TO: Members of the Legislative Commission on Pensions and Retirement
FROM: Ed Burek
RE: Consideration of Service Credit Purchase Requests Recommended for Interim Study
(First Consideration):
Military Service Credit Purchase Bills:
S.F. 370 (Wiger); H.F. 465 (Marko): PERA; PERA-P&F: Revision in Temporary Military Service Credit Provision by Eliminating PERA-General Purchases; Placing Cap on PERA-P&F Service Credit Purchases and Subsidizing Purchase Procedure
S.F. 409 (Solon); H.F. 619 (Swapinski): Various Plans (Combined Service Annuity Plans): Expanding Authority to Purchase Military Service Credit; Revising Purchase Procedures
S.F. 611 (Betzold); H.F. 124 (Bernardy): Various Plans: Elimination of Restrictions on Prior Military Service Credit Purchases
Police or Firefighter Service Credit Bills
S.F. 313 (Larson); H.F. 303 (Cassell): PERA-P&F: Purchase of Service Credit for Prior Local Relief Association Service
S.F. 314 (Larson); H.F. 295 (Cassell): PERA and TRA: TRA Service Credit Grant to Former Saint Paul Police Officer
DATE: September 6, 2001
At the first Legislative Commission on Pensions and Retirement (LCPR) meeting of the 2001 Legislative Session on March 2, 2001, the newly-elected LCPR Chair, Senator Dean Johnson, announced the formation of the Prior Service Credit Purchase Subcommittee. The purpose of the subcommittee was to hear testimony and review the various service credit purchase bills introduced during the session and to recommend appropriate LCPR and Legislative action. Subcommittee members were Senator Don Betzold, chair, Senator Dan Stevens, Representative Mary Murphy, and Representative Steve Smith.
The Subcommittee met on March 14, 2001, and again on March 21, 2001, hearing numerous purchase of service credit bills. The full LCPR included the Subcommittee’s report on its March 26, 2001, agenda, in the form of draft language. That Subcommittee report was recommended to pass by the full LCPR.
Several bills heard by the Subcommittee were recommended for interim study, due to the complexity of issues raised by the bills and the lack of sufficient time during the session to provide adequate review, conflicts between the bills regarding proposed treatment, and general pension policy concerns.
The primary purpose of the Commission’s first consideration of these bills during the interim is to hear public testimony. To provide some background for the Commission, below we note the applicable bills, we provide brief bill summaries and indicate Subcommittee and LCPR actions leading to the bill being held over for interim study, and we provide a few comments. The comments are intended to alert members to some issues that would need to be addressed in any further legislative actions. The comments are not intended as thorough policy analysis. A more complete discussion of pension policy issues raised by the bills will be provided a later meeting or meetings. Copies of the bills are attached, along with an appendix (Appendix A) describing Commission purchase of service credit policy as reflected in the last revision of the Commission Statement of Pension Policy, in late 1996. Appendix B notes recent service credit purchase provisions enacted in teacher plans and in other public plans for various groups.
Bills Under Review
The service credit purchase or grant bills recommended for interim study are as follows:
Military Service Credit Purchase Bills:
S.F. 370 (Wiger); H.F. 465 (Marko): PERA; PERA-P&F: Revision in Temporary Military Service Credit Provision by Eliminating PERA-General Purchases; Placing Cap on PERA-P&F Service Credit Purchases and Subsidizing Purchase Procedure
S.F. 409 (Solon); H.F. 619 (Swapinski): Various Plans (Combined Service Annuity Plans): Expanding Authority to Purchase Military Service Credit; Revising Purchase Procedures
S.F. 611 (Betzold); H.F. 124 (Bernardy): Various Plans: Elimination of Restrictions on Prior Military Service Credit Purchases
Police or Firefighter Service Credit Bills:
S.F. 313 (Larson); H.F. 303 (Cassell): PERA-P&F: Purchase of Service Credit for Prior Local Relief Association Service
S.F. 314 (Larson); H.F. 295 (Cassell): PERA and TRA: TRA Service Credit Grant to Former Saint Paul Police Officer
Note: S.F. 313 (Larson); H.F. 303 (Cassell): PERA-P&F: Purchase of Service Credit for Prior Local Relief Association Service, was drafted to apply broadly to individuals who have uncredited service in prior local police or paid fire relief associations. During the 2001 Legislative and Special Legislative Sessions, the bill was revised to apply to a single individual, was recommended to pass, and was enacted. The question for the Commission at this time is one of scope: whether to again consider legislation applicable to a class of similarly-situated individuals rather than a single individual.
Bill Summary; Prior Legislative Actions; Comments
Summary: The bills revise a temporary PERA, PERA-P&F military service credit provision which was enacted by the 2000 Legislature (Laws 2000, Chapter 461, Article 4, Section 3). That provision in existing law, set for repeal on May 16, 2003, permits individuals who provided military service before becoming a covered PERA or PERA-P&F member, or who missed deadlines for obtaining service credit under PERA’s general military service credit purchase procedure, to purchase service credit for that military service period at full actuarial value. S.F. 370 (Wiger); H.F. 465 (Marko) revises that temporary provision by eliminating purchases by PERA-General members, by capping the length of the service credit purchase period by PERA-P&F members at four years, by removing the full actuarial value purchase requirement and replacing it with contributions based on the individual’s salary, and by waiving any interest.
Prior Subcommittee/LCPR Actions. The Service Credit Purchase Subcommittee heard testimony on S.F. 370 (Wiger); H.F. 465 (Marko) at it’s first meeting on March 14, 2001, and the subcommittee reviewed a staff memo. No formal action was taken.
Comments. Reasons for removing PERA-General member purchase eligibility unclear. Would create inconsistencies between various pension plans. Proposed payment procedure not well specified. Proposal is inconsistent with standard policy of requiring full actuarial value purchases to avoid subsidy issues.
Summary. S.F. 409 (Solon); H.F. 619 (Swapinski) would create a new section in chapter 356, Retirement System, Generally, permitting members of any of the larger public pension plans (those included in the combined service annuity provision) to purchase service credit for military service, not to exceed five years, by paying contributions plus interest. Payment may be made any time prior to termination of covered service.
Prior Subcommittee/LCPR Actions. Representative Swapinski and various constituents testified at the March 14, 2001, subcommittee meeting. No formal action was taken.
Comments. Inconsistent with S.F. 370 (Wiger); H.F. 465 (Marko), regarding length of service credit purchase period, plans covered, and this purchase authority provision is permanent rather than temporary. Raises same subsidy issue, but on larger scope.
Summary. S.F. 611 (Betzold); H.F. 124 (Bernardy) revises the temporary military service full actuarial value service credit purchase provisions (set to expire on May 16, 2003) in MSRS General, MSRS State Patrol, PERA and PERA-P&F, TRA, and the first class city teacher plans, by removing the requirement that the purchase period be for an initial period of enlistment, induction, or call to active duty without any voluntary extension, and by striking language which disallowed a purchase if the individual was entitled to a current or deferred military service pension.
Prior Subcommittee/LCPR Actions. Staff memo reviewed at first and second Subcommittee meetings, brief testimony by Mr. Austin, TRA’s Executive Director, heard at second meeting. Subcommittee recommended that the bills be forwarded to the full Commission without specific recommendation. At the March 26, 2001, LCPR meeting, the bills were laid over for interim study.
Comments. It is alleged that the military service credit purchase provisions enacted by the Legislature in 1999 and 2000 are inconsistent with federal law. Issues raised in the staff memo provided to the Subcommittee include whether the allegation is valid, whether the federal law is constitutional, and whether repeal of the Minnesota legislation may be a preferable to permitting double coverage. We also note that this proposal differs considerably from other proposed in military service credit legislation mentioned previously.
Summary. These bills as originally introduced would authorize PERA-P&F members who are vested in that plan (have three years of service credit) to purchase service credit in PERA-P&F for any period covered by a local police or paid fire pension plan for which the individual is not entitled to a current or deferred pension. The service credit purchase is at full actuarial value and the period length can not exceed ten years of service. The provision is repealed May 16, 2002.
Prior Subcommittee/LCPR Actions. S.F. 313 (Larson); H.F. 303 (Cassell) was presented by Representative Cassell at the first Subcommittee meeting, and testimony was provided by a constituent. Representative Cassell again testified at the second Subcommittee meeting and proposed an amendment to make the bill apply to a single individual. Representative Smith moved the amendment and the motion prevailed. The bill, now in the form of a single person bill, was heard at the Commission’s March 26, 2001, meeting, and was recommended to pass.
Comments. At the LCPR meeting, Senator Betzold said the subcommittee was concerned about setting a precedent leading to a generalized purchase procedure for similarly-situated individuals, which was why the proposal was forwarded without recommendation. Ms. Vanek testified that since it was at full actuarial value, it is not expected to cause financial harm to the fund (assuming that the methodology is valid).
Summary. S.F. 314 (Larson); H.F. 295 (Cassell) applies to an individual who is a current TRA member as an Alexandria technical college faculty member, who has six years of PERA-General service credit as a Wilkin County attorney, and who was a Saint Paul police officer from September 3, 1968, to July 18, 1973. These bills would grant 4.7 years of service credit in TRA (presumably reflecting the period of time as a Saint Paul police officer), and would transfer $2,637 (representing unrefunded employee contributions as a police officer) plus interest from PERA-P&F to TRA.
Prior Subcommittee/LCPR Actions. At the first Subcommittee meeting, members reviewed the staff memo and heard testimony from Representative Cassell and from the covered individual, Mr. Sandell. At the second Subcommittee meeting, the Subcommittee further considered the issues and heard testimony. Senator Betzold stated that he would advise the Commission to refer this bill for interim study. The full Commission discussed the bills at its March 26, 2001, meeting. Senator Betzold reviewed the Subcommittee’s concerns. Executive Directors from TRA and PERA testified that the bills would have considerable financial impact on the various funds involved, through asset transfers, through earlier receipt of benefits, and through the impact of the combined service annuity. The bills were laid over.
Comments. The bills are inconsistent with Commission policies, raising the question of whether any legislative action is warranted. Issues include precedent, appropriateness of a service credit grant rather than a non-subsidized purchase, and the question of who should bear the cost of that grant.
Appendix A
This appendix describes LCPR service credit purchase policy, as reflected in the Commission’s Statement of Pension Policy.
The LCPR typically considers purchases of prior service credit requests on a case-by-case basis. In general, the LCPR recommends approval if the following conditions are met:
The full actuarial requirement has several implications. By requiring a full actuarial value payment, the pension fund does not subsidize the purchase. The justification is that since the pension fund did not harm the individual, it should not be held liable for making the individual whole. In other words, the broad membership of the fund, all the contributing employees and employers, should not be required to pick up part of the true cost of the service credit purchase. The full actuarial value requirement may be waived only in unusual circumstances where lack of service credit is due to some error on the part of fund administrators, like providing incorrect information to the individual which results in the individual not receiving service credit for a period of time for which service credit is authorized under general law. Lacking these circumstances, the LCPR generally requires receipt of the full actuarial value. If that amount is paid by the individual, generally there is no net financial gain to the individual. The individual is paying to the fund, to receive the added service credit, the full value of the added lifetime benefit to be received as a result of that additional service credit. In general, only if the employer pays part of that cost is it in the financial interest of the individual to pursue the service credit purchase.
When the LCPR considers purchase of service credit bills, it is common practice to include language which permits, but does not require, the local employer to pay a portion of the full actuarial value. There have been several situations where the employer, after reviewing its records and other relevant data, has determined that the individual was harmed by employer error, and the employer has agreed to pay a portion of the service credit purchase cost. The maximum employer payment the LCPR generally authorizes is the full actuarial value minus an employee contribution equivalent amount, including interest. The employee contribution equivalent amount would be the sum of the employee contributions that would have been deducted from pay during the period being purchased, plus 8.5 percent interest. This employee contribution requirement is an effort to treat the individual as similarly as possible to any other individual who was covered by the plan at the time. The interest requirement compensates for the time value of money. Without the interest requirement, the individual would be receiving an interest free loan on an amount equal to the unpaid contributions.
Mandatory employer contribution language seems justifiable when there is clear evidence or an admission by the employer that the employing unit committed an error that harmed the individual through a lack of pension coverage. At times, the LCPR has mandated employer contributions, in cases where the LCPR concluded the employer harmed the individual. Common problems are delays in enrolling new employees in the pension plan, either because the employer is slow in setting up contribution deductions from pay, or by incorrectly identifying permanent employees as temporary or part-time employees, who may be exempt from pension plan coverage.