The Minnesota State Retirement System (MSRS), Public Employees Retirement Association (PERA), the Teachers Retirement Association (TRA), the first class city teacher fund associations, and the Minneapolis Employees Retirement Fund (MERF) are required by Minnesota Statutes, Section 356.88, to present proposed administrative legislation to the Legislative Commission on Pensions and Retirement and to the Government Operations Committees in the House and Senate by October 1 if the proposed legislation is to be acted upon during the next legislative session. Commission staff must provide written comments to the applicable plan administrators by November 15^th. This year, PERA and TRA submitted provisions for review.

A copy of Section 356.88 is attached to this memo. The administrative legislation review provision, which was sought by the plan administrators and in which they played a role in drafting, passed as part of 1994 legislation (Laws 1994, Chapter 528, Article 1, Section 13). The section of statute has not been amended since its enactment except for the repeal of an obsolete subdivision. (The repealed subdivision established a salary study advisory committee which was dissolved after reporting its findings to the Commission in February 1995.)

Unfortunately, the review process suggested by Section 356.88 has never worked well in practice. The Commission may wish to improve that process to make it more effective and less burdensome for the Commission and its staff. Before beginning an initial review of provisions submitted by PERA and TRA, in this section we comment on the types of problems occurring in this review process since Section 356.88 was enacted, and we make a few initial comments for improving the process. At a subsequent meeting the Commission may wish to consider possible amendments to Section 356.88 to improve this process.

1. Summary of Section 356.88. Section 356.88 begins with a general statement of a process that public pension plan administrators must follow to permit the Legislature sufficient time to consider public pension administrative legislation. MSRS, PERA, TRA, the first class city teacher fund associations, and MERF must present "proposed administrative legislation" by October 1…in order for the proposed legislation to be acted upon during the upcoming legislative session." The draft administrative legislation is to be presented to the Commission and the Government Operations Committees in the House and Senate by October 1, and LCPR staff is required to provide written comments on the draft to the applicable plan administrators by November 15^th.
   
   The next paragraph in this section mentions certain areas that must be covered, but certainly administrative legislation is not to be limited to these areas. It reads:

(b) Proposed administrative legislation recommended by or on behalf of a 
public employee pension plan or system under paragraph (a) must address provisions:

(1) authorizing allowable service credit for leaves of absence and related 
circumstances;

(2) governing offsets or deductions from the amount of disability benefits;

(3) authorizing the purchase of allowable service credit for prior 
uncredited periods;

(4) governing subsequent employment earnings by reemployed annuitants; and

(5) authorizing retroactive effect for retirement annuity or benefit applications.

The final paragraph states that the plan administrators must propose, to the extent practical given unique characteristics of the plans, uniform proposals in the areas noted in the above paragraph, and supporting documentation explaining the policy rationale for the proposed uniform administrative legislation.

2. Comments on Section 356.88. Section 356.88 contains no definition of an administrative provision and there is no mutually agreed upon definition in practice. This creates disagreements regarding what provisions are properly includable in a draft submitted under Section 356.88. Problems have also occurred due to the poor quality of materials submitted as drafts, which at times have more closely resembled concept documents--suggested areas for possible change--rather than specific language.

1. Appropriate Content. The Commission may wish to give consideration to defining the nature of provisions that are acceptable for inclusion in a draft submitted under Section 356.88.
   
   The least controversial topics for inclusion in an administrative bill are provisions dealing specifically with plan administration, and general cleanup and clarification of the pension system’s laws. Ideally, a suggested provision in an administrative bill harms no individual or group, is not benefit-related leading to additional benefits or windfalls for any individual or group, and has no cost or at least negligible cost.
   
   Provisions in an administrative bill, other than technical corrections or clarifying wording, will raise policy issues. For example, proposed changes in pension board membership or in a board election provision, which have appeared in materials submitted under Section 356.88 in the past by MSRS, PERA, and TRA, have policy implications. The change may bestow additional power to specific individuals or employee groups, and alter the priorities of the board.
   
   Provisions that increase benefits seem least appropriate or consistent with a bill characterized by the pension fund systems as administrative. Clearly, when a proposed section entails cost, that should be raised as a policy issue. Presumably, cost which is low and which is clearly related to the administration of the pension systems will be the least controversial. However, most drafts submitted under Section 356.88 have included changes that enhance benefits or extend the eligibility groups for existing benefits. While cost is an issue with provisions or this type, the greater question is whether benefit improvements should be included in proposals characterized by plan administrators as administrative in nature.
   
   Regarding the cost of provisions to enhance plan administration, at times a pension system may suggest changes which place some burden on the pension plan staff, the reporting employer units, or both, in order to better identify all individuals required to be plan members, to ensure that contributions are being made and for proper amounts, and to minimize errors in determining proper benefits. Improvements in these areas, which may require revisions of law through an administrative bill, may add to administrative cost, but that cost might be more than offset by additional contributions received and by having contributions received in a more timely manner. These changes may save time for the pension fund staff and the Legislature and its staff. Better reporting and better data will create fewer omitted and erroneous contribution cases (both those that are identified and those that go undetected), and fewer service credit coverage problems which the Legislature is later asked to remedy through special law bills.
   
   A public pension plan’s laws specify in considerable detail the nature of the pension organization and the procedures and policies which are to guide its operations. These laws state the purpose of the organization, the membership of its board, the responsibilities of its board and key administrators, the membership group or groups to be covered by the plans, the amount and timing of contributions to be made to the applicable fund by and on behalf of the members, and the benefits payable to its members. Plan administrators should frequently and carefully review the organization’s operations and the laws governing those operations. This review serves two purposes. The first is to ensure that the operations of the pension fund organization are fully consistent with law, or at least as consistent as possible given limited resources. The second purpose of this review is to identify provisions needing attention through an administrative bill. There are obsolete provisions that ought to be repealed, cross-references and organization names that need updating, and drafting errors that occur in bills passed by past Legislatures. Provisions of law that at one time were clear can become cluttered due to frequent revision, and would benefit from restatement to provide its members, and perhaps more importantly the pension administration’s own staff, with a clear statement of requirements of law. Inconsistent treatment may be created because a recently enacted law specifies different treatment than is provided under similar existing provisions of the plan. Bringing these inconsistencies to the attention of the Legislature within an administrative bill may be appropriate.
   
   Provisions which address the data needs of a pension system seem appropriate for administrative bills, and in recent years TRA and the first class city teacher plans have addressed employer data reporting requirements in their administrative bills. Data is vital to every operation of a pension system. Without accurate data, a pension fund administration cannot operate consistent with its laws. The administration will not be able to accurately identify its required membership, ensure that proper contributions are made, compute correct benefits, or determine its actuarial contribution needs.
   
   Another area that seems appropriate for inclusion in administrative bills are efforts to close loop-holes and generally to avoid abuses. Examples are provisions suggested over the years by TRA and PERA to revise the definition of salary for pension purposes to block efforts to pad the high-five average salary.

2. Nature Of Provisions Submitted Under Section 356.88. In practice, pension plan administrators tend to include miscellaneous benefit improvements in drafts submitted under Section 356.88. At times, the Commission has removed all or most benefit-related provisions from bills submitted under Section 356.88. In other years, based on the preferences of the chair and available Commission time to review the applicable provisions, the Commission has recommended some of these provisions to pass.
   
   The larger defined benefit plans other than the few remaining local police and paid fire plans provide annuity benefits which are computed from the years of service, the high-five average salary, and the accrual rate or rates (the percentage of the high-five average salary which the individual receives for each year of service). Proposals that are obvious benefit increase proposals, particularly if the cost is large, have been introduced separately as benefit increase bills rather than administrative bills. Examples are any bill which increases the accrual rate of any plan, proposals to reduce early retirement reductions, proposals to use the high-three or high-four average salary rather than the high-five, and proposals to reduce normal retirement ages or to extend the Rule of 90. With changes of this nature, the immediate link to plan benefits is obvious. These proposals would lead to larger annuities for all members or large segments of the membership.
   
   Benefit provisions in proposals submitted under Section 356.88 generally are provisions which have lessor fiscal impacts on the plan and/or which apply to a small segment of the membership. A benefit enhancement that applies only to a small segment of the membership can be very valuable for the few that qualify, while having negligible cost impact for the plan as a whole. These provisions raise questions of fairness, and if enacted may created increased pressure on the Legislature to address the concerns of those who contend they also deserve comparable treatment. At times the benefit-related nature of the provision stems from expanding the size of the group eligible for a benefit provided in existing law, or by increasing the service credit used to compute a person’s benefit, or by permitting a benefit payout for a longer period. Examples of benefit-related provisions in proposals submitted under Section 356.88 in recent years are proposals by TRA, PERA, or MSRS to increase surviving spouse benefits in situations where benefit payment does not commence immediately upon the death of the covered employee; proposals to increase dependent child benefits or to expand dependent child benefit eligibility by increasing the maximum age for qualification (from age 18 to 22, 23, or later), by removing requirements that the child be financially dependent upon the now deceased member and that the child be unmarried; and proposals that appeared throughout much of the 1990s to permit retroactive accrual of various benefits.

3. Definition of Acceptable Draft. The Commission may wish to address the question of what constitutes an acceptable draft for purposes of Section 356.88. The current law says that "proposed administrative legislation" is to be submitted by October 1. That suggests a carefully considered proposal, hopefully one a legislator has agreed to author and that was drafted by the Revisor’s office or at least on the Revisor’s system.
   
   When the proposal submitted under Section 356.88 is not a Revisor’s draft, LCPR staff and the Commission cannot begin its review work in an effective, efficient manner. LCPR needs to provide a written response to the applicable fund director by November 15, and LCPR staff must eventually prepare the staff memo for the Commission’s consideration. Ideally, in that November 15 response the LCPR staff can indicate the policy issues raised by the proposal and could suggest technical cleanup of the draft. In practice, it is generally the case that part of the LCPR staff memo to the applicable Executive Director seeks further information on the nature of changes the administrators are attempting to make. It is not apparent from the proposed language. Sometimes a summary included with the draft is useful in indicating what the pension fund administration was attempting to do, permitting Commission staff to provide suggested language (or other sections also needing revision) which better conveys the director’s intent. At other times, the summary of the provision appears to contradict the proposed language, and at times no summary is provided. Even when the intent conveyed in the proposed language is clear, LCPR staff is not able to provide technical or substantive amendments that will be useful for the Commission’s eventual consideration of the draft, because the draft was not created on the Revisor’s system. All page and line references will change when the proposal is formally drafted. Also, the pension fund administrations often change the draft considerably after the proposal has been submitted under Section 356.88, dropping sections and adding others.
   
   In general, the submitted drafts have not been in a condition that permits LCPR staff to effectively begin its work. This year’s TRA proposal is the first proposal submitted by any pension fund system since Section 356.88 was enacted (in 1994) that was drafted on the Revisor’s system. At times, materials submitted by pension fund systems were little more than a list of suggested changes, with no effort made to put the draft in the form or order of a bill, and with little effort to craft language. More typically, the administrators attempted to draft language, but the materials sent to the LCPR and its staff consist of a draft typed by pension fund clerical staff. That typing introduces errors, inaccurately reflecting the statutes and laws proposed for amendment. The errors range from punctuation and spelling errors to words, phrases, or sentences accidentally being repeated or being left out of the draft. At times new language was not underlined, leading to considerable confusion about what is a proposed change rather than existing law. We have also seen existing law language accidentally underlined as if new language.
   
   Given the state of the submitted drafts, over the years LCPR staff has provided comments to the applicable fund director on policy issues raised by the submitted proposal, with the disclaimer that we are assuming that typed version of the sections proposed for amendment accurately reflect the actual language of the law, unless the errors are obvious. It is not feasible given the size of these proposals (often 20 pages or more) for LCPR staff to review every typed section in the proposal for accuracy with the actual law. That review process should have occurred within the pension fund administration prior to submitting the proposal.

4. Treatment of Materials Not Submitted By the Due Date. The LCPR may wish to consider the issue of what action the Commission should take if proposals are not submitted by the due date. It is not uncommon for pension fund directors to suggest that the Commission should act on additional provisions that were not part of the materials submitted by October 1. In one, involving Minneapolis Employees Retirement Fund (MERF) several years ago, the Commission acted on a provision for MERF although MERF failed to submit anything under Section 356.88.
   
   When unusual events occur after the due date that impacts a pension fund or plan, the Commission may need to consider some provisions submitted after the due date. However, if the Commission were to permit this on a routine basis, that action undermines the deadline in Section 356.88. Administrators will not take the deadline seriously. Proposals will not be well conceived and crafted prior to submission, because the submitted materials may serve as little more that a placeholder for other proposals to be added later.

5. Issues of Follow-Through on Requirements. In the summary of Section 356.88 provided above, we noted a paragraph of the law which required the pension fund administrators to propose changes which are more uniform within plans and across plans in leave of absence provisions, disability benefit offsets and reductions, purchase of service credit for prior uncredited service, reemployed annuitant earnings offsets, and retroactivity of retirement benefit applications.
   
   Although the above requirement has been in law since 1994, the systems have not proposed any legislation addressing inconsistencies in leave absence provisions. LCPR staff has long commented upon the considerable inconsistencies in these provisions within and across plans. Most require contributions to receive service credit, but there may be a few forms of leave for which service credit is permitted without contributions. For leaves where contributions are required, there are considerable differences in the salary used for computing contributions (salary prior to the leave, salary after returning from the leave, salary that would have been received during the leave), differences in interest requirements, differences in the length of time the individual has to make contributions, differences in the employee/employer burden for the leave payments, and various other matters.
   
   The some of the other areas mentioned in this paragraph of law, such as the purchase of service credit and reemployed annuitant issues, have been addressed in the years since 1994, but generally not through bills submitted under Section 356.88 and not with a primary focus on just creating consistency, or in tightening procedures to avoid creating subsidies. In general, the benefits have been enhanced. The reemployed annuitant provisions in the various plans, which varied in the amount of salary that could be earned without penalty and in the amount and nature of those penalties, was revised by eliminating the penalties. Amounts that would otherwise be forfeited under the prior law are now rolled into investment accounts until receipt occurs. The Legislature has taken considerable action regarding purchase of allowable service credit. A revised method is currently used to compute the payment amounts to purchase service credit and numerous provisions were enacted, mostly on a temporary basis, permitting service credit purchase for teaching service in other states and countries, and various breaks in service, including breaks in service for maternity reasons or other family-related reasons, and military service periods.

A copy of PERA’s submitted document is attached as Attachment B. The document was not created by the Revisor or on that system. We scanned the document for obvious errors but have not attempted a word-by-word comparison with the existing statutes that are proposed for amendment. One formatting error is obvious. On page 10, the "(e)" on line 5; "(f)" on line 7; and "(g)" on line 12 should reflect the beginning of new paragraphs.

In this section we comment on the materials that PERA submitted on October 1, 2001 for compliance with Section 356.88. The material submitted this year was not lengthy. Below we summarize each section, and after the summary of the applicable section we provide some policy comments. This material is based on the LCPR staff response to PERA, which was dated October 18, 2001, and also on later discussions between PERA and LCPR staff. This provides an overview for LCPR members, acquainting Commission members with some of the issues raised. It probably will not be possible during this meeting to begin a detailed review by the LCPR.

1. Summary and Comments: PERA Proposal Submitted on October 1, 2001.
   
   Section 1. Minnesota Statutes 2001 Supplement, Section 353.01, Subdivision 2a, PERA’s included employee (coverage) provision, is amended by striking "shall" in the statement indicating which public employees have PERA coverage, and inserting "must."
   
   Pension policy issue:

   1. Need for Change. The issue is whether there is any need for the proposed change. The proposed change has not altered the meaning in any way and may not add clarity. "Must" and "shall" both imply a mandate.

   Section 2. Minnesota Statutes 2001 Supplement, Section 353.01, Subdivision 2b, PERA’s excluded employee provision, is amended by revising the PERA coverage exclusion for full-time students to apply to all employees who, at the time of hire, are full-time students at the high school level, including students at private high schools; and by clarifying that the PERA exclusion for seasonal positions (185 or fewer consecutive calendar days) does not have to fall within a single business year.
   
   Pension policy issues are:

1. Need For Reconsideration of Recent PERA Changes in Student Coverage Provision. The LCPR may need to review the recently enacted changes in PERA’s student coverage provision to determine whether those revisions are as intended. The full-time student exclusion language, appearing on page 3, lines 13 to 17 of the draft, was revised last year (Laws 2001, First Special Session, Chapter 10, Article 11, Section 4). Language added at that time included the phrase "employees who at the time they are hired by a governmental subdivision (are enrolled) on a full-time basis…" The implications of that change may not have been fully considered. When this clause in PERA law is read in its entirety (page 3, lines 13 to 17 in the draft), it suggests that if at the time of initial hire by the public employer, the individual is excluded from coverage because of full-time student status, he or she remains permanently excluded from PERA coverage for employment with the public employer even when that student status no long applies. The LCPR may wish to move back toward language as it appeared in Minnesota Statutes 2000, in which it was clear that the exclusion only applied during the period of student status.

2. Need For A General Review of Student, Public Plan Coverage. The LCPR may wish to consider reviewing the treatment in law for various Minnesota public pension plans of full–time students who also are public employees. If individuals are providing public services and are employed by a public employer, there is an argument for including the individuals in the applicable public plans, regardless of their student status. Excluding them may lessen turnover gain which adds to a plan’s contribution needs, and creates situations where ex-students, late in their public careers, seek to obtain service credit for years of excluded coverage.

3. Justification for the Specific Proposed Change. PERA’s proposed change would exclude from PERA coverage all employees who are also full-time high school students, not just those whose employment is predicated on that student status. Under the proposed revision, full-time high school students who work (whether after school, evenings, or during summers or other school break periods) for any public employer (the school, city, county, or other) would be excluded from PERA coverage.
   
   PERA indicated to LCPR staff that all or most high school students who provide some public employment were excluded from PERA in the past due to the salary thresholds in PERA law ($5,100 per year). Under the law as recently revised, new hirees who are high school students will be included as PERA members because the salary thresholds will be eliminated for new hirees (and prorated service credit is created). With the proposed language PERA seeks to continue excluding these employees, possibly due to comments PERA has received from counties and other public employers who do not wish to make employer contributions for employees who likely will soon terminate from public service. One issue for the LCPR is whether all these students should be excluded, only some, or none. The proposal would exclude not only students who are employed by the school district to provide incidental service at a school, but also high school students who are employed by a city, county, or other public employer.

Section 3. Minnesota Statutes, Section 353.01, Subdivision 10, PERA’s definition of salary provision, is amended by clarifying that any salary in excess of salary limits imposed on public employees by other law (Section 356.611) is excluded from PERA’s salary for pension purposes.

Section 4. Minnesota Statutes 2001 Supplement, Section 353.01, Subdivision 16, PERA’s allowable service provision, is amended by revising the service-credit-for-authorized-temporary-layoff clause. It clarifies that the leave period could include a partial month or months, and clarifies that service credit earned during the preceding nine month period (used to determine whether service credit for the months of the leave will be full or partial) may overlap two different calendar years.

Pension policy issue is:

1. Cost. PERA’s proposed changes may have minor cost implications since presumably the proposed changes alter, in some manner, service credit that will be obtained.

Section 5. Minnesota Statutes, Section 353.01, is revised by adding a new subdivision which authorizes PERA members who are on a leave of absence, who are eligible for service credit for the leave period, and who are receiving temporary workers’ compensation payments and a reduced salary or no salary, to make payment to the applicable PERA plan fund for the difference between salary received (if any) and the member’s average salary for the last six months of covered employment immediately preceding the leave of absence. The member would be responsible for covering the applicable employee, employer, and employer additional contributions, although the employer, at its discretion, could pay the employer and employer additional components on the employee’s behalf. Payment must include compounded annual interest from the termination date of the leave of absence to the date payment is made. Payment must be completed within one year of the expiration of the leave of absence or within 20 days after termination of public service.

Pension policy issues:

The proposal raises several policy issues. The language and structure of the proposed provision is similar to the PERA personal, parental, and medical leave of absence provision as revised this last special session in Laws 2001, First Special Session, Chapter 10, Article 11, Section 10. This new proposal and the other leave of absence provision as revised during the recent special session need additional review.

1. Need for Change. The first issue is whether there is sufficient need to consider this provision. PERA’s personal, parental, and medical leave provision as revised during the special session may handle many of the situations that PERA’s new proposal would address. This PERA workers’ compensation proposal requires that the individual must be on a leave of absence to use the provision, and presumably that would be a PERA medical leave. The recently revised PERA personal, parental, and medical leave of absence provision specifies that the provision may be used if no salary is received for the leave period, and also that the leave cannot exceed one year. The new PERA workers’ compensation leave proposal may be applicable only if partial salary rather than no salary is received during the leave, or if the leave is in excess of one year.

2. Unspecified Payment Process. The proposed leave indicates that the average salary during the last six months is the salary upon which the leave contribution payments will be based, but the proposal does not specify that this salary increment needs to be multiplied by the applicable employee, employer, and employer additional contribution rates to determine the payment amount. PERA’s personal, parental, and medical leave provision, and PERA’s periodic repetitive leave provisions are also vague regarding how these contributions are to be computed.

3. Need to Consider Prorating. During the last special session, PERA’s laws were revised to reflect prorating of service credit. There may be a need to revise this proposal to reflect possible prorating.

4. Extensive Payment Period Leading to Adverse Selection against PERA. To protect PERA’s funding condition, it would be best to receive leave payments during the leave. This would treat these individuals like other active employees, whose contributions are deducted and transmitted to the plan on an ongoing basis. If that is not feasible, then payment should be received as soon after the leave as practical. Long delays or an unspecified payment period create adverse selection against the fund. As this current proposal is worded, payments can be made as late as 20 days of final termination of service and retirement. The language permits payment "within one year of the expiration of the leave of absence or within 20 days after termination of public service under subdivision 11a." Adding "whichever is earlier" to the end of the phrase should be considered. PERA’s personal, parental, and medical leave provision has the same flaw. PERA’s periodic, repetitive leave provision, and PERA’s military leave provision do include the "whichever is sooner" or "whichever is earlier" stipulation.

5. Cost. The proposal may add cost to the plan, particularly if the payment period is left as it is currently drafted.

6. Scope. The issue is the proper scope. During the recent special session, the Legislature included a pension provision that adds a somewhat similar workers’ compensation service credit provision to the Duluth Teachers Retirement Fund Association (DTRFA) plans. PERA is now proposing a similar provision for its plans. The LCPR may wish to consider the proposed scope. If the general concept of this proposal reflects reasonable policy, it may be appropriate to extend it to more plans. The general concept has not received much deliberation by the LCPR. The DTRFA provision was added to the package of pension proposals in the final minutes of the LCPR’s last meeting during the regular 2001 regular session, with little discussion.

7. General Comment: Effective Date Provision. The LCPR may wish to add an effective date covering the various provisions that were submitted and recommended to pass.

2. PERA Provisions Submitted Later.
   
   LCPR staff met with PERA staff on December 3, 2001, to discuss the proposal summarized above. At the meeting, LCPR staff was given a draft document containing six additional sections, which is attached as Attachment C. These dealt with various aspects of PERA disability policy and are summarized below. For purposes of the current document, LCPR staff has not included policy issues relating to these sections.
   
   To facilitate the Commission’s review, I agreed to create an LCPR draft which contains the various sections which PERA submitted in October under Section 356.88 (Attachment B) and the provisions we received in December (Attachment C). When that draft is created, it will incorporate technical cleanup of the provisions, allowing the Commission to focus on policy-related issues and amendments. A policy issue with all of the sections received in December is whether the Commission wishes to consider those provisions, given that the pension fund ought to be providing a complete and fairly polished document by October 1 and these provisions did not meet that deadline. At a later consideration of the administrative provisions submitted under Section 356.88, the Commission may wish to consider an amendment to remove these more recently received sections.
   
   I also agreed to help PERA draft language to address a situation that arose due to Laws 2001, Chapter 169, Section 5, which is a provision in a claims bill. The Commission may wish to consider the provision as part of the Commission’s review of PERA administrative provisions. On at least two occasions, most recently during the last legislative session, the Commission heard bills addressing the situation of a St. Paul police officer who was on a mobility assignment to serve as an Assistant Commissioner of Public Safety. Contributions were made to the applicable PERA Police and Fire Fund consolidation account based on the salary of a police officer, not reflecting the additional increment of salary which reflects the individual’s full salary as a assistant commissioner. The Commission declined to take action on the proposal. However, a claim was brought to the Claims Subcommittee of the Legislative Coordinating Commission, and a provision was enacted that appropriated $69,637 to PERA for the benefit of the individual. The provision of law stemming from the Claims Subcommittee is problematic by specifying little more than a dollar amount. The provision does not specify which fund or funds within PERA should receive this money; what modification, if any, that PERA is authorized to use to compute the individual’s benefits, and what PERA should do with any portion of the appropriated $69,637 that would be a windfall to one or more PERA retirement plan funds.
   
   Below is a summary of the six sections given to LCPR staff on December 3, 2001 (Attachment C).
   
   Section 1. PERA’s disability benefit application procedure provision (Section 353.33, Subdivision 4) is amended by requiring the applicant to submit a written medical report signed by a medical doctor as part of the disability benefit application.
   
   Section 2. The PERA provision requiring that PERA coordinated PERA disability benefits with any workers’ compensation benefits received (Section 353.33, Subdivision 5) is generalized by eliminating reference to specific forms of workers’ compensation benefits--temporary total, permanent total, temporary partial, permanent partial, or economic recovery compensation benefits--and replacing it with a requirement to coordinate PERA disability benefits with any workers’ compensation benefits that represent compensation for work loss.
   
   Section 3. Section 353.33, Subdivision 6, PERA’s disability continuing eligibility provision, is amended by requiring the individual to provide a written medical report signed by a medical doctor as part of the application for continuation of disability benefits.
   
   Section 4. A PERA provision which authorizes the Executive Director to designate licensed physicians to perform disability medical examinations and reviews (Section 353.33, Subdivision 6(b)), is amended to permit evaluations by all types of medical practitioners.
   
   Section 5. PERA’s disabilitant partial reemployment provision, Section 353.33, Subdivision 7, is amended by specifying that the provision applies to individuals who remain disabled but have income from employment that is not substantial gainful activity, rather than applying to individuals who resume gainful activity.
   
   Section 6. REPEALER. Minnesota Statutes 2000, Section 353.33, Subdivision 5b, is repealed. This is an obsolete provision dealing with a benefit adjustment that PERA was required to make to disability benefits as of July 1, 1987.

Some of the provisions in TRA’s proposal, Revisor Draft 02-4683, are rather uncontroversial administrative provisions, while about half are benefit enhancements and benefit revisions raising considerable policy issues. The draft includes enhanced surviving child benefits, enhanced surviving spouse benefits, revision to the part-time teaching program in cases where the teacher is also a legislator, the service credit purchase provisions (relating to private school and parochial school teaching, out-of-state teaching, uncredited military service, Peace Corps or VISTA service, and various other uncovered service) would be made permanent rather than expiring on May 16, 2002, and payment for this purchased service could be made with tax-free rollovers from other fund sources.

Below is a section-by-section summary of TRA’s draft proposal. That section is followed by discussion of policy issues raised by the draft. This summary and discussion refer to the proposal as submitted. In subsequent discussion with LCPR staff, TRA has indicated that would support some changes to that original proposal. LCPR staff will provide to the LCPR amendments to make these and other changes at later Commission meetings.

1. Section-By-Section Summary of TRA Proposal (Revisor Draft 02-4683)

Section 1. One of TRA’s dependent child definitions (Section 354.05, Subdivision 8) is amended by revising the definitions to "child" rather than "dependent child;" by striking requirements that the child be unmarried and under age 18 (or age 22 if a full-time student); and striking the requirement that the child be dependent for more than one-half of support from the now-deceased member.

Section 2. The TRA dependent child definition (Section 354.05, Subdivision 8a), applicable for dependent child benefits if there is no surviving spouse in death-while-active-or-deferred situations, is revised by eliminating the requirement that the child had to be dependent on the member for more than one-half of support, and by permitting payment to age 22 rather than to age 20.

Section 3. TRA’s family leave provision, Section 354.096, is revised by striking language requiring the leave to be reported to TRA before the end of the fiscal year in which the leave was granted.

Section 4. TRA’s annuity accrual date provision, Section 354.44, Subdivision 4, is revised by striking language indicating that an annuity must not begin to accrue more than one month before the date of final salary receipt.

Section 5. TRA’s death-while-active-or-deferred surviving spouse benefit provision, Section 354.46, Subdivision 2, is amended by using the surviving spouse’s age at the date receipt commences, rather than the age at the date of the member’s death, for purposes of computing the joint-and-survivor annuity.

Section 6. A TRA dependent child survivor benefit provision, Section 354.46, Subdivision 2b, applicable if there is no eligible surviving spouse, is revised to permit payment to age 22, rather than age 20, if the child is under age 17, rather than under age 15, at the time of member’s death.

Section 7. Section 354.46, Subdivision 5 (a TRA provision which permits the covered employee and spouse to designate some other beneficiary to receive a joint-and-survivor annuity or death refund in lieu of the surviving spouse in death-while-active-or-deferred cases) is revised to permit naming more than one beneficiary, and by specifying that if an annuity or refund is provided to the designated beneficiary or beneficiaries, those beneficiaries must be a former spouse, or biological or adopted children of the member.

Section 8. Section 354.46 is amended by adding a new subdivision (Subdivision 6), an additional beneficiary coverage provision. The new subdivision permits vested employees to designate any individual or individuals to receive, in death-while-active-or-deferred situations, a 100 percent joint-and-survivor annuity based on the member’s age at death and the age of the designated beneficiary or beneficiaries at the time benefits commence, providing there is no surviving spouse or surviving dependent children. The annuity is computed using a three percent annual reduction factor to age 55, and a 1.5 percent annual reduction factor from age 55 to the age payment begins. If there is more than one beneficiary, the amounts are split between them. A beneficiary can also elect to receive a refund of accumulated member contributions or can elect a term-certain benefit.

Section 9. Section 354.48, Subdivision 2, TRA’s disability application provision, is revised to clarify that an application for total and permanent disability benefits must be a written application.

Section 10. Section 354.52, Subdivision 4a, TRA’s employing unit member data reporting provision, is revised by requiring information on gender and employment position code.

Section 11. Section 354.52, Subdivision 6, a TRA provision applying a $5 per day fine if an employing unit fails to comply with member data reporting requirements, is revised by applying this fine only for failure to timely provide the annual report on reemployed TRA annuitants (Subdivision 2a) and member data reporting (Subdivision 4a), rather than applying the penalty for failures to comply with all requirements indicated in this section.

Section 12. Section 354.66, Subdivision 2, TRA’s qualified part-time teacher program participation provision, is revised by providing alternative filing date requirements if the teacher is also a legislator. If the teacher is also a legislator, the part-time teacher program participation agreement between the teacher and school district may be signed by those parties as late as March 1 of the year for which the teacher requests to make retirement contributions under this program, rather than by October 1, and fines on the school district that would commence on October 1 for agreements filed with TRA after that date do not commence until after March 1.

Section 13. Section 356.81, a provision applicable to all Minnesota public pension plans which permits refund repayments to be made from accounts eligible for tax-free rollovers, is revised by expanding the provision to include payments for leave of absences and any payments for allowable service credit.

Section 14. REPEALER. Laws 1999, Chapter 222, Article 16, Section 16, would be repealed. This repealer would change the various temporary TRA and first class city teacher plan service credit purchase provisions enacted in 1999 into permanent provisions. Under existing law, these provisions are set to expire on May 16, 2002.

[Laws 1999, Chapter 222, Article 16, Section 16, is a provision which repeals the various TRA and first class city teacher plan service credit purchase provisions enacted in 1999. Those provisions for TRA and the first class teacher plans include the prior or uncredited military service credit purchase provision (Sections 354.533 and 354A.097, respectively), the out-of-state and out-of-country teaching service provision (Sections 354.534 and 354A.098, respectively), maternity leaves and breaks-in-service provision (Sections 354.535 and 354A.099, respectively), the private, parochial teaching service provision (Sections 354.536 and 354A.101, respectively), the Peace Corps, VISTA service provision (Sections 354.537 and 354A.102, respectively), the charter school teaching service credit purchase provision (Sections 354.538 and 354A.103, respectively), and a provision which was applicable only in the first class city teacher plans, the previously uncredited part-time teaching service credit provision (Section 354A.104)].

Section 15. EFFECTIVE DATE. Sections 1 to 14 are effective the day after final enactment.

2. Discussion

Revisor Draft: 02-4683: Teachers Retirement Association (TRA): Administrative Provisions; Dependent Child and Surviving Spouse Benefit Enhancements; Permanent Extension of Service Credit Purchase Laws; Other Miscellaneous Benefit Provisions, raises numerous pension policy issues. Below is a restatement of the provision summary followed by comments, discussing provisions of an administrative nature first. More controversial topic areas are handled later in the section. At times, several sections are grouped into a topic area for discussion purposes.

1. Sections of an Administrative Nature

Section 3. TRA’s family leave provision, Section 354.096, is revised by striking language requiring the leave to be reported to TRA before the end of the fiscal year in which the leave was granted. The pension issue or question is:

1. Impact of Proposed Change. We assume that this change was proposed because the fiscal-year-end reporting deadline in the current law is unnecessary and conflicts with requirements in TRA’s employing unit member data reporting provision, Section 354.52. That section includes a general requirement that all leaves, regardless of type, must be reported to TRA far more quickly--on a payroll cycle basis. If, however, this change somehow has the impact of causing delays in reporting family leaves, the change should not be made.

Section 10. Section 354.52, Subdivision 4a, TRA’s employing unit member data reporting provision, is revised by requiring information on gender and employment position code. The pension issue or question is:

1. Drafting Issue. The LCPR may wish to strike additional language. This data-reporting provision was added to TRA law in 1994, with a July 1, 1995 effective date. Language on page 6, lines 13 and 14, of the TRA draft is transitional, to coincide with the July 1, 1995, effective date of the 1994 legislation. Presumably, it can now be stricken.

Section 11. Section 354.52, Subdivision 6, a TRA provision applying a $5 per day fine if an employing unit fails to comply with member data reporting requirements, is revised by applying this fine only for failures to comply with two subdivisions of this section (the annual report on reemployed TRA annuitants (Subdivision 2a), and member data reporting (Subdivision 4a), rather than applying the penalty for failures to comply with all subdivisions in this section. The pension issues are:

1. Reason for Proposed Change. The proposed changes suggest an effort to provide clarity and to eliminate a conflict within Section 354.52. Current law imposes at least one penalty (an interest requirement) on late or deficient contribution payments to TRA, and possibly two penalties. Imposing two penalties may not have been intended. We observe that existing language in Subdivision 6 imposes a $5 per day fine for any violation of the requirements of this section. However, within Subdivision 4, a contribution remittance requirement provision, is another penalty. That subdivision specifies that if a school district fails to remit to TRA in a timely manner any employee, employer, or other required contributions, 8.5 percent interest must be assessed on the shortage until paid, and if any amounts remain unpaid after 60 days of TRA notification of the deficiency, the amounts due can be certified to the Commissioner of Finance who will deduct necessary amounts from any state aid the school district would otherwise receive. Thus, if the school district does not remit full required contributions in a timely manner, a literal reading of the law requires interest penalties under Subdivision 4, and presumably also the $5 per day penalty in Subdivision 6. Under Revisor Draft: 02-4683, the 8.5 percent interest penalties for delinquent or deficient contributions would be assessed, but not the $5 per day penalty.

2. Implications of Possible Policy Change. The issue is whether the proposed language change reflects an actual change in TRA policy, or is merely something that TRA views as a technical correction. If TRA to date has assessed two penalties on delinquent or deficient contributions (an interest penalty and an additional $5 per day charge), assessing only the interest charge will have a revenue impact on TRA, although the impact will be minimal.

3. Possible Need for Further Drafting. If the LCPR’s intention is to impose the interest charge on delinquent or deficient contributions and a $5 per day charge on all other violation of requirements of this section of TRA law, further drafting changes are needed. The phrase "subdivision 2a or 4a" on page 7, line 12, should be revised to read, "subdivisions 2a, 4a, or 4b". Another alternative is a more general revision of this section of your draft to indicate that unless another penalty is specified within an applicable subdivision within this section, the $5 per day penalty applies for any failure to comply with this section’s requirements.

2. Sections which are Benefit Enhancements and Benefit Revisions

The following three sections would expand access to various benefits that currently are directed to dependent children. The sections are:

Section 1. One of TRA’s dependent child definitions (Section 354.05, Subdivision 8) is amended by revising the definitions to "child" rather than "dependent child" by striking requirements that the child be unmarried and under age 18 (or age 22 if a full-time student); and striking the requirement that the child be dependent for more than one-half of support from the now-deceased member.

Section 2. The TRA dependent child definition (Section 354.05, Subdivision 8a), applicable for dependent child benefits if there is no surviving spouse in death-while-active-or-deferred situations, is revised by eliminating the requirement that the child must be dependent on the member for more than one-half of support, and by permitting payment to commence as late as age 22 rather than age 20.

Section 6. A TRA dependent child survivor benefit provision, Section 354.46, Subdivision 2b, applicable if there is no eligible surviving spouse, is revised to permit payment to age 22, rather than age 20, if the child is under age 17, rather than under age 15, at the time of member’s death.

Comments on Sections 1, 2, and 6: These proposed changes are similar to past TRA, MSRS, and PERA proposals. Pension policy issues are:

1. Benefit Amount Clarification, Possible Excessive Payout. The LCPR may wish to seek further clarification of how TRA is computing these benefits. With that information, the Commission may wish to decide whether the process is capable of producing payouts that are excessive, at least in some circumstances.

2. Removal of Financial Dependency Requirements, Public Purpose Issues. The bill draft would considerably revise public policy. Current law suggests that children of deceased members should receive financial support from the deceased employee’s pension plan providing there is a clear demonstration of dependence (based on age and financial need). If not, and the employee wishes to provide income to these individuals in the event of the member’s death, that income should be provided by income of the other spouse, employee savings, or life insurance policies.
   
   The proposal in this article removes the financial dependency requirement, making benefits from the pension plan to the child an entitlement providing the maximum age has not been exceeded. The draft would remove requirements that an eligible child be financially dependent upon the member for at least half support prior to the death of the member, that the child be unmarried, and be enrolled fulltime in an educational institution if benefits are to continue beyond age 18. What remains is age, a less definite indicator of dependency, and the maximum age for benefit receipt is also increased. Although the drafting of applicable current law with the proposed age change is ambiguous, it appears that under the proposal benefits could commence up to age 22, and could continue until age 27, and possibly older.

3. Conflict Between Administrative Ease and Public Policy. The proposed changes, if implemented, will be easier to administer. TRA will not have to monitor marital status, educational enrollment, or review tax records or other documents to make financial dependency determinations. The Commission may wish to inquire about the level of this administrative burden, and whether reducing that burden is sufficient justification for abandoning the longstanding policies reflected in the current law.

4. Cost. By expanding entitlement to child survivor benefits, there will be some cost impact on the pension funds.

5. Scope. The proposal is similar to PERA and MSRS proposals last year. If the Commission deems these proposals to be reasonable, consistency would suggest extending the changes to other retirement plans, possibly also including first class city teacher plans.

6. Questions Regarding Length of Surviving Child Benefit Eligibility. It is not clear how long a child remains benefit-eligible. We assume, reading the existing law with the proposed changes, that the intention is to permit children to be eligible to commence receiving applicable surviving child benefits up to age 22, with the further stipulation that once benefits commence, they will be paid for at least five years. Therefore, if benefits commence just before age 22, the individual would continue to receive those benefits until age 27. However, other interpretations are possible, including an argument that there is no maximum eligibility age. Additional clarifying language would be helpful.

7. Benefit Design Issues. TRA’s laws suggest an effort to pay at least five years of child survivor benefits. The need for this "five-year minimum" approach is not clear. The Commission may wish to hear policy justification for that structure.

Section 5. TRA’s death-while-active-or-deferred surviving spouse benefit provision, Section 354.46, Subdivision 2, is amended by using the surviving spouse’s age at the date receipt commences, rather than the age at the date of the member’s death, for purposes of computing the joint-and-survivor annuity.

This change will increase the surviving spouse benefit amount in any situation where the surviving spouse delays receipt of the joint-and-survivor annuity. MSRS and PERA have suggested similar but not identical changes in their law in past years. To date, these changes have not been incorporated into law. The issues raised are:

1. Need For Benefit Improvement. The question is the amount of the benefit improvement and the need for that improvement. TRA may wish to provide supporting information for Commission consideration.

2. Scope, Consistency with Other Plans. The issue is the scope of the proposed change and consistency with other plans. If the change is appropriate for TRA, the Commission may wish to consider making similar changes in other pension plans.

3. Cost. The issue is the cost of the proposal. The cost will increase if similar changes are extended to other plans.

4. Drafting Issues. Further clarification would be helpful. The applicable subdivision contains three paragraphs. Paragraphs (b) and (c) deal with situations where the member is under age 55 at the date of death. Presumably, paragraph (a) is applicable in cases where death occurs at age 55 or older, but that is not stated. Also, in all cases we assume that the benefit being offered is the second half or second portion of a 100 percent joint-and-survivor annuity. That is explicit in paragraph (a), but paragraphs (b) and (c) simply refer to a 100 percent joint-and-survivor annuity. To avoid an argument from a spouse of a deceased TRA member that he or she is entitled to name an individual to receive the second half of the joint-and-survivor annuity being offered, it would be appropriate to add clarifications.

Section 7. Section 354.46, Subdivision 5, (a TRA provision which permits the covered employee and spouse to designate some other beneficiary to receive a joint-and-survivor annuity or death refund in lieu of the surviving spouse in death-while-active-or-deferred cases) is revised to permit naming more than one beneficiary, and by specifying that if an annuity or refund is provided to the designated beneficiary or beneficiaries, those beneficiaries must be a former spouse, or biological or adopted children of the member. Comments on Section 7 include:

1. Drafting Issues, Intention. The proposed change gives complete discretion in naming beneficiaries, which may not have been intended.

2. Clarification. The LCPR may wish to consider whether further language is needed to clarify conditions under which this subdivision, rather than some other one, is applicable.

Section 8. Section 354.46 is amended by adding a new subdivision (Subdivision 6), an additional beneficiary coverage provision. TRA has indicated that this new provision would apply in cases of divorce where there are children. Under the proposed provision, an active member who is single but has a child who is not dependent can be named to receive the second half of a joint-and-survivor annuity if the member dies. The provision is not limited to that case, however. Anyone could be named to receive the second half of the joint-and-survivor annuity. The annuity is computed using a three percent annual reduction factor to age 55, and a 1.5 percent annual reduction factor from age 55 to the age payment begins. If there is more than one beneficiary, the amount is split between them. A beneficiary can also elect to receive a refund of accumulated member contributions or can elect a term-certain benefit.

This new subdivision raises several issues:

1. Need for Change. The issue is whether there is any compelling reason to adopt this provision. As outlined below, the provision creates risk for the plan, may be administratively burdensome, and authorizes benefit payments to individuals who may be unrelated to the member.

2. Issues Stemming from Current Procedure, Extension of Procedure. Our reading of TRA law suggests that individuals who retire have broad discretion in naming beneficiaries, and can name unrelated individuals to receive a joint-and-survivor annuity. This can lead to higher use of joint-and-survivor annuities than would be the case if use were restricted to spousal coverage situations. High joint-and-survivor option usage may lead to marginally higher contribution requirements, because this annuity option has a subsidized bounce-back feature, and the plan is exposed to additional mortality risk by insuring more lives. The Commission may wish to decide whether it is appropriate to further extend that policy, by clearly authorizing that treatment in death-while-active-or-deferred situations, given the additional risk placed on plan contributors.

3. Pension Fund Risk Due to Mortality Factors, Multiple Beneficiaries. The issue is whether to adopt TRA’s proposal given that it is likely to increase mortality risk. The additional mortality loss exposure which may stem from this proposed TRA provision will be a mortality loss suffered providing benefits to individuals who, in some cases, are not former public employees, their spouses, or dependents of those employees.
   
   Whenever a pension fund offers joint-and-survivor annuities or term-certain annuities, it is insuring at least two lives. In the case before us, the plans could insure more than two lives since the provision, as drafted, would permit the member to designate multiple beneficiaries, with each receiving portions of the full annuity value. This may increase the risk of having mortality losses, as individuals live longer than predicted under the life table assumptions in current use. Mortality loss could lead to higher contribution requirements in future years, as these accumulating mortality losses filter into employee and employer contribution rate requirements.

4. Confused Methodology. It is not clear what annuity reductions apply. On page 5, lines 18 to 23, the draft suggests that the benefit is to be computed as a money purchase annuity (Section 354.44, Subdivision 2) or a formula annuity (Section 354.44, Subdivision 6), whichever is applicable. The draft then continues by stating that "The annuity is payable using the full early retirement reduction under section 354.44, subdivision 6, clause (3), item (ii), to age 55 and one-half of the early retirement reduction from age 55 to the age payment begins." The draft suggests that this reduction process must be applied whether the annuity is a money purchase annuity or a formula annuity. Language to clearly indicate when these reductions apply would be helpful.

5. Justification of Subsidy. While it is not clear how TRA intends to compute these annuities, the process mentioned on page 5, lines 18 to 23, suggests that some or all of these annuities will be subsidized by applying reductions which are less than full actuarial value reductions. The Commission may wish to decide why subsidized annuities are being created, adding to plan costs and/or depleting plan assets, for benefits that will be provided to individuals who are not dependents of the deceased and may have no family relationship to the deceased.

6. Administrative Complexity, Multiple Beneficiaries. This provision permits multiple beneficiaries to be named, all of which would share in the total benefit payments, and the language in the draft suggests that each beneficiary could choose the form of benefit he or she desires. Some could select joint-and-survivor annuities, with payment commencement dates to be determined by each beneficiary, others could choose term-certain annuities, and the language also permits one or more of the named beneficiaries to receive refunds of all or part of the member contributions. The combinations of options suggested in this draft will add considerable complexity, which will increase administrative burdens and potentially lead to errors. In some cases, it is unclear how the benefit amounts or combination of benefits described can be determined, and conflicts with other sections of law will arise. For instance, if one beneficiary wants a refund of employee contributions and other beneficiaries decide to receive some form of annuity, it is totally unclear how the refund amount is to be determined, and how to compute any remaining benefits to the others.
   
   If TRA decides to include this provision in later drafts, it would be helpful if TRA would provide a description of how benefits would be computed, including situations where different beneficiaries want different benefit forms, possibly including refunds. TRA may also wish to consider whether changes are needed in refund provisions or other provisions of TRA law to accommodate these multiple beneficiary situations.

7. Cost. The proposal will add to plan cost.

Section 12. Section 354.66, Subdivision 2, TRA’s qualified part-time teacher program participation provision, is revised by providing alternative filing date requirements if the teacher is also a legislator. If the teacher is also a legislator, the part-time teacher program participation agreement between the teacher and school district may be signed by those parties by March 1 of the year for which the teacher requests to make a retirement contribution under this program, rather than by October 1, and fines on the school district that would commence on October 1 for agreements filed with TRA after that date do not commence until after March 1. Policy issues are:

1. Drafting, Mechanics. The new proposed paragraph and the existing language of the provision are somewhat vague, stemming from the lack of a definition of "year." This term is not defined in the provision and we are not aware of any definition elsewhere in the TRA chapter of statutes. The existing law language refers to executing the agreement "by October 1 of the year for which the teacher requests to make retirement contributions (under this program)." A reasonable meaning is that "year" as used here means the academic school year, September through June. Under this interpretation, the agreement needs to be executed shortly after the start of the academic year, by October 1. "Year" could, however, mean calendar year rather than school year. Depending upon the meaning, different policy issues are raised. The new proposed language for legislators who are also teachers would require them to execute the agreement by "March 1 of the year for which the teacher requests to make retirement contributions under (this program)." If "year" as used here means the academic school year, most of the year would be over before the legislator is required to have filed for the program. That date might be considered by the Commission and the Legislature to be too lax. If, however, "year" means calendar year, the teacher would be required to file by March 1 for a program to take effect several months in the future, the next September. Clarification of what is meant by "year" is needed before the Commission can begin to debate the merit of the proposal.

2. Need for Change. The question is whether there is any need to change the existing program. It is likely that the intention in this drafting is to provide more time for a teacher who is also a legislator to enter this program and file this form. There seems little reason why any serving legislator would need the revised provision. These individuals should have a reasonable expectation of the time needed for the legislative session and other legislative duties, and should seek access, if needed, into this part-time teacher program on or before October 1. If there is any need or justification for proposed change, it would be by an individual who did not recognize a need for the program before October 1, perhaps someone running for the first time who did not expect to be elected. The Commission, if it considers this provision at all, may wish to consider a more narrowly focused proposal, and whether some other deadline, rather than the proposed March 1 deadline, is more appropriate.
   
   The Commission may also reflect on whether much harm occurs to a teacher who is also a legislator and who fails to enter the program by the required date in current law. Possibly the individual may forgo some TRA service credit due to the legislative service, but the Legislative Plan or Unclassified Plan covers the individual for the legislative service.

3. Cost. The issue is the cost, if any, imposed by this change on the plan.

Section 13. Section 356.81, a provision applicable to all Minnesota public pension plans which permits refund repayments to be made from accounts eligible for tax-free rollovers, is revised by expanding the provision to include any payment made to TRA for leave of absences and any payments for allowable service credit.

During the recent special session, a provision was enacted for the first class city teacher plans (Laws 2001, First Special Session, Chapter 10, Article 3, Section 20) which provides more expanded authority than that provided by the existing law version of Section 356.81. Section 356.81 currently applies only to repayments of refunds, and permits those repayments to be made from individual retirement accounts (IRAs) or other accounts or plans if federal law permits tax-free rollovers from those sources. The provision passed during the special session would apply to first class city teacher plans only (the proposed coding is Section 354A.107), and would permit these rollovers to be used to finance purchases of allowable service credit, contributions required for leaves of absences, in addition to refund repayments.

TRA’s current proposal is quite similar to a provision enacted for the first class city teacher plans last year, except that TRA is proposing to revise Section 356.81, in the Retirement System, Generally chapter, where it would apply to all Minnesota public pension plans, rather than just to TRA or to teacher plans in general. Issues are:

1. Cost Impact. This provision encourages individuals to make payments to receive service credit in applicable plans through refund repayments, purchases of service credit, and leave contribution payments, by permitting these payments to be covered by tax-free rollovers from other accounts or plans. This increased activity will have an impact on plan costs, and may increase those costs.

2. Scope. The issue is the proper scope. The first class city teacher plans were granted this increased authority in legislation passed during the recent special session. The issue now is whether to limit that authority to those plans, extend that authority to TRA, or, as this draft would do, extend that authority to all Minnesota public pension plans. If the Commission concludes that no change in authority should occur, at least not at the current time, it would be necessary to drop this section. If the Commission concluded that the proposed expanded treatment should only be extended to teacher plans, suitable revisions are needed.

3. Drafting Issue. If the Commission concludes that the change TRA proposes to make in Section 356.81 should be enacted, it is reasonable to repeal the section recently enacted for the first class city teacher plans since it will become duplicative.

4. Broader Context Issues. The Commission may conclude that this proposal to expand use of tax-free rollovers to fund various service credit contributions and purchases should not be considered as a separate issue. Rather, it should be considered part of a broader package of proposals, including the change in service credit purchase authority discussed in the next section, and benefit increase proposals which are likely to be part of proposals to merge the various teacher plans into a single retirement system.

Section 14. This section repeals the language that would phase out the various purchase of service credit authority enacted in TRA and first class city teacher law by the 1999 Legislature. These provisions were to expire on May 16, 2002. The effect of this proposed repealer is to make these service credit purchase provisions permanent. Issues are:

1. Fundamental Policy Shift. The Commission’s long-standing purchase of service credit policy, last formally revised on December 6, 1996, includes a requirement that these purchases should be permitted only if the cases are each separately examined, if the period to be purchased is public employment or substantially akin to public employment, if the prior service period has a significant connection to Minnesota, and if the payment received fully covers the added cost to the pension plan that occurs by permitting the service credit.
   
   Many of the purchase of service credit provisions enacted in 1999 are not consistent with these Commission policies. These temporary provisions are set to expire in May 2002. If this proposal is recommended to pass, the provision become permanent. The Commission may wish to consider whether that change amounts to abandoning the Commission’s purchase of prior service credit policy and whether this change will fundamentally blur the distinction between public and private plans and raise tax-qualification and federal reporting issues.. The Commission may find it difficult to deny any request from plan members in Minnesota public pension plans for service credit purchase authority, regardless of the nature of the service, if any, provided during the service credit purchase period.

2. Harm to Pension Fund, Subsidy Issues. The Legislature may have passed these service credit purchase provisions in 1999 based partly on assurances from the administrators of the various teacher plans that no harm would occur to the pension funds. The contention was that all purchases were to occur at full actuarial value, and if that purchase price is correctly computed and all assumptions are met, the purchase price will cover the full additional liability created by granting the additional service credit.
   
   This outcome is too optimistic. In effect, the various service credit purchase provisions added to TRA and first class city teacher plan law a few years ago amount to an opportunity for members of those defined benefit plans to convert personal savings and defined contribution plan assets, where there are no guarantees, into a defined benefit plan asset that is guaranteed. The responsibility for investing the assets and all mortality risk is shifted from the member to the pension fund.
   
   Given that teachers, like all individuals, can be expected to act in their best financial interest, it is reasonable to expect many teachers to pursue service credit purchases in the defined benefit plan when investment markets are weak. By making the purchase, the individuals will receive an additional annuity amount consistent with earning an 8.5 percent annual return on that money until retirement, and they have no worry of outliving that income stream—it will be paid until death. In a period of weak investment markets, this may leave them far better off financially than they can expect by investing on their own. Conversely, the teacher pension fund is likely to be harmed by these purchases because the fund will not be able to achieve an 8.5 percent return. In contrast, in periods when investment markets are strong, individuals expect to earn a return well above 8.5 percent by personal investing or other tax deferred investments. They will not be interested in purchasing an additional defined benefit plan incremental annuity that can be supported with only an 8.5 percent return. Therefore, the most reasonable expectation if these service credit purchase provisions become permanent, is that there will be considerable interest in these purchases when markets are weak (when the fund is most likely to be hurt by the purchases) and little interest in these purchases when markets are strong (when the fund may be able to realize a net gain on the purchases). There is no reason to expect these periods to offset each other. The most likely outcome is that over time, these service credit purchase provisions will not be cost neutral—they will add to plan contribution requirements.
   
   In considering whether to make these service credit purchase provisions permanent rather than temporary, the Commission may wish to consider this transfer of risk from the individual to the pension fund, and the Commission may wish to consider that the incentive to purchase this service will be particularly strong in periods of low investment returns, because the individual’s purchase is likely to be subsidized. Section 13 in this draft, which would allow use of tax-free rollovers to make these purchases, is likely to add to this problem.
   
   Mortality risk that may add losses to the plans over time. If individuals live longer than expected, the computed service credit purchase price will prove in the long term to be insufficient. The mortality assumptions are reasonable estimates of current mortality conditions, but future life expectancy increases will cause pension funds to suffer mortality losses because benefit payments must continue until death. This risk that more assets may be needed to cover the benefit payouts through these extended lifetimes is understood and accepted. It is part of the risk borne by having a defined benefit pension plan to reward public employees for their service. What the Legislature may wish to ask is whether that risk should be accepted when it stems from service credit being purchased for periods having nothing to do with Minnesota public employment, as is the case with many of these service credit purchase provisions.

3. Interaction with Benefit Increase Proposals. Benefit improvements passed after the service credit purchase also create a loss for the fund. The purchase price cost estimate is based on the cost of the benefits offered by the plan in effect at the time of the purchase. If the plan is enhanced after that date but before the individual retires, the purchase price will not cover the full liabilities that ultimately are created.
   
   TRA and first class city teacher plan administrators and various teacher union officials currently are working on a proposal to merge TRA and the three first class city teacher fund associations. The proposal is likely to include a request for a substantial benefit improvement. The possibility of a considerably benefit improvement under the merger proposal may lead to an increase in prior service purchases, in the expectation that the purchase will be subsidized due to a later benefit improvement. The Commission may wish to delay any consideration of this proposal to make permanent the purchase of service credit provisions, and consideration of the additional rollover authority in Section 13, until a teacher plan merger proposal, if any, is reviewed by the Legislature. This may enable the Legislature to have a better understanding of the interaction between these provisions, and the full scope and cost implications of the merger proposal.

4. Scope. If the Commission considers this proposal, it may wish to consider whether the proposal should impact all teacher plans, or just TRA. As drafted, the proposal would make these service credit purchase provisions permanent in all these teacher plans. The MTRFA, in particular, is in weak financial condition and is less able than TRA to bear the net liabilities that can be created by these provisions in current financial markets.

Possible MERF Issue.

On October 16, 2001, we were copied on a letter from MERF’s Executive Director, Judith Johnson, to Mr. Patrick Born, the City of Minneapolis Finance Director. The letter urged the City of Minneapolis to have a bill created to revise the manner in which investment earnings are allocated to employer accounts maintained by MERF. Under the proposal, more income would be directed to the city, the Metropolitan Airports Commission, and the Metropolitan Council, and less would be allocated to the Minneapolis school district relating to its MERF-covered employees.

LCPR staff has taken no action on this proposal. Section 356.88 directs public pension plan directors, including MERF’s director, to submit a draft by October 1 of administrative legislation that the public pension fund sponsors and intends to pursue during the next legislative session. It does not appear that our being copied on a letter to Patrick Born was intended as a draft submitted under Section 356.88. Rather, it seems intended to alert the LCPR and its staff that the City of Minneapolis might sponsor a proposal for the coming session. MERF would not sponsor the legislation, although Ms. Johnson indicates that she would be prepared to testify on the bill. A copy of the letter and a few of its attachments are attached to this memo as Attachment E.