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TO: Members of the Legislative Commission on Pensions and Retirement

FROM: Lawrence Martin, Executive Director

RE: Designated Commission Interim Project; Potential Expansion of the MSRS-Correctional Plan Coverage Group (First Consideration)

DATE: September 6, 2001

Introduction

As an interim study topic, the Commission chair, Senator Dean E. Johnson, has designated a review of a number of proposed expansions in the membership group of the State Correctional Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional). The topic is the outgrowth of hearings by the Subcommittee on Prior Service Credit Purchases of the Commission and/or the Commission during the 2001 Legislative Session (March 12, 2001; March 21, 2001; March 26, 2001; and April 2, 2001), where no action was taken and the proposed legislation was laid over for potential interim work.

This meeting is the initial Commission interim consideration of the topic. Commission consideration of the topic is expected to require two meetings.

This Commission staff issue memorandum is the initial memorandum on the Commission interim study topic. This memorandum will summarize the development of the membership, benefits, and funding of the MSRS-Correctional Retirement Plan and will summarize the various legislative proposals for expanding the MSRS-Correctional Plan coverage group. The memorandum is intended to provide a context for testimony on the various legislative proposals attempting to add individuals or groups to the MSRS-Correctional Plan. A subsequent Commission staff issue memorandum will identify and discuss the various pension and related public policy issues that arise from the proposed legislation.

Background Information On The State Correctional Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional)

a. General Background Information on MSRS-Correctional. The Correctional State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional) was established in 1973 as a result of collective bargaining by the State of Minnesota with the American Federation of State, County, and Municipal Employees, Council 6, under the Public Employees Labor Relations Act (PELRA), when pensions were a mandatory bargainable item, and the resulting implementing legislation. Up to that point, correctional guards and most other correctional system employees were covered by the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General). Some correctional system employees were covered by the Teachers Retirement Association (TRA). In 1973, PELRA was amended to eliminate pension benefits and contributions from the definition of "terms and conditions of employment," Minnesota Statutes, Section 179A.03, Subdivision 19, which are subject to mandatory collective bargaining.

The MSRS-Correctional Plan has been amended numerous times, from the 1973 change from the career average salary formula benefit to the highest five successive years average salary formula benefit to the 2000 inclusion of the Phoenix Treatment Program in plan covered service credit.

b. Background Information on MSRS-Correctional Plan Membership Eligibility. In 1973, when the MSRS-Correctional was created as a separate plan, membership was largely limited to correctional guards and correctional counselors in adult correctional facilities. In subsequent years, by amendments to the coverage group eligibility provisions of the plan, the coverage group was expanded to include additional correctional positions in both adult and juvenile correctional facilities. The initial coverage group was given credit for prior State employment service in the MSRS-Correctional Employees Retirement Plan, with service credit in the prior plan being forfeited. As a modest number of other groups and job titles were added over the period 1974-1995, MSRS-Correctional Plan service credit was typically prospective only.

The premise for MSRS-Correctional Plan coverage is that the nature of certain types of correctional employment is sufficiently hazardous on a regular basis and that the need for a particularly vigorous workforce in certain correctional employment positions is sufficiently great that these employees should have retirement coverage that allows for retirement at an age earlier than generally provided for other state employees, provides a retirement annuity upon that retirement in an amount greater than is accruing to other state employees and imposes mandatory retirement at an age earlier than once was applicable to other state employees.

The first substantial MSRS-Correctional Plan coverage expansion was in 1974. In 1974, the MSRS-Correctional Plan coverage group was expanded to include special schools counselors and shop instructors at the adult correctional institutions and special teachers, trades personnel, and maintenance personnel at the Stillwater Prison, the St. Cloud Reformatory and the Shakopee Women’s Prison if the employee was certified by the Department of Corrections as being regularly engaged in the rehabilitation, treatment, custody, or supervision of inmates. The 1974 expansion occurred only after extended deliberations by the Commission and substantial testimony about the employment duties and hazards of the applicable employee groups.

Between 1974 and 1996, expansions in the coverage group of the MSRS-Correctional Plan were limited in number and limited in scale, although there were numerous requests for coverage groups expansions and several Commission studies of the issue.

In 1996, the MSRS-Correctional Plan membership was increased by more than 400 State employees by virtue of the inclusion of 33 additional employment classifications which were certified by the Department of Corrections or the Department of Human Services as having at least 75 percent inmate or Security Hospital patient contact. The affected employees were allowed to retain their prior MSRS-General or TRA retirement coverage if they so desired. For State employees newly included in the MSRS-Correctional Plan, an option was provided to transfer prior State employment service to the plan if there were no breaks in the prior service of more than 180 days, and the prior service was comparable to service eligible for Correctional Plan coverage. To transfer the service, the State employee had to contribute in a lump sum the differential, if positive, between 4.9 percent of salary and the member contribution made to the prior plan, plus six percent interest. For those individuals transferring past coverage, assets representing the funded portion of the present value of the benefits earned to date were transferred from TRA or MSRS-General, as applicable, to MSRS-Correctional.

In 1999, the MSRS-Correctional Plan membership was increased by an estimated 115 State employees employed in nine employment positions with the Minnesota Extended Treatment Option (METO) on-campus program at the Cambridge Regional Human Services Center, with the affected employees allowed to retain their prior MSRS-General retirement coverage if they so desired. Newly included METO employees had an option to transfer prior State employment service to MSRS-Correctional, with a lump sum contribution differential payment by the transferring employee. For the METO employees transferring past coverage, assets representing the funded portion of the present value of the benefits earned to date were transferred from MSRS-General to MSRS-Correctional.

As of July 1, 1999, the most recent date on which particular employee information is available, the MSRS-Correctional Plan membership consisted of 2,855 state employees in 102 employment classifications working in 15 state facilities or institutions. The facility and installation breakdown of the MSRS-Correctional Plan membership is as follows:

Department of Corrections	Number of MSRS- Correctional Plan Members
Central Office	24	(0.84%)
MCF-Lino Lakes	387	(13.56%)
MCF-Stillwater	423	(14.82%)
MCF-Oak Park Heights	235	(8.23%)
MCF-Shakopee	145	(5.08%)
MCF-Red Wing	150	(5.25%)
MCF-Sauk Center	43	(1.51%)
MCF-Thistle Dew/Moose Lake	39	(1.37%)
MCF-Faribault	323	(11.31%)
MCF-St. Cloud	353	(12.36%)
MCF-Willow River	278	(9.74%)
MCF-Camp Ripley	7	(0.25%)
Total	2,407	(84.31%)
Department of Human Services	Number of MSRS- Correctional Plan Members
St. Peter Security Hospital	264	(9.25%)
Moose Lake Treatment Center	139	(4.87%)
Minnesota Extended Treatment Options	45	(1.58%)
Total	448	(15.69%)

The ten occupational classifications with the largest number of MSRS-Correctional Plan members are as follows:

Occupational Title	Number of MSRS- Correctional Plan Members
Correctional Officer 2	1,254	(43.92%)
Correctional Officer 3	334	(11.70%)
Security Counselor	244	(8.55%)
Correctional Lieutenant	128	(4.48%)
Registered Nurse	107	(3.75%)
Correctional Security Caseworker	87	(3.05%)
Correctional Program Therapist 1	47	(1.65%)
Human Services Support Specialist	38	(1.33%)
Correctional Officer 1	35	(1.26%)
Security Counselor Lead	32	(1.12%)

c. Background Information on MSRS-Correctional Plan Benefits. The attraction of the MSRS-Correctional Plan for groups seeking this coverage is that the plan pays higher benefits than a general employee plan and has an earlier normal retirement age. Because of the better benefits and earlier retirement age, the plan is more costly than a regular general employee plan. The plan offers a hybrid of general employee plan and public safety plan features. MSRS-Correctional Plan members are coordinated members (i.e., plan coverage supplements Social Security coverage), unlike Public Employees Retirement Association Police and Fire Plan (PERA-P&F) members. Like a public safety plan, members can retire without a reduction for early retirement at age 55 or with a reduction at age 50. The MSRS-Correctional Plan annuity is computed using a 2.4 percent yearly service benefit accrual factor. Duty-related disability benefits are generous, typical of a public safety plan. The duty-related disabilitant receives 50 percent of high five average salary, plus 2.4 percent of high five average salary for each year in excess of 20 years of allowable service. Also akin to a public safety plan, the MSRS-Correctional Plan uses an occupational definition of disability rather than the total impairment disability definition used by the MSRS-General Plan.

The MSRS-Correctional Plan is a hybrid plan, with features lying somewhere between general employee plans and pure public safety plans. Akin to the state public safety plans (the State Patrol Plan and the Public Employees Retirement Association Police and Fire Plan (PERA-P&F)), the MSRS-Correctional Plan has an age 55 normal retirement age and disability provisions similar to the public safety plans. Like general employee plan members, MSRS-Correctional Plan members do pay into Social Security for the covered employment and will receive monthly checks from that federal program when Social Security benefit eligibility age is reached. Because the MSRS-Correctional Plan members are assumed to have hazardous employment, like the state public safety plan members, but will also receive Social Security, the accrual rate (the percentage of the high-five average salary payable per year of service) is set above that of general employee plans but below that of public safety plans. Coordinated members of general employee plans who retire at normal retirement age have a 1.7 percent accrual rate, MSRS-Correctional Plan members have a 2.4 percent accrual rate, and State Patrol Plan and PERA P&F members have a generous 2.9 percent accrual rate. The justification for the 2.9 percent rate in the State Patrol Plan and PERA P&F is that members of these public safety plans do not pay into the Social Security Old Age Insurance Program and will not be receiving monthly benefits from that system due to covered public safety employment to supplement the income received from the state retirement plan.

The following is a more detailed summary of specific MSRS-Correctional Plan features:

Normal Retirement Benefits. Members are eligible for a normal retirement benefit at age 55 and receive a benefit of 2.4 percent of high-five average salary per year of allowable service.

Early Retirement Benefits. Members are eligible for early retirement at age 50. The benefit is computed like a normal retirement benefit, but the benefit is reduced to the actuarial equivalent of the benefit that would be payable if the member deferred receipt until age 55.

Optional Annuity Forms. In lieu of a single life normal or early retirement single life annuity, various optional annuities may also be elected, which are to be actuarially equivalent to the single life annuity except for a subsidized bounce-back provision. Term certain annuities and Social Security leveling options may also be elected.

Duty-Disability Benefits. A member who can not perform his or her duties due to work-related disability is eligible for a duty-disability benefit of 50 percent of high-five salary plus 2.4 percent for each year of service in excess of 20 years, 10 months, but the benefit is capped at 75 percent of the high-five.

Non-Duty Related Disability. If the disability is not duty-related, the benefit is 2.4 percent of the high-five per year of service, computed on 15 years or actual covered service, whichever is greater.

Death Benefits to Surviving Spouse. If an active or deferred member dies prior to receiving a retirement or disability benefit, benefits are payable to the surviving spouse, or to dependent children if there is no surviving spouse. The surviving spouse benefit is the 100 percent joint-and-survivor benefit that the deceased employee and spouse would qualify for on the date of death, given their ages. If benefits commence before age 55, the benefit is reduced by one-half of an actuarial reduction, rather than a full reduction. In lieu of this joint-and-survivor annuity, the surviving spouse could select an equivalent term-certain annuity, or a refund of member contributions plus six percent interest.

Death Benefits to Surviving Children. If there is no surviving spouse, the surviving children share a 100 percent optional annuity, but benefits cease when the dependent reaches age 20, or after receiving benefits for five years, whichever is later.

Combined Service Provision. The plan is included under the combined service annuity, disability, and survivor provisions.

Post-Retirement Adjustments. Annuities payable under the plan (retirement, survivor, or disability) are adjusted annually to match inflation up to 2.5 percent, plus an additional investment return based adjustment may be received based on a five year averaging of State Board of Investment (SBI) Post Fund investment performance.

Termination Refund. If no other benefit is payable or if a refund is preferred to an annuity, a terminating employee may elect to receive a refund of member contributions plus six percent interest.

Deferred annuity. A deferred retirement annuity is payable at the normal retirement age to a person with three years of allowable service, with the benefit computed under law in effect at termination and increased by three percent, compounded annually, until January 1 of the year following the attainment of age 55, and five percent thereafter, until the annuity begins.

Actuarial Condition and Funding of MSRS-Correctional

The following compares the July 1, 1999, and the July 1, 2000, MSRS-Correctional Plan actuarial valuation results:

	1999	2000	Change
Membership
Active Members	2,882	3,098	+216
Service Retirees	542	616	+74
Disabilitants	60	75	+15
Survivors	50	56	+6
Deferred Retirees	337	419	+82
Nonvested Former Members	135	163	+28
Total Membership	4,006	4,427	+421
	1999	2000	Change
Funded Status
Accrued Liability	$307,408,000	$359,885,000	+52,477,000
Current Assets	$335,408,000	$386,964,000	+51,556,000
Unfunded Accrued Liability	($28,000,000)	($27,079,000)	-(921,000)
Funding Ratio	109.11%	107.52%	-1.59%

Financing Requirements
Covered Payroll	$112,202,000	$127,557,000	$15,355,000
Annuities Payable	$10,190,000	$12,414,000	$2,224,000

Normal Cost	14.85% $16,664,000	14.64% $18,670,000	-0.21% +2,006,000
Administrative Expenses	0.15% $168,000	0.22% $281,000	+0.07% +113,000
Amortization	(1.69%) ($1,896,000)	(1.14%) ($1,454,000)	+0.55% +(40,000)
Financial Requirements	13.31% $14,936,000	13.72% $17,497,000	+0.41% +2,561,000

Member Contributions	5.69% $6,384,000	5.69% $7,258,000	- +874,000
Employer Contributions	7.98% $8,954,000	7.98% $10,179,000	- +1,225,000
Direct State Funding	0.00% $0	0.00% $0	- -
Other Govt. Funding	0.00% $0	0.00% $0	- -
Administrative Assessment	0.00% $0	0.00% $0	- -
Total Support	13.67% $15,338,000	13.67% $17,437,000	- +2,099,000

Financial Requirements	13.31% $14,936,000	13.72% $17,497,000	+0.41% +2,561,000
Total Support	13.67% $15,338,000	13.67% $17,437,000	- +2,099,000
Deficiency (Surplus)	- 0.36% ($402,000)	0.05% $60,000	+0.41% +462,000

Current Proposed Legislation Expanding the MSRS-Correctional Plan Coverage

S.F. 804 (Kleis); H.F. 2314 (Schumacher): MSRS-Correctional; Inclusion of Reshape Program Director

S.F. 804 (Kleis); H.F. 2314 (Schumacher) amends Minnesota Statutes, Section 352.91, Subdivision 3d, which specifies a number of correctional employment positions for inclusion in coverage by the Correctional State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional), by adding the director of the Reshape Program to MSRS-Correctional Plan coverage, effective on July 1, 2001. The "Reshape" program has been existence for about 21 years. It is an enclosed unit within the St. Cloud Correctional Facility. Between 25 and 40 inmates eat, sleep, and work in the unit. The director of the program has an office within the unit. The Phoenix program, added to MSRS-Correctional Plan coverage in 2000, was absorbed directly into the Reshape program. The primary affected individual is Robert Jungbauer.

S.F. 1548 (Chaudhary); H.F. 2000 (Goodwin) and S.F. ____ ( ); H.F. 1693 (Entenza): MSRS-Correctional; Inclusion of Corrections Agent Service/Assistant Group Supervisor Service for Retiree

S.F. 1548 (Chaudhary); H.F. 2000 (Goodwin) and S.F. ____ ( ); H.F. 1693 (Entenza) requires the Minnesota State Retirement System (MSRS), on behalf of an existing retiree, to recompute the individual’s retirement benefit after shifting approximately ten years of service credit from MSRS-General to MSRS-Correctional. MSRS must credit service credit earned by the individual (as a department of corrections agent from January 1, 1975, to September 28, 1978, and as an assistant group supervisor from January 17, 1990, to October 15, 1996) to the MSRS-Correctional Plan, rather than to the MSRS-General Plan. To receive this change in service credit, the individual must pay to the state retirement system the difference between the employee contributions that were made to the MSRS-General Plan for the periods in question and the employee contributions that would have been made to the Correctional Plan. This difference is payable with 8.5 percent interest. Upon receipt of the payments, MSRS must recompute the annuity, including retroactive benefits back to the individual’s retirement date, October 31, 1998, with 8.5 percent interest. The affected individual is Richard Kaufman.

S.F. 1571 (Hottinger); H.F. 1757 (Johnson, R.): MSRS-Correctional; Inclusion of Sex Offender Program Social Worker

S.F. 1571 (Hottinger); H.F. 1757 (Johnson, R.) allows an individual Department of Human Services employee to purchase service credit in the Correctional State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional) for 2.25 years of service at the St. Peter Security Hospital that was not credited as MSRS-Correctional Plan service. The purchase would be at full actuarial value. The affected individual is Linn Ford.

S.F. 1738 (Terwilliger); H.F. 1798 (Wenzel): MSRS-Correctional; Inclusion of Sentencing-to-Service Crew Leaders

S.F. 1738 (Terwilliger); H.F. 1798 (Wenzel) amends Minnesota Statutes, Section 352.91, Subdivision 3g, which specifies additional Department of Corrections employment positions for membership in the Correctional State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional), by adding the sentencing-to-service crew leader position who is responsible for county inmate supervision to MSRS-Correctional Plan coverage. It also allows retroactive MSRS-Correctional Plan service credit to June 30, 1975, to be purchased with the payment of the differential between MSRS-Correctional Plan contribution rate and the MSRS-General Employees Retirement Plan (MSRS-General) contribution rate by the member and the transfer of prior related MSRS-General assets. The proposed legislation would apply to all sentencing-to-service crew leaders employed by the Department of Corrections.

Conclusion

This Commission staff memorandum is intended to provide the Commission with the necessary background to begin consideration of these proposed individual and group expansions of the Correctional State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional). A subsequent Commission staff memorandum will provide a full discussion of the pension and related policy issues raised by the proposals as well as the results of Commission staff information gathering about the affected employees.