Legislative Commission on Pensions and Retirement Staff Memo

COLA Study Overview Memo

TO: Members of the Legislative Commission on Pensions and Retirement
FROM:Susan Lenczewski, Executive Director
DATE:December 13, 2019
RE:Cost of Living Adjustment (COLA) Study - Project Overview


One of the cost-saving measures included in the 2018 omnibus retirement bill was to reduce the percentage rate used to determine postretirement adjustments (often referred to as COLAs or cost of living adjustments) for many of the statewide plans:

The 2018 bill also included a significant change in the method for computing the postretirement adjustment for PERA General and PERA Correctional. Instead of annually increasing retirees' benefits by applying a percentage that is fixed in statute, PERA's new method ties the percentage of annual increase to the annual increase used by the Social Security Administration (SSA) in annually adjusting Social Security benefits. This increase is based on inflation, specifically, the percentage increase in CPI-U, for the prior year. For PERA General, the increase as of each January 1 will be 50% of the increase announced by the SSA, but no less than 1% and no greater than 1.5%. For PERA Correctional, the increase as of each January 1 will be equal to the increase announced by the SSA, but no less than 1% and no greater than 2.5%. When the plan's funded ratio is less than 85% for two years or less than 80% for one year, the 2.5% maximum is reduced to 1.5% and remains at 1.5% thereafter.

Due to the significance of the changes to the COLA in the 2018 bill and legislators' interest in possibly expanding the use of the inflation-based approach to the other public pension plans, the 2018 bill also required the Commission to conduct a study of postretirement adjustments for the statewide pension plans and St. Paul Teachers (see Laws 2018, Ch. 211, Art. 5, Sec. 14). The Commission must complete the study by December 31, 2020, and report its conclusions during the 2021 legislative session.

The study is required to:

Study Outline and Timeline

Phase - Timeline

  1. Research and inquiry - November 2019 through August 2020
  2. Produce preliminary draft - by August 31, 2020
  3. Commission and stakeholder input - September 2020 through November 2020
  4. Finalize the report - by December 31, 2020

See the attached schedule of tasks and completion dates for more details.

We welcome your comments and suggestions on this and will communicate progress and seek your feedback throughout the process.

MN Pensions - COLA Study

Completion Date (Final Report): December 31, 2020

STUDY. Before December 31, 2020, the Legislative Commission on Pensions and Retirement must conduct a study of postretirement adjustments for the covered plans as defined in Minnesota Statutes, section 356.415, subdivision 2, and the St. Paul Teachers Retirement Fund Association. The study shall take into account the purpose of postretirement adjustments and whether governing statutes are consistent with the purpose of postretirement adjustments. The study shall also consider alternative methodologies for determining postretirement adjustments and evaluate the new methodology to be used by the Public Employees Retirement Association under this act. The Legislative Commission on Pensions and Retirement shall report its conclusions based on the study during the 2021 legislative session. -- Laws 2018, Chapter 211, Article 5, Section 14

November 2019 through August 2020
Sept. through Nov. 2020
By Dec. 31, 2020
During 2021 Session
Research & Inquiry
Preliminary Draft
Workgroup Review
Draft Final Report
Commisson Adopts Report

Due Date
Description Comments/Status


- Identify members of work group LCPR: Susan, Chad
MSRS: Erin, Holly
PERA: Doug, Amy
TRA: Jay, Rachel
St. Paul: Jill, Christine
10.22 Mtg
- Brainstorm scope, tasks, timeline
11.21 Mtg
- Assign tasks
- Create data room for posting written materials MSRS sponsored, user name and password required to use

Research & Inquiry

Collect and Share Published Research and Articles Post all publications to MSRS shared workspace
- NEA Characteristics of Large Public Plans
- Credit Rating Agencies (S&P, Moody's)
- Center for Retirement Research at Boston College
- COLAs in private sector defined benefit plans
1/13 Mtg
- Summarize for rest of group Gather articles, studies, publications and prepare summaries for presentation to the rest of the group
TBD in Feb.
Interview Plan Representatives and Experts Identify individual(s) who will speak for the identified entity on COLAs and schedule a telephone interview
- Colorado Public Pension Plan
- Wisconsin Public Pension Plan
- Iowa Public Pension Plan
- N. Dakota Public Pension Plan
- S. Dakota Public Pension Plan
- Other states with creative approaches to COLAs
- Center for Retirement Research at Boston College Alicia Munnell
- Social Security Administration
- Minnesota PERA Others?
- Research on Purpose of COLAs and Adequacy of Current Policy
- History of COLAs in Minnesota public pension plans
- Summary of current approaches
- Coordinated v. basic plans
- Impact of 2018 pension bill on COLAs
- Appropriate measure of inflation? (CPI-U, CPI-W, CPI-E)
- Retiree spending patterns study by EBRI
Research on Alternatives for Providing a COLA
- Identify 1-3 alternative methods in addition to PERA method
- Identify metrics for comparison between alternative method
Cost/Benefit Analysis
- Actuary performs valuation of alternatives Consider whether actuarial work should be performed by plan actuaries or LCPR actuary
Draft Preliminary Report

Workgroup Review

- Identify stakeholders
- Public meeting
- Communicate and Discuss Preliminary Study Results with Selected Stakeholders
- Determine revisions needed to the report to incorporate LCPR and stakeholder comments
- Identify additional questions for study
- Consider collateral implications of the alternative methods (funding policies, assumed rate of return, others?)

Final Report

- Prepare final report Consider whether the report will include recommendations as to legislation
- Distribute final report for review and comment to members of the work group and LCPR
- Submit Report to the LCPR for adoption

Prepare PowerPoint summarizing the final report for presentation to the LCPR

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