1, 2018, date; or (2) the state, if the municipality did not pay a required contribution within those 10 years. According to the Legislative Commission on Pensions and Retirement, the only two VFRAs that provide benefits of $9,500 or more are Brainerd and Plymouth.

The new law also requires PERA to establish a Fire State Aid Work Group to study the impact of allocating a portion of fire state aid to pay PERA P&F employer contributions. Additionally, the new law establishes a Relief Association Work Group to consider possible changes to the statutes governing VFRA plan type conversions, dissolutions, and disposition of surplus assets.

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