Fix sought for Duluth teachers' pension fundThe pension fund for Duluth teachers is one of the worst-funded in the state for public employees, with only 63 cents in the bank for every dollar it will need to pay out.
By: Jana Hollingsworth, Duluth News Tribune
The pension fund for Duluth teachers is one of the worst-funded in the state for public employees, with only 63 cents in the bank for every dollar it will need to pay out.
The problem surfaced when Duluth Teachers Retirement Fund investments tanked in the stock market crash of 2008.
“We live and die by the markets,” said Jay Stoffel, executive director of the fund. “The crash of 2008-09 is still haunting us.”
Despite measures taken by the Legislature two years ago requiring higher contributions from teachers and the district and freezing cost-of-living raises for pension recipients, the fund still has a $119 million unfunded
It doesn’t mean anyone won’t get the pensions they’re owed, Stoffel emphasized. But the Duluth group and the St. Paul Teachers Retirement Fund, which is 62 percent funded, are among the retirement funds under pressure from the state to build their pension kitties back up to 100 percent of their total potential payout.
Though Stoffel and others say the retirement fund was devastated by the Great Recession and that managers couldn’t have foreseen the drop from being 100 percent funded in 2002 to 63 percent today, others say the Retirement Fund should have been handled differently.
Duluth teachers and the district didn’t increase their contributions soon enough, said Mark Haveman, executive director of the nonpartisan Minnesota Center for Fiscal Excellence.“If you go back to 2005, you start to see contribution deficiencies,” Haveman said. “You have a six-year lag time from when the problem started to materialize and when they did something
The actuary for the Duluth teachers’ fund agrees that contributions from teachers and the district are too low, Stoffel said. But even if teacher and district contributions were doubled, the fund wouldn’t be in a “comfortable range,” he said. “The money has to come from the markets.”
Stoffel said he will go to the Legislature this session to seek higher contributions from teachers, from the school district — and more money from the state. With the state facing a $1.1 billion deficit, that money might be hard to come by.
State Sen. Roger Reinert, DFL-Duluth, said that though he believes the Duluth Teachers Retirement Fund “is exceptionally well-run,” looking for help from the state might be a tough sell.
“It’s a legitimate question to ask … but the state doesn’t have a lot of money lying around,” Reinert said.
Until 2010, retired Duluth public school teachers saw increases each year in their pensions. In some years, the “adjustments” were generous, including 9 percent in 2000 and 10 percent in 2001. The state Teachers Retirement Fund had similar adjustments around that time. The fund was healthy, Stoffel said, and the increases reflected strong investment returns.
But one Duluth teacher says that money should have been saved.
“When times are good and you have extra money, you bank it,” said Duluth East High School and Ordean East Middle School science teacher Tim Velner, who is nearing retirement. “It’s really important that this is funded. We’re going through a period where we have a lot of people in this generation.”The Duluth Teachers Retirement Fund’s financial troubles stem from a combination of lower return on investments and fewer people paying into the fund.
Though the retirement fund continues to lose members for a variety of reasons, it has an ever-larger group of retirees.
Some of the reasons for the membership declines:
The district now has more people receiving pensions than it has people paying into the fund.
Last year, 919 members contributed to the fund, down from 1,512 in 1995. On the flip side, the fund was paying 1,386 pensions last year, compared to 841 in 1995.
Finding more money
Employee contributions account for about 14 percent of the fund’s revenue. The employer contribution is about the same. The state contributed about $550,000 last year. About 70 percent of the fund’s income comes from investments.
Haveman of the Minnesota Center for Fiscal Excellence was critical of the Duluth fund’s investments, saying the average annual return over the past 10 years was 3.8 percent, compared to the Minnesota State Board of Investment’s returns of 5.7 percent, which he considers a benchmark.
“Over 10 years’ time, the implications of that are mammoth,” Haveman said.
Stoffel said he doesn’t think there is a serious problem with the way the fund is investing.
“We beat the Minnesota State Board of Investments several times; some years we way outperform them,” Stoffel said.
Duluth teachers pay 6.5 percent of their salaries and employers pay 6.79 of each teacher’s salary annually toward the pension fund. St. Paul’s rates are 6.25 percent and 9.09 percent, and the state Teacher’s Retirement Association rates are each 7 percent. Both the St. Paul and state funds have increases in contributions legislated for 2014, and each will make small increases in their pension payments to retirees. All public employee pension contribution rates and payouts are set by the Legislature.
The Duluth Federation of Teachers supports higher contributions by teachers and the district, said its president, Frank Wanner.
“It’s extremely important to employees who have been paying into it for many years and want to make sure benefits are going to be there,” Wanner said.
Should the state pay?
But the state, too, should kick in more for the Duluth pension fund, say Stoffel and others.
Stoffel said he plans to ask for a bigger chunk — between $5 million and $10 million a year — of the state’s total contributions to public pension funds for Duluth.
Paul Doane, executive director of the St. Paul Teachers Retirement Fund, said he also will ask for more money for his fund.
State Rep. Mary Murphy, DFL-Hermantown, sits on the Legislative Commission on Pensions and Retirement. She said about 10 public employee pension funds will be asking for more state assistance this year.
The state bears some responsibility for the increased liability of pension funds, Murphy said, by changing predictions last year on how long people might live. That means more money will have to be paid out when they retire. It also decreased the earnings expectation for plans from 8.5 percent to 8 percent.
Time also will play a role in reducing the unfunded liability, Stoffel said. The benefit of increasing employee and district contributions and eliminating cost-of-living raises two years ago will increasingly be felt. And with the rebound in the stock market last year, the fund had a nearly 15 percent return in 2012.
“It’s not impossible” to fix the fund, Stoffel said.
“We have a problem and we’re continuing to fix it,” he said. “The big issue would be if the market went down 50 percent again. Managing a pension fund is a moving target.”