Two local teachers pension plans in Minnesota are on opposing sides of a merger proposal with the state teachers plan.
In separate preliminary votes Sept. 18, the board of the $926 million St. Paul Teachers' Retirement Fund Association voted against the merger with the $18 billion Minnesota Teachers Retirement Association, while trustees of the $210 million Duluth Teachers' Retirement Fund Association voted in favor of the merger.
The proposed merger of both funds with the TRA came from a request by the state Legislature to have representatives of the three funds form a study committee to look at combining the assets and administration of the local pension funds under the state teachers plan. If merged, assets of the plans would be managed by the $65 billion Minnesota State Board of Investment, St. Paul, which manages the assets of the TRA, also of St. Paul.
Paul Doane, executive director of the St. Paul teachers plan, said that despite the board's vote to remain separate from the state plan, the ultimate decision rests with the Legislature. He added: “I would say the (vote) will carry significant weight. … From the information and understanding I have, there is very little merit in joining TRA.”
J. Michael Stoffel, executive director of the Duluth plan, said the St. Paul fund's vote would have no impact on his plan's merger.
The study group continues to meet and is scheduled to issue a report to the Legislature in January. The report's findings could lead to legislation during the Minnesota General Assembly's next session, which begins in February, that would be required to merge one or both of the plans with the state plan.
According to data provided by Laurie Hacking, executive director of TRA, the St. Paul Teachers plan had $1.6 billion in liabilities, for a funded status of 58%, and the Duluth Teachers plan had liabilities of $384 million for a funded status of 55%. The TRA had liabilities of $23.6 billion, for a funded status of 76%. All assets are as of June 30. Ms. Hacking said the bill that created the study group also stipulated that state funding for the unfunded liabilities would be addressed in its report.
Mr. Doane said the cost of a merger with TRA is a big reason he opposes it. “It will be far less expensive for us to remain independent,” he said. “The cost complications, who would pay for all of this, that's the big mystery. We have a plan in place to meet our obligations.”
He said the state is providing $7 million in funding to the plan each year in 2013 and 2014. “If the state can contribute that $7 million additionally each year and we meet our 8% (assumed) rate of return, we will have full and sufficient funding in a 25-year period,” Mr. Doane said.
Mr. Stoffel said he favors the merger because of funded status problems that were the result of the “devastating” effects of the 2008-2009 financial crisis. He said before that, prior to the financial crisis, the plan was “very healthy actuarially, with about 80% to 90% funding or a surplus” each year, he said.
“To close the gap … we can't invest our way out of it,” Mr. Stoffel said. Plus, with 800 active current teachers and 1,400 retirees getting benefits, “those 800 active members can't contribute enough to make that up.”
Manager issue unresolved
Currently, each of the two city plans has its own stable of external managers; what would happen to those firms if a merger goes through hasn't been determined. In 2006, when the TRA took on the assets and liabilities of the $745 million Minneapolis Teachers Retirement Association, that plan's nine traditional money managers were terminated. (Pensions & Investments, June 12, 2006). The St. Paul and Duluth plans are the last independent state teacher funds in Minnesota.
“It remains to be seen how (the money manager issue) will be handled,” said TRA's Ms. Hacking. “The pension funds and the board have some common managers, so it's possible that would not change.” She added the manager issue would be included in the report due in January and that the state board would be “consulted on investment issues” related to any merger.
Mr. Stoffel of the Duluth plan said decisions on what to do with managers “hasn't been determined yet. We will need to recommend a course of action.” He said the managers could continue to run the assets under the state board's oversight or they could be terminated.
According to the Duluth Teachers' latest annual report, its managers as of June 30, 2012, were Western Asset Management Co., Disciplined Growth Investors Inc., Wellington Management Co. LLP, HarbourVest Partners, Pacific Investment Management Co., Permal Capital Management and North Sky Capital LLC.
Duluth Teachers' alternatives managers would continue to manage money for the pension fund after the merger. “Because of the commitments we've made to those managers, those commitments will need to be maintained,” Mr. Stoffel said.
Twenty percent of Duluth Teachers' assets are in alternatives, Mr. Stoffel said; 60% are in equities and the remainder is in fixed income.
At St. Paul Teachers, according to its latest annual report, external managers as of June 30, 2012, were BlackRock (BLK) Inc. (BLK); Barrow, Hanley, Mewhinney & Strauss LLC; Boston Co. Asset Management; Dimensional Fund Advisors; Fifth Third Asset Management; Wellington; Capital International Ltd.; J.P. Morgan Asset Management (JPM); Morgan Stanley (MS) Investment Management; Lazard Asset Management LLC; Advantus Capital Management Inc.; UBS Realty Investors LLC; RWI Ventures Inc. and North Sky.
Even without a merger, the St. Paul fund is considering moving management of some assets to the state board, but that is not connected to the proposed merger. “It's just to provide further operational savings” that is part of the pension fund's plan to improve funded status.