SF5181

Purpose

• Establish retirement reforms related to a career rule for teachers who are aged 60 with at least 30 years of service. The bill makes changes to how pension adjustments, employer contributions, and retirement benefits are calculated and funded, primarily affecting teachers in Minnesota’s public retirement systems.

Main Provisions

• Pension adjustment revenue and rates (Section 1)

  • Defines how the state and districts calculate pension adjustment revenue that supports retirement funding.
  • The calculation uses:
  • The difference between a district’s adjustment per adjusted pupil unit (for fiscal year 2014) and the state average adjustment per adjusted pupil unit (fiscal year 2014).
  • The district’s adjusted pupil units for the year.
  • The salaries paid to district employees who are members of the Teachers Retirement Association (TRA) and the St. Paul Teachers Retirement Fund Association for the prior year.
  • The district’s pension adjustment rate for the fiscal year (St. Paul has higher rates; other districts have a lower rate).
  • Rates specified:
  • St. Paul (Independent School District No. 625): 2.3% (fiscal 2023), 2.5% (fiscal 2024–2025), 3.25% (fiscal 2026 and later).
  • All other districts: 1.25% (fiscal 2025), 2.31% (fiscal 2026 and later).
  • Revenue cap and proration:
  • For fiscal year 2025, total state pension adjustment revenue cannot exceed the amount for fiscal year 2024; the commissioner must prorate to stay within the cap.
  • For fiscal years 2026 and 2027, no proration; for 2028 and later, the total must not exceed the 2027 amount, with prorating as needed to stay within the maximum.
  • Cooperative units:
  • A cooperative unit (as defined by statute) qualifies for pension adjustment revenue as if it were a district; the aid is paid to the cooperative unit.

• Employer contributions to the retirement fund (Section 2)

  • Minneapolis Special School District No. 1:
  • Regular employer contribution is set as the applicable percentage of salary for coordinated and basic members (rate defined in the bill’s other provisions, referenced as paragraph c).
  • Additional employer contribution: 3.64% of salary for each teacher who is a coordinated or basic member.
  • Duluth (Independent School District No. 709):
  • Regular employer contribution matches the applicable rate for the district’s coordinated or “old law/new law” coordinated members (as defined in the bill’s parallel provisions).
  • All other employers:
  • Regular contribution: 9.81% of salary for coordinated members and 13.81% of salary for basic members.
  • Effective date:
  • When an employer’s contribution rate changes, the new rate applies to the entire salary paid in that fiscal year.

• Retirement annuity formula and early retirement rules (Section 3)

  • Formula background:
  • The retirement annuity is calculated using the average salary (as defined in the statute) and years of formula service credit, using different percentages for coordinated and basic members.
  • Different formulas apply depending on when a member began service (pre- or post-July 1, 1989; and special treatment for certain districts like Minneapolis and Duluth).
  • Service credit and benefit calculation:
  • For service prior to July 1, 2006, the annual percentages per year of service are lower in the early years and increase after 10 years (specific to coordinated vs basic members).
  • For service after July 1, 2006 (and certain other post-2006 rules for special districts), the percentages per year of service are adjusted accordingly.
  • Early retirement reductions:
  • For employees retiring at age 60 with 30 years of service, the annuity is reduced by 5% for each year the retirement age is earlier than normal retirement age, with a further adjustment considering a deferral augmentation if retirement is deferred to normal retirement age.
  • For those under age 60 or with fewer than 30 years of service, early retirement reductions are:
    • 4% per year for ages 55 through 58, and
    • 7% per year for ages 59 up to normal retirement age.
  • The reduction amount is adjusted by an augmentation factor if the member defers retirement to normal retirement age (rates tied to whether the member started employment before or after July 1, 2006).
  • Augmentation and eventual expiry:
  • The monthly amount of augmentation (increasing the benefit if retirement is deferred) is fixed to a rate (2.5% for members who began employment after June 30, 2006, or 3% for those who began before July 1, 2006) and is compounded annually.
  • For retirements after June 30, 2024, the augmentation does not apply to a reduced annuity started before normal retirement age.
  • Salary audit guard:
  • An employee’s retirement annuity cannot be paid if the highest five-year average salary used to compute the benefit exceeds 95% of the governor’s salary, until the salary figures have been audited by the TRA and found compliant with applicable limits.
  • Special case provisions:
  • Particular rules apply to certain districts (e.g., Minneapolis, Duluth) and to members who were part of certain earlier retirement funds, with formulas tailored to those histories.

Significant Changes to Existing Law

• Introduces a defined pension adjustment revenue framework with district-specific rates and caps/proration rules, affecting how retirement funding is allocated across districts and cooperative units.
• Establishes new and clarified employer contribution rates for major districts (Minneapolis, Duluth) and sets uniform rates for other districts, with a rule that rate changes apply to the entire payroll year.
• Reworks the formula for calculating retirement annuities, including:
  • Separate treatment for coordinated vs basic members, and for pre- vs post-1989 membership (plus district-specific adjustments).
  • Expanded and stricter early retirement reductions and a staged augmentation mechanism tied to retirement timing and member age.
  • A time-bound augmentation policy that declines to zero by mid-2024 for certain early-retirement scenarios, after which augmentation is not considered.
  • A salary auditing requirement to ensure benefits are not paid if salary benchmarks are not met, preserving integrity of high-5 average salary calculations.

Practical Effects

• Potentially more district-level variability in pension funding, with St. Paul facing higher pension adjustment rates than other districts.
• Some employers may see changes in how much they contribute to retirement funds, influencing school district budgets and planning.
• Teachers approaching retirement with 60 years of age and 30 years of service could see changes in how their annuities are calculated, including early retirement reductions and potential augmentation if they defer retirement—subject to the new rules and timing.
• New protections require validation of salary data before paying certain retirement benefits.

Relevant Terms

• pension adjustment revenue
• pension adjustment rate
• adjusted pupil unit
• Teachers Retirement Association (TRA)
• St. Paul Teachers Retirement Fund Association
• cooperative unit
• regular employer contribution
• additional employer contribution
• coordinated member
• basic member
• formula retirement annuity
• normal retirement age
• early retirement reduction
• augmentation
• highest five years average salary
• audit
• Minnesota Statutes 126C.10, 354.42, 354.44
• Minneapolis (Special School District No. 1)
• Duluth (Independent School District No. 709)
• pre- vs post-1989 membership
• former retirement funds (e.g., Minneapolis, Duluth histories)

Relevant Terms - pension adjustment revenue - pension adjustment rate - adjusted pupil unit - Teachers Retirement Association (TRA) - St. Paul Teachers Retirement Fund Association - cooperative unit - coordinated member - basic member - formula retirement annuity - normal retirement age - early retirement reduction - augmentation - highest five years average salary - audit - Minneapolis - Duluth - Minnesota Retirement Statutes sections cited (126C.10, 354.42, 354.44)