| TO: | Members of the Service Credit Purchase Subcommittee of the Legislative Commission on Pensions and Retirement |
| FROM: | Ed Burek, Deputy Director |
| RE: | One Person and Small Group Service Credit Purchases |
| DATE: | March 13, 2001 |
This memo provides general background for the Subcommittee’s consideration of one person and small group service credit purchases. The one person and small group service credit and small group service credit purchase bills on the agenda are as follows:
S.F. 59 (Foley); H.F. 87 (Koskinen): MTRFA; TRA; Service Credit Purchase For Omitted Contributions Caused By School District Error (Sandra Lenarz)
S.F. 106 (Belanger); H.F. 163 (Seagren): MTRFA; Service Credit Grant To Certain MTRFA Member (Pamela Trutnau)
S.F. 205 (Berg); H.F. 316 (Peterson): PERA; PERA Service Credit Purchase For Former Lac Qui Parle County Employee (Lori Schwendemann)
S.F. 215 (Oliver); H.F. 60 (Workman): TRA; Service Credit Purchase For Uncredited Leave Period
S.F. 314 (Larson); H.F. 295 (Cassell): TRA; PERA; Service Credit For Former St. Paul Police Officer, Wilkin County Attorney, and Alexandria Technical College Faculty Member (Daniel Sandell)
S.F. 315 (Oliver); H.F. 356 (Workman): TRA; Service Credit Purchase For Leave, ISD No. 270-Hopkins (Joan Hagburg)
S.F. 329 (Johnson, Debbie); H.F. 134 (Tingelstad): MSRS; Service Credit Purchase For Prior State Highway Department Employee (Alan Chapman)
S.F. 371 (Anderson); H.F. 907 (Osthoff): TRA; Service Credit Purchase By Teacher Injured In Auto Accident, ISD No. 12-Centennial (Daniel Kennedy)
S.F. 435 (Dille); H.F. 527 (Ness): TRA; Service Credit Purchase For Extended Leave Of Absence, ISD No. 423-Hutchinson (Bruce Petterson)
S.F. 438 (Foley); H.F. 537 (Koskinen): TRA; Service Credit Purchase Due To Clerical Error For Sabbatical Leave, ISD No. 11-Anoka (John Georgolopolos)
S.F. 656 (Rest); H.F. 732 (Thompson): PERA; Service Credit Purchase For Former Minneapolis Park Board Employees (Virginia Rootes & Loris Longie)
S.F. 732 (Neuville); H.F. 142 (Boudreau): MSRS; Prior DOT Service Credit Purchase For Corrections Employee (Mark Miller)
S.F. 737 (Cohen); H.F. ____ ( ): PERA; Service Credit Purchase For Former St. Paul City Council Member (Len Levine)
S.F. 928 (Oliver); H.F. 982 (Sykora): MSRS; Service Credit Purchase For Specified DOT Employee (Clint Bucher)
S.F. 1114 (Sabo); H.F. 726 (Skoglund): MSRS; Service Credit Purchase For University of Minnesota Carlson School Of Management Temporary Full-Time Employment (Judith Johnson)
S.F. 1273 (Ring); H.F. 1215 (Jennings): TRA; Service Credit Purchase For Prior University of Minnesota Teaching Service, ISD No. 279-Osseo (Joe Pung)
S.F. 1327 (Bachmann); H.F. 1326 (Mares): PERA; Service Credit Purchase For Individual Employed By ISD No. 624-White Bear Lake (Ruth Lindbeck)
LCPR Policy
A brief statement of LCPR purchase of service credit policy may be useful to the Subcommittee in considering the bills on the Subcommittee’s agenda. Specific comments on individual bills, noting any unusual circumstances about the specific bill, are provided later.
A. Most recent Commission policy statement—December 1996. The Commission’s Principles of Pension Policy, last revised in December 1996, includes the following statement of purchase of service credit policy:
Purchase of public pension plan credit for periods of prior service should be permitted only if, on a case-by-case basis, it is determined that the period to be purchased is public employment or substantially akin to public employment, that the prior service period must have a significant connection to Minnesota, that the purchase payment from the member or from a combination of the member and employer must equal the actuarial liability to be incurred by the pension plan for the benefit associated with the purchase, appropriately calculated, without the provision of a subsidy from the pension plan, and that the purchase must not violate notions of equity.
The above statement indicates various policies and criteria applicable to the purchase requests:
Individual review. The statement indicates that the Commission considers each case separately, whether the "case" is a single person bill or a bill covering a group of similarly situated individuals.
Public employment. The period requested for purchase should be a period of
public employment, or substantially akin to public employment. This is
consistent with the notion that public plans should be providing coverage
for public employees for periods of time where they were serving the public
through public employment or quasi-public employment. Coverage for a period
where an individual provided private sector employment are not consistent
with this statement.
Minnesota connection. The employment period to be purchased should have a
significant Minnesota connection. This is consistent with the notion that
Minnesota taxpayers support these public plans and bear the investment risk
of investing plan assets. Given the support that taxpayers provide, it is
appropriate that the service have a Minnesota connection, reflecting
services provided to the people in our state.
Presumption that an employee is in active status at time of purchase. The
statement refers to necessary contributions from the member, or in
combination from the member and employer. There is a presumption that the
individual covered by the service purchase bill is an active employee.
Active plan members contribute to the plan, and certainly once an employee
terminates service or retires from public employment he or she no longer has
a public employer. If there are unresolved issues of whether an individual
should have service credit for a given period, those issues should be
resolved before the individual terminates from public service, and certainly
before the individual retires. The act of retiring undermines a claim that
there is sufficient need for the Legislature to consider the coverage issue.
If there were considerable hardship caused by the lack of service credit,
presumably the individual would not have retired. Entering retirement
suggests that the benefit is adequate without any further increase in the
benefit level due to a purchase. Only on very rare occasions has the LCPR
and Legislature authorized service credit purchases by retirees.
Presumption of purchase in defined benefit plan. The statement refers to
contributions which in total match the liability. This statement, in
conjunction with the specific procedures in Minnesota statutes and law for
computing service credit purchase amounts (Minnesota Statutes, Section
356.55, 356.551, and elsewhere) presume that the purchase is in a defined
benefit plan with a benefit based on the individual’s high-five average
salary. We do not have any process in law specifying a procedure for
computing a "full actuarial value" purchase in a defined
contribution plan, or even defining what that concept means in the context
of a service purchase or service credit purchase in a defined contribution
plan.
Full actuarial value purchase. Within the context of a defined benefit
plan, the statement indicates that the pension fund is to receive a payment
from the employee or from the employee and employer in combination, an
amount which equals the additional liability placed on the fund due to the
purchase. This is referred to as the full actuarial value of the service
credit purchase. The statement emphasizes that the procedure used to compute
this full actuarial value must be a methodology that accurately estimates
the proper amounts.
The Commission does purposely depart from the full actuarial value
requirement when there is evidence that the pension plan administration
created the lack of service credit coverage do to pension plan
administration error. In these situations, the employee may be required to
pay the contributions that would have been required for the relevant time
period, plus 8.5 percent interest to adjust for the time value of money. Any
difference between the payment and the full actuarial value would be
absorbed by the pension fund.
Where there is clear evidence that the employing unit committed an error
which caused the individual to not receive pension plan coverage, the
Commission has permitted the employee to make the employee contribution for
the relevant time period, plus 8.5 percent interest, and the employer has
been mandated to cover the remainder of the computed full actuarial value
payment. If the employer does not directly make the payment following
notification that the employee has made his or her portion of the full
payment, a sufficient amount to cover the remainder of the full actuarial
value is deducted from any State aids that would otherwise be transmitted to
the employer.
No violation of equity considerations. The LCPR principles statement specifies that purchases of service credit should not violate equity considerations. The dictionary defines "equity" as fairness; impartiality; justice. For purposes of law, "equity" is further defined as (a) "resort to general principles of fairness and justice whenever existing law is inadequate; and (b) a system of rules and doctrines, as in the United States, supplementing common and statute law and superseding such law when it provides inadequate for just settlement." The LCPR and this Subcommittee could view requests by existing retirees to purchase additional service credit and have their annuities recomputed as being a situation which violated equity considerations. New bills on behalf of individuals, who were covered by purchase of service credit bills passed by earlier Legislatures, but who are dissatisfied with the purchase of service credit terms that were provided, can be considered as violating equity considerations. Individuals requesting service credit purchases for periods specifically excluded from plan coverage under applicable law could also be considered as violating equity considerations, among other policy concerns relating to those considerations. Bills allowing purchase credit in a defined contribution plan, or to otherwise add assets to one of these plans, permitting the assets to grow tax-free until withdrawal, can be viewed as a violation of equity. Long delays in seeking remedial action can also be considered a violation of equity considerations. Individuals tend to wait until late in their career before seeking any remedial action for lost service credit. Prompt action, closer to the time period when the service credit problem occurred, would often result in a solution at lower cost and would avoid efforts by the LCPR to try to determine the factual situation many years or even decades after the event occurred. In general, any issue or factor which the LCPR or Subcommittee views as lacking fairness or being less than impartial, can be a basis for not recommending a bill to pass.
B. Issues raised by recent legislation. To the extent that some bills on the Subcommittee’s agenda are similar to service purchase situations covered by general purchase of service credit legislation enacted in 1999 and 2000, the Subcommittee and LCPR may wish to consider how much they wish to be guided by that recent legislation. Some of those provisions conflicted with LCPR policy as stated in the 1996 Commission Statement of Pension Principles. Perhaps the 1999 and 2000 legislation should be viewed, in part, as reflecting evolution and permanent change in Commission policy. On the other hand, Subcommittee and LCPR members may view the 1999 and 2000 legislation as temporary provisions to address a short-term labor shortage situation, warranting a temporary waiver of standard Commission purchase of service credit policy.
The 1999 Legislature enacted numerous general law purchase of service credit provisions (Laws 1999, Chapter 222) for purchases of service credit in TRA and first class city teacher plans. The provision requires payment of the estimated full actuarial value, as computed under Section 356.55. The 1999 laws authorizes individuals to purchase service credit for military service performed before becoming a teacher plan member, for military service for which the individual was eligible to purchase service under teacher plan leave of absence provisions, but the individual failed to exercise that option in a timely manner; for out-of-state teaching service; for maternity leaves or breaks in service not covered by leave provisions; for parochial or private school teaching service; for Peace Corps or VISTA service; and, in the case of the first class city teacher plans, authority was also granted to purchase service for certain previously uncredited part-time teaching service.
In 2000, similar military service credit language was passed for the Minnesota State Retirement System (MSRS) plan and Public Employees Retirement Association (PERA), and for TRA and the first class-city teacher plans, purchase of service credit was authorized for non-profit community based corporation service. Although the 1999 and 2000 provisions were coded in statutes, the teacher plan provisions are scheduled to expire on May 16, 2001. The MSRS and PERA provisions are scheduled to expire on May 16, 2003.
The teacher plan provisions may have been viewed by legislators as part of a package addressed at teacher employment policy. Many areas are reporting teacher shortages, currently, or predicted in the near future. Proponents for the service credit purchase provisions contended that the provisions would enable higher paid individuals to retire earlier, reducing teacher payrolls and creating a body of individuals who could be called back as substitutes or short-term teachers to fill specific school district needs. The provisions added to MSRS and PERA for military purchases presumably reflects pressure, from individuals in the MSRS and PERA plans, for provisions comparable to those provided a year earlier for similar individuals in the teacher plans.
The 1999 and 2000 legislation creates questions for the LCPR. Some of those provisions conflict with the LCPR’s Principles of Pension Policy, as revised in late 1996. It is unclear to what extent, if any, the more recent legislation reflects an intended, permanent, change in purchase of service credit policy, or whether the LCPR and Legislature intended to waive general policy in the 199 and 2000 legislation, to address a short-term, temporary labor force situation. Among the conflicts are purchase for private sector employment periods, which conflicts with the public sector nature of our plans, and purchases for service in VISTA, the Peace Corp, and out-of-state teaching, which do not have a Minnesota connection. The expiration of all the general service credit purchase provisions enacted in 1999 and 2000, which is scheduled for May 16, 2002 and May 16, 2003, respectively, suggest a temporary window, with the LCPR and Legislature waiving usual requirements and policy concerns in order to address a specific, short-term situation.
C. Full actuarial value issues. In general, the single person and small group service credit purchase requests before the Subcommittee specify that payment is to be computed under the full actuarial value estimation procedure in Section 356.55. That section of statutes was enacted in 1998, based on a contention by administrators of the teacher plans, other retirement plans, and various other groups that the full actuarial value estimation procedure the Commission used up to that time created estimates which were too high. The current actuary retained by the LCPR played a prominent role in developing the methodology contained in Section 356.55. The full actuarial value estimation methodology the Commission used up to 1998 is coded in statute as Section 356.551.
A continuing question with the full actuarial estimation procedure in Section 356.55 is whether that new estimation technique produces more accurate estimates. It is possible that the new method produces estimates which are too low or which are inconsistent (producing some overcharges, and some undercharges), leading to subsidies provided by the school districts, other covered employees in general, or other covered employees who are purchasing service credit. While information on the purchases of service credit that have occurred under the newer methodology have been provided to the LCPR in overviews by the actuary retained by the LCPR, a detailed study of the results of that methodology has not occurred.
Continued use of the methodology in Section 356.55 is scheduled to expire on July 1, 2001. If it expires, under current law the previous methodology contained in Section 356.551 will again be used. There is a bill on the Subcommittee’s agenda (item 23), S.F. 1321 (Pogemiller); H.F. 1462 (Mares): TRA; Prior Service Credit Purchase Payment Amount Determination Procedure Expiration Date Extension, which would extend use of the methodology in Section 356.55.
In another matter related to this debate over full actuarial value methodology, we note that in the last few years the actuary retained by the LCPR has revised the approach used to estimate the cost of merging large groups of individuals into pension plans which participate in the State Board of Investment (SBI)-invested pension plans. That change has resulted in inconsistencies in the way the new liabilities are estimated, depending on whether the proposal is for a single individual in special legislation, or for an individual who is a member of a larger group proposed to be merged into SBI-managed pension funds. This newer bill-costing approach for groups of individuals was used in recent legislation which added various PERA P&F consolidation account members into the SBI Post Fund. An example where the approach would be used for potential legislation is any proposal to merge first class city teacher plans into TRA. Specifically, the argument is that whenever larger groups of individuals are added to the SBI Post Retirement Investment Fund, an asset transfer should be required to the Post Fund which is sufficient to cover not only the full actuarial reserves to fully fund the current pensions of these individuals (the full actuarial reserves, as usually defined) but also sufficient additional assets to cover the built-in pension increases that are likely to result due to the quasi five-year averaging system used to determine SBI Post Fund post-retirement increase. If that additional asset transfer does not occur, the contention is that the assets in the Post Fund that are set aside to fund the future pension increases will be diluted, because they will be divided among more retirees, leading to a lower increase per retiree than would otherwise occur. In other words, adding a new group to the Post Fund would harm the retirees who are already in the Post Fund, by lowering the post retirement increases they would have otherwise been received.
Currently, there is a conflict between the latest procedure that the actuary is using for bill cost estimation for large groups and that used for small groups and individuals. If this newest approach to determining appropriate Post Fund reserves when adding groups to the Post Fund is deemed appropriate, it would seem appropriate that the same policy should also apply to individual and small group service credit purchase cost estimates. Purchases of service credit, when permitted, often alter the timing of retirement. If the general purchase of service credit provisions added to law in 1999 and 2000 and any other legislation for single person or small group service credit purchases created a wave of new retirees added to the Post Fund, to some unknown extent this diluted the assets previously set aside in the Post Fund for future increases, leading to reduced post retirement increases for these new retirees and for all existing Post Fund retirees. There is nothing in the claimed full actuarial value estimation procedure, in either Section 356.55 or 256.551, which provides the additional assets needed to eliminate that effect. Consistency would suggest that the service credit purchase amount should include an additional element to pre-fund some or all of the post-fund increases, to avoid the dilution effect. At the time of retirement by the individual who purchased the service credit, the full reserves as normally computed, plus a benefit-increase-pre-funding amount, should transfer to the Post Fund.
Comments on Individual/Small Group Bills (Agenda Items 1 to 17)
Below are comments specific to each of the individual or small group bills, agenda items 1 to 17, alerting Subcommittee members to any aspects of the particular request which is unusual or warrants specific attention. The bills and the comments are in the order of the bills on the printed agenda.
S.F. 59 (Foley); H.F. 87 (Koskinen): MTRFA; TRA; Service Credit Purchase
For Omitted Contributions Caused By School District Error (Sandra Lenarz)
These bills would authorize the individual to obtain an additional year of
service credit from the Minnepolis Teachers Retirement Fund Association (MTRFA),
due to a period of uncovered service (the 1985-86 school year) in which she
taught in the Minneapolis public schools but did not have retirement plan or
Social Security contributions taken from pay or made on her behalf.
These bills present the Subcommittee and Commission with several specific
issues warranting attention, and which may lead to amendments. The bill is
drafted to mandate that the school district pay the bulk of the full
actuarial value of the purchase, requiring the Subcommittee to determine
whether there is sufficient evidence to warrant that treatment. Although
past failures to enroll eligible teachers in MTRFA and other coverage
problems related to this school district have been documented, the LCPR to
date has been reluctant to mandate employer payments, perhaps because this
would lead to similar treatment for numerous other individuals and groups,
creating a considerable financial burden on the district. The bills as
drafted also require the individual to pay no interest on the employee
contribution equivalent amount (the contributions the individual would have
made in 1985-86 if employee contributions had been deducted from pay). The
standard treatment is to require 8.5 percent interest on the employee
contribution, in cases where an employer pick-up of the remainder of the
full actuarial value is mandated. The bills also require the school district
to establish a separate account for the individual, sufficient to compensate
the individual for any harm due to lost or lessened Social Security benefit
due to the failure to make contributions to Social Security for the
individual in 1985-86. While that request may have merit, the Commission has
never dealt with a request of this type. The Subcommittee may wish to
ascertain whether the individual would have been covered by Social Security
if 1985-86 contributions had been made to the MTRFA. The Subcommittee may
also wish to determine whether the separate-account concept in these bills
is an acceptable remedy, and the best way to structure a remedy, since it is
likely to establish a model for use in similar situations in the future.
Finally, this individual also has service credit in TRA. A purchase of
service credit in MTRFA may also create some additional liability in TRA due
to earlier receipt of retirement annuities and application of the combined
service annuity law.
S.F. 106 (Belanger); H.F. 163 (Seagren): MTRFA; Service Credit Grant To
Certain MTRFA Member (Pamela Trutnau)
These bills present the Subcommittee with some difficult issues. The bills are
not a standard service credit purchase request. Rather, the bills request a
grant of an additional year of MTRFA service credit, to permit the individual
to reach 30 years of service credit sooner to enable the individual to retire
under a 30-and-out provision in the MTRFA Basic Plan. The argument, explained
in attachments to the bills in your packet, is that the individual was injured
at work and this injury or injuries lead to the indiviudual missing work, or
to cut back on hours, which resulted in less service credit. The contention is
that without these injuries the individual would now have sufficient service
credit to retire. The Subcommittee may wish to focus on whether there was some
flaw or error in disability benefit processing or disability determination, if
an application was made, or relating to a medical leave, if any, that would
warrant remedial action by the Legislature. The Subcommittee, LCPR, and
Legislature, however, may conclude that it is not an apppropriate body to
conduct this form of review.
LCPR staff can not recall any prior situations where individuals were given a
service credit grant through individual-specific legislation. Grants have
occurred as part of early retirement incentive legislation offerred to
teachers through the state, or perhaps in school merge/comsolidation
situations where there is a need to downsize staff, but not in any situation
similar to that presented in S.F. 106 (Belanger); H.F. 163 (Seagren). The
Subcommittee may also wish to consider that recommending the bill to pass may
undermine the MTRFA process for determining disabiity within the MTRFA plan
and service credit accrual procedures. Redrafting the bill as a purchase
rather than a grant may address the immediate subsidy issues presented by the
bill, but it would create precedent issues and does not address other policy
issues. This is not a situation where there is a clearly defined period of
employment service, where service to the public was provided, but which for
some reason was not covered by a pension plan. Rather, there is the contention
is that if injury had not occurred, the individual would have accumulated more
service credit for the same total number of years as a Minneapolis teacher.
The individual, however, was not disabled, under standards applicable to the
MTRFA. There also was no medical leave of absence. If there were, presumably
the individual would have received service credit for time in question, and
the bills would not be before the Subcommittee. Thus, the Subcommittee and
LCPR would need to deal with the issue of whether there is any appropriate
basis for granting service credit or permitting a purchase that does not
undermine or otherwise bypass the disability and medical leave processes in
MTRFA.
S.F. 205 (Berg); H.F. 316 (Peterson): PERA; PERA Service Credit Purchase
For Former Lac Qui Parle County Employee (Lori Schwendemann)
This appears to be a case of employer error. The bills, however, are not
drafted to required mandatory employer payments. If the Subcommittee concludes
that the employer should be mandated to cover the remainder of the full
actuarial value providing that the employee pays the employee contributions
plus interest, an amendment is needed. Another issue with these bills is
language in the drafting which would authorize use of the actuarial value
method in Section 356.55, even if that section has expired, provided that
payment is made before July 1, 2002. The Subcommittee may to wish to not
permit that exception, since is will lead to request for that treatment for
all purchase of service credit situations.
S.F. 215 (Oliver); H.F. 60 (Workman): TRA; Service Credit Purchase For
Uncredited Leave Period
Our understanding is that the authors wish to withdraw these bills. The bills
would permit an individual on leave from the Hennepin County Home School for a
several months in 1998 to purchase service credit for the leave period in TRA.
If the bill authors and the Subcommittee wish to move forward on these bill
drafts, information on the nature of the leave, whether the leave was eligible
for service credit under existing pension fund leave of absence provisions,
and identfier information is needed. When we sent an information request to
Mr. Austin, Executive Director of TRA, he indicated that he was informed that
the bills were being withdrawn. We received no information from the authors.
S.F. 314 (Larson); H.F. 295 (Cassell): TRA; PERA; Service Credit For
Former St. Paul Police Officer, Wilkin County Attorney, and Alexandria
Technical College Faculty Member (Daniel Sandell)
These bills raise considerable pension policy issues. The individual has
service credit in TRA, PERA, and he also provided service as a Saint Paul
Police officer in the late 1960s and early 1970s covered by the Saint Paul
Police Relief Association (StPPRA), which many years later consolidated into
PERA P&F. When Mr. Santell left StPPRA in the mid 1970s, he was not vested
and was not entitled to a refund, because a refund was not authorize under the
laws of that plan. Mr. Santell attempted to obtain a refund, but in litigation
which reached the Minnesota Supreme Court, that request was rejected.
Over the years, Mr. Santell and some other individuals who left employment
covered by local police or paid fire relief associations, but who forfeited
rights upon leaving that employment, and who moved to other public employment,
have attempted to receive value for that local plan service through bills
which would include that local plan in a combined service annuity computation,
or some other arrangement which provided some value for that forfeited
service. There are several policy problems with legislation of this type,
including an inablity to compute the benefits in a combined service annuity
computation. The combined service annuity plans provide benefits based on
high-five average salary, while the local relief association plans do not.
Those pensions, when payable, are based on the salary for a particualar
employment position in the department. The LCPR has never recommended a bill
to pass which tried to include local relief service time for service credit in
a combined service annuity computation, which would have required payments
from the local relief association or its successor plan (PERA P&F
consolidations accounts, or PERA P&F itself).
S.F. 314 (Larson); H.F. 295 (Cassell) do not attempt to require payments from
a local relief association under a combined service annuity. Rather, the bills
attempt to provide pension value or recognition for the local relief
association service by providing a grant of 4.7 years (presumably the length
of time served under the relief association) in TRA, solely for purposes of
having sufficient years of recognized service to qualify for the Rule of 90 or
other subsidized early retirement benefit. The service credit grant years,
however, would not be included in computing the annuity. The added financial
benefit to the individual is in the form of earlier access to a subsidized
retirement. (The individual would be eligible to draw an annuity under the
computation procedure used to compute Rule-of-90 benefits a few years earlier
than would otherwise be the case.) The Subcommittee may wish to consider that
this treatment would set a precedent. LCPR staff is not aware of any situation
where forfeited local relief association service credit was given recognition
or value, and is likely to lead to other requests. The Subcommittee may also
wish to consider whether there is any justification for a service credit
grant, given that the individual left Saint Paul police service for career
advancement, presumably with knowledge of the consequences of that
termination. Also, if the grant or purchase causes the individual to qualify
for subsidized early retirement at an earlier age, we would assume that both
TRA and PERA will be harmed by the cost of providing the earlier unreduced
early retirement benefit. If PERA is harmed, in addition to harm to TRA, there
is no clear justification for transferring assets from PERA to TRA, as
required under the bills.
S.F. 315 (Oliver); H.F. 356 (Workman): TRA; Service Credit Purchase For
Leave, ISD No. 270-Hopkins (Joan Hagburg)
This appears to be a case where the individual was notified by TRA of rights
to make payment to receive service credit for a medical leave period. The
individual did not make payment as required to receive the service credit
and is now requesting special law authority.
S.F. 329 (Johnson, Debbie); H.F. 134 (Tingelstad): MSRS; Service Credit
Purchase For Prior State Highway Department Employee (Alan Chapman)
These bills would permit an individual to purchase service credit in MSRS
General for a period of service as a right-of-way agent trainee in 1969. The
bills mandate that the Department of Transportation cover most of the full
actuarial value payment cost, requiring the Subcommittee to review evidence
to determine whether there is a basis for a claim of harm. If the period was
properly excluded from coverage, that would undermine a claim to harm, and
may be a sufficient basis for the Subcommittee to recommend against a
service credit purchase, even if fully paid by the individual. If the period
was properly excluded from coverage, permitting a service credit purchase
serves to undermine the exlusion in law. A memo and other materials are
attached to the bills for your review.
S.F. 371 (Anderson); H.F. 907 (Osthoff): TRA; Service Credit Purchase By
Teacher Injured In Auto Accident, ISD No. 12-Centennial (Daniel Kennedy)
The covered individual lost some partial service credit in 1993-94, and in
1994-95, due to medical leaves of absence. The leaves were certified to TRA,
the individual was notified of leave payment requirements, but the individual
failed to make the payments. The individual also had partial service credit in
1995-96, but the reason for the less than full service credit is unclear. No
medical leave was reported for that year. Depending upon the facts as
presented to the Subcommittee, the Subcommittee may recommend eliminating
1995-96 from the purchase request, for reasons stated above in S.F. 59
(Foley); H.F. 87 (Koskinen). Or, perhaps there may be indication of employer
harm during that period, due to failure to report a valid leave.
These bills also raise an issue regarding a possible flaw in Section 356.55,
the process used to compute the payment. Perhaps because the individual is
rather young, and given the nature of teacher pay increases, the full
actuarial value procedure has produced an estimate of cost that may be less
than the current value of payments that should have been made under the leave
of absence provisions in TRA law. Perhaps there is some error in the cost
estimates provided in letters from TRA, but those letters indicate that the
payment, if made currently, under the applicable leave of absence provision,
would be nearly three times higher than the cost computed under Section
356.55. The Subcommittee may wish to avoid a situation that would create an
incentive to forgo use of the payment provisions under TRA leave provisions
because special legislation can provide service credit at a lower cost. There
is an amendment for your consideration to revise Section 356.55.
S.F. 435 (Dille); H.F. 527 (Ness): TRA; Service Credit Purchase For
Extended Leave Of Absence, ISD No. 423-Hutchinson (Bruce Petterson)
These bills would permit a TRA member on an extended leave of absence to
purchase service credit for the 1997-98 school year, which apparently was the
first year of the leave of absence. Because of requirements in TRA’s
extended leave of absence provision (Section 354.094), if payment deadlines
are missed in any year the indiviudal loses the right to make payments to
receive service credit for any later years. Mr. Austin’s letter indicates
that several years presumably would need to be purchased at this point. An
amendment may be needed for clarification.
The Subcommittee may also wish to consider whether the teacher extended leave
of absence provisions have outlived their purpose. The provisions were added
to law many years ago to help transition teachers to other carreers, due to a
surplus of teachers. It may now be appropropriate to repeal these provisions,
given the current teacher shortage problems.
S.F. 438 (Foley); H.F. 537 (Koskinen): TRA; Service Credit Purchase Due
To Clerical Error For Sabbatical Leave, ISD No. 11-Anoka (John Georgolopolos)
This is a case where an individual received partial TRA service credit for a
sabbatical leave, rather than full service credit, due to employer error. A
letter is attached from the school district which can be interpretted
acknowledging employer responsibility. The bill is drafted to have the school
district pay the bulk of the cost, consistent with the general approach in
employer-error cases.
S.F. 656 (Rest); H.F. 732 (Thompson): PERA; Service Credit Purchase For
Former Minneapolis Park Board Employees (Virginia Rootes & Loris Longie)
If the Subcommittee wishes to take action on these bills, amendments will be
needed. As drafted, the bills cover only one indiviudual, not two. As of this
writing, we have not received background and cost information from PERA. The
individuals apparently were added to the PERA General Plan in 1997, but the
contention is that they should have been added to PERA several years earlier.
The proper entry dates are unclear. Materials that we have claim employer
error, but there is no material indicating that the employer shares that
belief.
S.F. 732 (Neuville); H.F. 142 (Boudreau): MSRS; Prior DOT Service Credit
Purchase For Corrections Employee (Mark Miller)
The bill would permit an MSRS General member, who had some uncovered service
during the 1984-89 period due to seasonal employment, to purchase service
credit for that period. The Subcommittee may wish to consider whether the
position was excluded from MSRS coverage under law during the applicable
time period. If that is the case, and if there is a justifiable reason for
that exclusion, the Subcommittee may conclude that a service credit purchase
is not justified. Permitting a purchase undermines coverage exclusions in
law. Rather than have clear exclusions, in practice a situation may develop
where certain positions are excluded from plan coverage as specified in
general law, unless the person chose to pay full actuarial value to have
that service covered.
The bills are drafted to prohibit the Department of Transportation,
the employing unit at the time, from paying any portion of the purchase
price. This suggests that the exclusion of the position from MSRS coverage
was a proper intrepretation of law. On 9/28/00, we received a cost estimate
for the purchase of $6,1000.
S.F. 737 (Cohen); H.F. ____ ( ): PERA;
Service Credit Purchase For Former St. Paul City Council Member (Len Levine)
As of this writing, we do not have information from PERA relating to these
bills. The bills rasie a few specific issues for the Subcommittee. A letter
from Mr. Levine, included in the materials, suggest he received an estimate of
the full acutarial value from PERA of $13,500. If accurate, the Subcommittee
may wish to consider where the problem is sufficiently severe to warrant
Subcommittee and LCPR meeting time, given other issues presented by the
proposal. Mr. Levine apparently has retired. Approval of purchase of service
credit bills for individuals who have already retired are very rare, since
retiring undermines a claim of sufficient harm. The bill as drafted would
require additional retroactive payments, back to the retirement date. The bill
is drafted to require the City of Saint Paul to cover the bulk of the purchase
cost, but there is no information that the City agrees with any claim that it
caused harm.
Given the pension policy issues raised by this bill, it may be advisable to
consider remedies which do not involve the pension plan or LCPR. If
legislation were to pass, and if there is inconclusive information supporting
a claim of harm by the City, Mr. Levine would have to pay the full actuarial
value. If our actuarial methodology is providing appropriate estimates, Mr.
Levine would receive no net financial gain. He would pay an amount equal to
the increased pension he would receive over time. There would only be a net
benefit to Mr. Levine if the prior employing unit, the City of Saint Paul,
covered part of the cost. That can be achieved without involving special
legislation or the pension plan, by reaching a lump sum financial arrangement
with the city to compensate for harm.
S.F. 928 (Oliver); H.F. 982 (Sykora): MSRS; Service Credit Purchase For
Specified DOT Employee (Clint Bucher)
The bills would authorize an individual, currently a MSRS-covered employee, to
purchase service credit in MSRS for various teaching service performed in
South Dakota. The bills presumably stem from similar authority added to TRA
and first class city teaching plans in 1999, which is scheduled to expire. The
Subcommittee may wish to consider whether it wishes to continue and extend
that practice, and if that practice is extended, whether it should be extended
for a single individuals, or for a class. Permitting service credit to be
purchased in Minnesota pension plans for out-of-state service is not
consistent with the long-standing Commission policy that the service to be
purchased must have a Minnesota connection. Minnesota taxpayers, however,
would bear all risks for ensuring that sufficient assets are available in the
years to come, to meet any pension benefit obligations that arise from the
purchase. Also, the contention when the TRA provisions passed was that these
service credit purchase provisions were needed to address teacher labor force
issues. The same situation may not apply to employment in State service.
S.F. 1114 (Sabo); H.F. 726 (Skoglund): MSRS; Service Credit Purchase For
University of Minnesota Carlson School Of Management Temporary Full-Time
Employment (Judith Johnson)
These bills, for Minneapolis Employees Retirement Fund (MERF) Executive
Director Ms. Judith Johnson, pose considerable issues for the Subcommittee
and Commission. If they are to be enacted along the general lines proposed
in the bills, the Subcommittee and LCPR will be required to set new policy
to govern service credit purchases involving defined contribution plans.
According to the language in the bills, Ms. Johnson seeks to purchase four
years of service credit in the MSRS Unclassified Plan, with a cost to be
deterimined under Section 356.55, the full actuarial value methodology in
current law. LCPR staff is not aware of any similar request in the past to
purchase service in a defined contribuiton plan, service credit has no
clearly defined meaning within the context of a defined contribution plan,
and the method the bill would use to obtain a "cost," the
procedure in Section 356.55, does not work. The method assumes a purchase in
a defined benefit plan, where the benefit is based on a high-five average
salary, and where "cost" is an amount that the individual pays to
the pension fund to offset the added gain. If the full actuarial value is
computed correctly in a defined benefit plan purchase, the "cost"
exactly offsets the gain, so there is no net financial gain.
Within the context of S.F. 1114 (Sabo); H.F. 726 (Skoglund),
"cost" is a misleading term, whether computed under Section 356.55
or any similar procedure. The "cost" number that would result is
nothing more than the contribution amount that the individual would be
allowed to add to a tax-sheltered savings account due to special
legislation. "Cost" in that context is equivalent to a net
advantage. The larger that amount, the greater the advantage. As an
alternative to Section 356.55 or similar procedure, it is possible to
estimate the value today of contributions plus interest over the years,
assuming that contributions had been made to a plan for the University of
Minnesota service. Allowing the deposit of that amount in the MSRS
Unclassified Plan account at this time, however, would give the individual
the advantage of having that amount compound tax-free until withdrawn. There
is a question of why a single individual, or even a group of indiviudals,
should be given a special right to additional tax-deferred investing. There
is no clear basis for permitting this treatment for this individual and not
many other similarly situated individuals. The proposed treatment may be
considerably more advantageous than the treatment of individuals covered by
other bills who may be offerred an opportunity to purchase service credit in
a defined benefit plan.
The request relates to four years during which the individual was employed
as a full-time temporary instructor at the University of Minnesota, for
which no pension coverage was provided. Given that the individual took that
employment and remained in that employment for four years, with the
knowledge that the employment did not include pension contributions or
coverage, the Subcommittee may wish to consider whether there is a
sufficient need or basis at this time to try to create pension coverage
related to those years. Hardship is not a factor. The individual is
relatively young and has a considerable salary. The individual also has a
self-help remedy to address her retirement concern. The individual has the
option of investing in an annuity from an insurance company, providing a
tax-deferred investment for retirement. One reason that the individual may
be pursuing a right to add money to the MSRS Unclassified Plan rather than
an annuity from an outside provider is that the net return is higher under
the Unclassified Plan. The costs and charges under the Unclassified Plan are
far lower that under an annuity from an insurance company or similar
provider.
If the Subcommittee wishes to consider these bills, one issue is that the
full actuarial value procedure in Section 356.55 is intended to compute full
actuarial value estimates for defined benefit plans, where a high-five
average salary is used to determine the value of the pension, in conjuction
with the years of service credit and the service accrual rate or rates for
the plan. Although MSRS claims it has produced a cost estimate for the
proposal, it is not clear how that was computed, or why whatever process was
used to produce the estimate reflects reasonable defined contribution plan
policy. The process in Section 356.55 (assuming the methodology is sound)
produces an estimate of the additional lifetime benefits that would result
from a purchase in a defined benefit plan. By charging the individual
a payment equal to that additional lifetime benefit amount, the fund is held
harmless. In a defined contribution plan, there are no corresponding
concepts. Any "cost" number that results from an attempt to apply
Section 356.55 or any similar procedure produces nothing more than a number,
a rather arbitrary one, representing an amount that the individual would be
allowed under this special legislation to add to a tax-deferred savings
account.
The usual concepts behind a full actuarial value servcie credit purchase in
a defined benefit plan do not trasfer to the context of a defined
contribution plan. In a defined benefit plan service credit purchase,
a full actuarial value service credit purchase implies an intention that the
pension fund should not be harmed by the purchase. If the amount
is properly computed, the only way to do this is to charge the
individual an amount equal to the full financial value of the additional
benfit to be received. The purchase would not make the individual
financially better off, although there is a non-financial benefit, perhaps
access to an earlier retirement date. (The purchase is financilally
worthwhile if the emmployer covers part of the full cost. In effect, the
employer is subsidizing the purchase by covering part of the full cost.)
Within the context of a defined contribution plan, the "purchase
price"or "cost" could be any amount whatsoever, and would not
harm the plan. The Unclassified Plan is, in essence, a tax-deferred savings
account. Any amount could be put into an individual’s account, a large
amount or a small amount, and the plan would not be harmed as long as the
plan gave the individual the value of his or her account, no more and no
less, at the time of retirement or whenever the funds are withdrawn.
If the Subcommittee or LCPR concludes that under a "full actuarial
value purchase" in a defined contribution plan, the individual should not
be made financially better off due to that purchase, some system for
computing a penalty or charge would be needed to remove the advantage of
permitting the tax-free investment compounding rather than taxable
investment compounding, or at a minimum, a mechaninsm to remove the asset
growth advantage of the Unclassified Plan (with its low fees and
correspondingly higher net returns) compared to the expected result of an
insurance company annuity. If the Subcommittee were to explore any of these
options, any system the Subcommittee or LCPR might devise might be
combersome, inaccurate, or both. And if it could be done accurately, the
individual would be left no better off than if the leglisation did not pass
and the person invested in an annuity from an insurance company or similar
provider. If that is the case, no legislation is needed since the self-help
remedies produce the same net result.
The Subcommittee may also wish to consider that individuals in the MSRS
Unclassified Plan have transfer rights after ten years of covered service to
the MSRS General Plan, which would allow the individual to receive a defined
benefit plan annuity under the General Plan in lieu of the value of the
individual’s Unclassified Plan account. If the individual has or obtains
sufficient years of service to exercise that right, either through existing
service plus the four years of service credit these bills would grant, or
through further subsequent State employment, the individual would exercise
that transfer right if the high-five average salary MSRS General annuity has
more value than the individual’s Unclassified Plan account value at the
time of retirement. The transfer to the MSRS General Plan is most likely to
occur if the Legislature were to authorize only a minimal amount for
addition to the individual’s existing Unclassified Plan account, because
in that situation, the MSRS General Plan annuity is more likely to have the
higher value. That election would create a future loss in MSRS General if
the individual decides to forfeit the Unclassifed Plan account because a
high-five MSRS General annuity has higher value. If the Legislature were to
permit a very large amount of assets to be added to the Unclassified Plan
account, this would make it less likely that the individual would convert to
the General Plan, but it would give the individual a unique advantage of
being authorized, through this special legislation as amended, to place a
large amount of assets in a very cost efficent, tax-deferred investment
account.
If the Subcommittee feels some action is appropriate, the Subcommittee may
wish to consider an alternative, a solution along the lines suggested in
item 16 on the agenda. Those bills would authorize a defined benefit plan
service credit purchase rather than a defined contribution plan
"purchase." Agenda item 16 is S.F. 1273 (Ring); H.F. 1215
(Jennings): TRA; Service Credit Purchase For Prior University of Minnesota
Teaching Service, which would authorize service credit purchase in a defined
benefit plan. In addition to the Unclassified Plan service-related purchase
request for Ms. Johnson in S.F. 1114 (Sabo); H.F. 726 (Skoglund), another
bill has been introduced on her behalf which would allow her to purchase
defined benefit plan service credit in PERA General for a period of service
as an assistant city attorney in Somerville, Massachusetts, and a period as
a housing director in Waterloo, Iowa. The bills relating to Ms. Johnson’s
out-of–state service are S.F. ( ); H.F. 1525 (Skoglund): PERA General:
Authorizing Purchase of Service Credit for Out-of-State City Employment.
If the Subcommittee is interested in revising legislation as needed to allow
Ms. Johnson to pursue defined benefit plan service credit for the
out-of-state-service and the University of Minnesota service, the issue of
the accuracy of the full actuarial value methodology for computing defined
benefit plans service credit purchases (Section 356.55) is a policy issue.
Elsewhere in this memo we have mentioned a few inconsistencies between that
methodogy and the approach taken by the actuary in cost estimates on recent
bills, and for determining Post Fund asset requirement for transfers
required due to some recent legislation. The question is whether the
approach in Section 356.55 involves a subsidy, at least in certain
situations. Ms. Johnson is a lawyer, certified public accountant, has held
high ranking positions in the Office of the State Auditor and in the
Department of Finance, and is now the Executive Director of MERF. We assume
she is fully capable of analyzing the implication of the Section 356.55
methodology. The Subcommittee may wish to hear brief testimony from Ms.
Johnson regarding why she believes that the purchase in a defined benefit
plan is worth pursuing. Perhaps the motivation for requesting those bills is
simply to shift risk from the individual to the State and employing units,
by having the State ensure an outcome through the guarantee of payment of a
higher defined benefit plan annuity due to the purchase. This risk-shifting
is a policy issue--whether Minnesota State taxpayers should bear the
pension-plan-related risks for service that occurred in Massachusetts and
Iowa, and for University of Minnesota service freely entered into with the
understanding that no pension coverage would be provided. Regarding the
out-of-state service, at the current time (and since 1999) legislation has
permitted teachers in TRA and the first class city teacher plans to purchase
service credit for out-of-state teaching. The bills for Ms. Johnson could be
viewed as a request for comparable treatment. The authority in the teacher
plans for this form of service credit purchase expires on May 16, 2002.
S.F. 1273 (Ring); H.F. 1215 (Jennings): TRA; Service Credit Purchase
For Prior University of Minnesota Teaching Service, ISD No. 279-Osseo (Joe
Pung)
These bills are a request to permit a TRA member with some University of
Minnesota teaching service to purchase service credit in TRA for that time
period. Unversity of Minnesota teaching service and teaching service in other
higher education institutions were not included in the 1999 service credit
purchase legislation enacted for TRA and first class city teacher plans. The
likely reason for that exclusion is the probability of creating double
coverage, where the individual is covered by a higher education plan (defined
benefit or defined contribution) and would also be authorized to purchase TRA
defined benefit service credit for the same period. If the Subcommittee is
interested in pursuing S.F. 1273 (Ring); H.F. 1215 (Jennings), or any revised
version, the Subcommittee may wish to consider language prohibiting a purchase
if it creates double coverage. A memo with further analysis is included in
your packet.
S.F. 1327 (Bachmann); H.F. 1326 (Mares): PERA; Service Credit Purchase
For Individual Employed By ISD No. 624-White Bear Lake (Ruth Lindbeck)
These bills would grant of one year of PERA General service credit to an
individual due to a failure by the school district to report her for PERA
coverage for the 1973–74 school year. The bills are drafted to require the
district to cover the entire full actuarial value payment. It is not clear why
the bills are drafted as a grant. Even in the case of employer error, the
standard policy is to require the individual to pay employee-equivalent
contributions plus interest, with the remainder picked up by the employer. It
is not clear from the materials that we have whether the district is fullly
willing to accept a burden or error without contention. Representative Mares
may have further information to provide on that matter. A memo is enclosed for
a further analysis of issues.