S.F. 2555 (Stevens); H.F. 2782 (Erickson) would include Kanabec Hospital employees under the provisions of Chapter 353F, Privatized Public Hospital, PERA Pension Benefits, if the hospital is privatized (hospital to be operated by or purchased by a private sector entity or a non-profit sector entity). The act would be effective if local approval is provided and if the bill does not create an actuarial loss for PERA-General.

When a privatization of a PERA-covered employing unit occurs, the employees, who up to the date of privatization were public employees and therefore covered by the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), no longer qualify as public employees. At the time of privatization, PERA-General coverage terminates. However, the provisions of Chapter 353F extend certain rights to the privatized employees that differ from the typical treatment of terminated employees. One justification for this different treatment is that the privatized employees did not choose to be privatized. Their status changed from public to private or quasi-public employment due to a transfer of ownership of the employing hospital. In contrast, termination is assumed to be initiated by the employee exercising his or her free will, with full understanding of the consequences of that action.

Under a privatization, Chapter 353F provides the following special coverage provisions to the privatized employees:

1. Vested Benefit With Any Service Length.  The normal three-year PERA vesting period is waived, so a privatized employee with less than three years of PERA-covered service would be entitled to receive a PERA retirement annuity, notwithstanding general law.

2. Increased Deferred Annuity Augmentation Rate.  For the period between the date of privatization and the date of eventual retirement, the privatized employee’s deferred PERA retirement annuity will increase at the rate of 5.5 percent rather than three percent until age 55 and at the rate of 7.5 percent rather than five percent after age 54.

3. "Rule of 90" Eligibility With Post-Privatization Service.  For privatized employees with actual or potential long service who could have retired early with an unreduced retirement annuity from PERA under the "Rule of 90" (combination of age and total service credit totals "90"), the employee will be able to count future privatized service with the hospital for eligibility purposes, but not benefit computation purposes.

1. Privatization Trend.  There has been a trend among health care facilities to convert from public sector ownership to private sector or quasi-public sector ownership. These conversions have involved selling, leasing, or transferring the facility, and transferring the existing employees to that reorganized health care facility.
   
   The privatization of health care facilities is occurring among both large and small hospitals, clinics, and related healthcare providers. The privatizations typically increase organizational flexibility and reduce various costs to remain financially competitive. One area of potential savings is that of retirement coverage by the Public Employees Retirement Association (PERA), or other public pension plan, which may be eliminated by the privatization.

2. Privatization Impact on Retirement Coverage.  When a privatization occurs, the employees may no longer qualify as public employees for PERA pension purposes. When this occurs, membership in PERA terminates, and retirement benefit coverage problems may emerge.
   
   Under current PERA law, three years of PERA coverage is required for vesting. For employees who terminate PERA membership without vesting, no deferred retirement annuity right typically is available. The member may elect a refund of accumulated member contributions with six percent interest, or the individual may leave the contributions at PERA, perhaps in the expectation that the individual will change employment in the future and again become a covered public employee. For a vested employee who terminates PERA membership with at least three years of service, there is a choice between a deferred retirement annuity right or a refund. The deferred retirement annuity is augmented by three percent per year under age 55 and five percent per year thereafter until retirement.
   
   When a privatization occurs and employees lose the right to continue coverage by the public plan, all the employees are impacted. The employee may be terminated from employment at the time of the sale, transfer, or reorganization. Those employees will lose both continued employment and continued retirement coverage. For employees who remain employed after transfer to the newly organized healthcare facility, the privatization interrupts their benefit coverage. If there is no pension plan established by the privatized health care facility, the employees will suffer a loss of overall benefit coverage beyond Social Security. If a plan is provided by the new employer, portability problems between the old and new plan are likely.

3. Prior Precedent on Hospital Privatization.  The Legislature has dealt with health care privatizations numerous times and has used several different treatments to address pension coverage issues. At times, in addition to any benefit that the employee may have been eligible for under a public pension plan, the individual was offered the alternative of an enhanced refund (employee plus employer contributions) plus interest. On at least one occasion, the individuals were permitted to remain in PERA, although that practice has not been favored in more recent years. The following is a summary of treatments used since 1984.
   
   In 1984, relating to the privatization of the Owatonna City Hospital, legislation allowed the affected employees to receive a deferred retirement annuity with at least five years of service or to receive a refund of employee and employer contributions, plus interest at six percent, compounded annually.
   
   In 1986, relating to the St. Paul Ramsey Medical Center reorganization, legislation allowed only a delayed right to withdraw from PERA and receipt of a refund of only member contributions plus interest at five percent, compounded annually.
   
   In 1987, relating to the Albany Community Hospital and the Canby Community Hospital, legislation allowed the affected employees to receive a deferred retirement annuity with a five year vesting period or to receive a refund of both employee and employer contributions, plus compound annual interest at six percent.
   
   In 1988, relating to the Gillette Children’s Hospital employees, legislation continued the membership of the affected employees in the General State Employees Retirement Plan (MSRS-General), but excluded new employees from public pension plan coverage.
   
   In 1994, relating to the St. Paul Ramsey Medical Center again, legislation continued the PERA membership of existing employees who were PERA members unless the employee elected to terminate PERA membership before July 1, 1995.
   
   In the most recent years, 1995 through 1997, two approaches have been used:
   

1. Public Pension Plan Membership Discontinuation With Local Employer Option.  In the first model, continuing PERA coverage ends for all employees at the time of the transfer of the healthcare facility to the new ownership. The new healthcare entity may provide a "PERA-like" plan for individuals who are transferred with the facility and remain as employees of the new entity. For individuals who are terminated at the time of the transfer, and who were not vested in PERA, the city may match any refund with interest that the individual receives from PERA. This model was used with the Olmsted County Medical Center privatization (1995), the Itasca County Medical Center (1995 and 1996), and Jackson Medical Center, Melrose Hospital, Pine Villa Nursing Home, and the Tracy Municipal Hospital and Clinic (1997), and the Luverne Community Hospital (1998).

2. Special Continuing Public Pension Plan Rights After Membership Discontinuation.  In the second model, termination of coverage by the public plan occurs at the time of the privatization, but the employees who terminated coverage were permitted deferred annuities (even those who were not vested) from the public plan with an augmentation rate that exceeded that used under general law, and the employees were allowed to use service with the new organization to meet age/service requirements for qualifying for the Rule of 90 under the public plan. This approach was used in1996 for the University of Minnesota Hospital-Fairview merger. The plan that had previously provided coverage to the transferred employees was the General Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General).
   
   In 1999, the Legislature passed legislation for PERA privatizations based on the model used in the 1996 University of Minnesota Hospital-Fairview merger. That process is coded as Minnesota Statutes, Chapter 353F, and provides the type of benefit extension provisions, the waiver of vesting requirements, enhanced deferred annuity augmentation, and Rule of 90 eligibility provisions previously described.

S.F. 2555 (Stevens); H.F. 2782 (Erickson) would include Kanabec Hospital employees under the provisions of Chapter 353F, Privatized Public Hospital, PERA Pension Benefits, if the hospital is privatized (hospital to be operated by or purchased by a private sector entity or a non-profit sector entity). The act would be effective if local approval is provided and if the bill does not create an actuarial loss for PERA-General.

The proposed pension legislation raises the following pension and related public policy issues that merit consideration by the Commission, as follows:

1. Appropriate Model.  The policy issue is whether the Commission and the Legislature conclude that the model used in the last few years remains an appropriate model, or whether some other approach or other action should be considered. Other possibilities include returning to an enhanced refund approach, or simply taking no action. If no action is taken and a privatization occurred, the individual would be treated under PERA-General law, with the same options as any other public employee who terminates employment. The individual would have a right to a refund of employee contributions plus interest. If the individual had at least three years of covered service but can not or chooses not to retire, the individual can have a deferred annuity in lieu of a refund. The deferred annuity would augment at three percent per year up to age 55 and five percent per year thereafter, which is less favorable augmentation than is extended under the provisions of Chapter 353F.

2. Actuarial Cost of the Special Benefit Provisions/Gain/Loss Issues.  In the Fairview/University hospital merger, and in the PERA privatizations where employees have been extended the treatment under Chapter 353F, the Commission and the Legislature approved the proposed treatment providing that the pension plan from which the employees were terminating (MSRS-General in the case of the Fairview/University Hospital merger and PERA-General in the case of the PERA privatizations) was not expected to suffer actuarial losses as a result of the proposed treatment. In most cases, the actuary was able to provide that analysis in time for the Commission’s consideration. In cases where that information was not available at the time of Commission consideration, the legislation’s approval was conditional upon the receipt of actuarial analysis by the Commission-retained actuary, indicating that a gain, rather than a loss, to the applicable pension plan was expected due to the combination of privatization and the enhanced benefits provided by Chapter 353F. S.F. 2555 (Stevens); H.F. 2782 (Erickson) is consistent with that Commission practice by including language in the effective date making the legislation conditional upon the receipt of actuarial work from the Commission-retained actuary, and certification by PERA that that analysis indicates that at net gain to the fund is expected.

3. Special Consideration Due to PERA-General Actuarial Condition.  The issue is whether S.F. 2555 (Stevens); H.F. 2782 (Erickson) should be recommended to pass given PERA-General’s current funding problems. As Commission members are aware, in the last few years PERA-General has had a contribution deficiency. The results from PERA-General’s most recent actuarial valuation (July 1, 2001), summarized below, indicate a contribution deficiency of 1.28 percent of payroll, or $49.2 million.

PERA-General
July 1, 2001, Actuarial Valuation Results

Membership
Active Members		138,759
Service Retirees		41,797
Disabilitants		1,468
Survivors		6,149
Deferred Retirees		25,917
Nonvested Former Members		83,027
Total Membership		297,117
Funded Status
Accrued Liability		$12,105,337,000
Current Assets		$10,527,270,000
Unfunded Accrued Liability		$1,578,067,000
Funding Ratio	86.96%
Financing Requirements
Covered Payroll		$3,835,448,000
Benefits Payable		$592,209,000
Normal Cost	9.40%	$360,850,000
Administrative Expenses	0.23%	$8,822,000
Normal Cost & Expense	9.63%	$369,672,000
Normal Cost & Expense	9.63%	$369,672,000
Amortization	1.97%	$75,558,000
Total Requirements	11.60%	$445,230,000
Employee Contributions	4.94%	$189,604,000
Employer Contributions	5.38%	$206,389,000
Employer Add'l Cont.	0.00%	$0
Direct State Funding	0.00%	$0
Other Govt. Funding	0.00%	$0
Administrative Assessment	0.00%	$0
Total Contributions	10.32%	$395,993,000
Total Requirements	11.60%	$445,230,000
Total Contributions	10.32%	$395,993,000
Deficiency (Surplus)	1.28%	$49,237,000

As drafted, S.F. 2555 (Stevens); H.F. 2782 (Erickson) would provide the treatment indicated under Chapter 353F to privatized Kanabec hospital employees providing the actuarial work shows some net expected gain (the liabilities created by the enhanced deferred annuities and Rule-of-90 rights where applicable are less than gains that occur due to termination). Assuming the analysis does indicate that a net gain is expected, that net gain must be less than the gain due to termination, since the enhanced deferred annuities and Rule-of-90 rights do have value. Therefore, if a privatization does occur, PERA will be in better condition without this legislation, although the effect will be quite marginal, given the number of employees involved compared to PERA’s total membership.

4. Replacement Pension Plan.  The LCPR may be interested in the pension plan coverage the private employer will provide for these privatized employees for the service provided after privatization. LCPR staff does not have any information on that issue, but presumably someone can provide testimony summarizing the new coverage. In the not too distant past, it was hoped that the new employer would establish a "PERA-like" plan for the privatized employees. If the pension plan coverage provided by the employer following privatization is deemed to be inadequate, that may be a reason for the Commission, at some future date, to reconsider the policy used in privatizations.