The MSRS Board of Directors proposed legislation during the 2010 Legislative Session to adjust benefits to ensure the retirement system has sufficient funds to pay benefits for retirees, active employees and future hires.

The legislation followed almost two years of steep market declines. Although it appears that the economic recovery is underway, most experts predict a slow recovery.

"We were in a strong funding position going into the severe market drop and we've weathered the storm. Now is the time to get the ship back on course toward full funding, "explains MSRS Executive Director Dave Bergstrom.

Governor Pawlenty signed the Omnibus Pension Bill SF2918/HF3281 on Saturday, May 15, 2010. The legislation is now Minnesota Laws 2010, Chapter 359. There are several modifications to benefits for active, deferred and retirees in an effort to provide stability to the MSRS Retirement Plans.

As of June 30, 2007, the General Plan administered by MSRS was about 95 percent funded. A 5 percent market decline in fiscal year 2008, followed by a 19 percent loss in fiscal year 2009, decreased the Plan's funding ratio to a level below 70 percent. Since June 30, 2009, the Plan has experienced significant recovery with strong investment gains of about 15 percent. The investment gains have helped stabilize the funding and the Plan is now over 70 percent funded, but there is still progress to be made to return to full funding.

To achieve our goal to reach full funding, the MSRS Board of Directors began making strides through 2006 legislation to gradually increase contribution rates for both employees and employers over three to four years. See the chart below which shows how the increases in rates were phased in to ease the burden for employees of the General, Correctional, and State Patrol Plans and their employers. To continue its efforts to reach full funding, the MSRS Board recommended other types of benefit adjustments in the 2010 Session which will lower current and future liabilities. All of these various changes made over a period of time will help improve the overall funding of the retirement plans.

The MSRS Board decided that no additional employee and employer contribution rate increases will be proposed for the General and Correctional Plans beyond the final increase set for July 1, 2010. "The Board does not believe that employees should bear any additional contribution rate increases to resolve the funding issue. Employees have already experienced gradual contribution rate increases, and they have not received significant raises in the past several years. The Board understands that most employees will go without raises for the next two years," explains Bergstrom. The Board is also aware that the State's budget shortfall will not allow for any additional employer contributions for several years.

The MSRS Board decided that retirees, employees, and deferred members (employees who have terminated but not yet started to collect monthly benefits) will share the responsibility of keeping MSRS sustainable. "We need to modify benefits now to make sure MSRS can pay benefits in the future. The Board's most important responsibility is to protect the long-term solvency of the fund," explains Bergstrom.

The MSRS Board of Directors is proposing the following nine solutions to maintain the solvency of the retirement fund and to get the plans on track to reach full funding.

1. Lower future Post-Retirement Adjustments

   Under current law, benefit recipients receive a 2.5 percent increase each January 1. Retirees in all MSRS retirement plans, except the State Patrol Plan, will now receive 2 percent beginning January 1, 2011. State Patrol Plan retirees will receive 1.5 percent per year. Post-Retirement Adjustments will return to 2.5 percent per year when the retirement plan reaches 90 percent funded.

2. Reinstate waiting period for initial Post-Retirement Adjustments

   The law will extend the waiting period for the initial Post-Retirement Adjustments back six months. Currently, a person who retires any time during the year is eligible for a prorated increase the next January 1. Under the proposal, only employees who retire before July 1 will be eligible for a prorated increase the following January. Increases are prorated depending on which month the person retires. For example, a person who ends their service in January under the proposal would receive 6/12 (one-half) of next January's increase. If the increase is 2 percent, a January retiree's first increase would be 1 percent.

   The chart below shows what an employee retiring in the year 2010 can expect under the proposed law compared to current law:

   
   
   

   A RETIREE'S FIRST POST-RETIREMENT ADJUSTMENT (Prorated Percent and Year Granted)
   Retirement Month in 2010	Current Law (percent of full increase)	Proposed Law (percent of full increase)
   January	11/12 to receive in January 2011	5/12 to receive in January 2011
   February	10/12 to receive in January 2011	4/12 to receive in January 2011
   March	9/12 to receive in January 2011	3/12 to receive in January 2011
   April	8/12 to receive in January 2011	2/12 to receive in January 2011
   May	7/12 to receive in January 2011	1/12 to receive in January 2011
   June	6/12 to receive in January 2011	12/12 to receive in January 2012
   July	5/12 to receive in January 2011	11/12 to receive in January 2012
   August	4/12 to receive in January 2011	10/12 to receive in January 2012
   September	3/12 to receive in January 2011	9/12 to receive in January 2012
   October	2/12 to receive in January 2011	8/12 to receive in January 2012
   November	1/12 to receive in January 2011	7/12 to receive in January 2012
   December	12/12 (full) to receive in January 2012	6/12 to receive in January 2012

   
   
3. Lower interest on refunds

   The law reduces interest paid on refunds from 6 percent to 4 percent.

4. Reduce the benefit increases for members who terminate service and plan on collecting monthly benefits in future years (deferred members)

   Employees who are vested can keep their contributions in the MSRS retirement plans and collect benefits when they reach retirement age. Under the current method of determining a deferred member's benefit amount, their base amount is increased by 3 percent per year until January 1 following the member's 55th birthday, and 5 percent per year thereafter. The new law lowers all future deferred augmentation to 2 percent in future years after December 31, 2011. Current terminated employees would retain the higher accrued rate for the past years, but for all future years the benefits would be increased by 2 percent instead of 3 or 5 percent.

   While cutting this benefit saves money, it also makes sense from a retirement plan policy perspective. At the current rate, some employees who leave state service and wait to collect monthly benefits, results in getting higher benefits than if they continued to work and contributed to MSRS. The 5 percent rate increase after age 55 is extremely costly and has led to fairly generous benefit increases. Terminated employees over age 55 are eligible to collect monthly benefits, if they prefer, rather than waiting to collect and letting their monthly benefits increase. It still will be attractive for deferred members to wait to collect, because the penalty for early retirement also lessens every year.

5. Eliminate interest on suspended benefits for re-employed retirees

   Retirees who return to state employment, or to any employment normally covered by MSRS, have their retirement benefits suspended when they earn more than the earnings limit ($14,160 in 2010). Any suspended amounts are paid back to retirees one year after they terminate from their re-employed positions. Currently, 6 percent interest is added to the suspended amount - the new law eliminates interest after December 31, 2010.

6. Increase vesting for future hires

   Currently, most employees become vested (eligible for monthly benefits) after three years of serviceThe new law changes vesting to five years for future employees (hired after June 30, 2010) covered by the General and State Patrol Plans and graded ten years year vesting for future employees covered by the Correctional Plan. Graded vesting means that the retirement benefit is 50 percent vested after five years - increasing 10 percent each additional year of service until fully vested after 10 years.

7. Increase in early retirement penalty for future Correctional and State Patrol Plan employees

   Members of the State Patrol and Correctional Plans can retire with full benefits at age 55. They can retire as early as age 50 with subsidized early retirement benefits. The law changes increase the early retirement penalty in the State Patrol Plan for future hires (after June 30, 2010) from 1.2 percent for each year a person retires under age 55 to 2.4 percent. The Correctional Plan early retirement penalty for new hires and those retiring after June 30, 2015 will increase from 2.4 percent to 5 percent for each year a person retires under age 55.

8. Lower retirement formula for future Correctional Plan employees

   Under the current formula of determining a Correctional Plan employee's benefit amount, 2.4 percent is added to their base amount for each year of service. Under the new law, employees hired after July 1, 2010, would receive 2.2 percent for each year of service.

9. State Patrol Plan contribution rate increases

   State Patrol Plan members will increase their contribution rates under the new law. Beginning July 1, 2011, the employee rate will increase from 10.4 percent to 12.4 percent and the employer rate will increase from 15.6 percent to 18.6 percent.

The MSRS Board of Director's initiative lowers current and future liabilities by about $75 million per year. If the markets continue to rebound, the Funds will move back toward full funding. If the market recovery stalls or takes several years, the Board may have to consider additional modifications. Bergstrom stated, "The Board is committed to bringing MSRS back to its strong funding position it has enjoyed for many years. We need to make sure retirees, active members, and future employees have a retirement plan that is sustainable and can depend on."

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