H.F. 841 (Fuller); S.F. 843 (Rudd) allows a Public Employees Retirement Association (PERA) Coordinated member, who was covered by PERA-General for Beltrami County employment, who terminated from that employment but continues as a active PERA-General member due to elected service for which the individual chose PERA-General coverage, to be treated as a PERA-General terminated member and to begin drawing an annuity.

Ms. Erickson is an individual with PERA-General coverage as an employee of Beltrami County, and who was elected to the Bemidji City Council in 2000, taking office in 2001. Ms. Erickson elected PERA-General coverage for her elected city council service. Ms. Erickson’s pension problem is that she wants to draw a PERA-General annuity but is unable to do so because she remains an active member of that plan due to her election of PERA-General coverage for the city council service.

Ms. Erickson indicated that she worked for Beltrami County in a variety of positions starting in 1991. She indicates that she has a degree in accounting and has worked in both accounting-related positions and non-accounting-related positions for the county. As a general employee of the county, Ms. Erickson became a member of PERA-General for that service. For non-elected service, PERA-General coverage is mandatory once an individual first earns more than $425 in a month due to that public employment.

In 2000, Ms. Erickson ran for the Bemidji City Council and was elected, taking office in January 2001. At the time Ms. Erickson made her coverage decision for elected service, she had an option to elect coverage by the PERA-General Plan or by the PERA Defined Contribution Plan, or to elect no coverage at all. Ms. Erickson was a PERA-General member for her non-elected service, and she decided to elect the same coverage for her city council service.

If Ms. Erickson were elected somewhat later, she could not have chosen PERA-General coverage. The options for elected officials were revised by the 2001 Legislature. PERA-General law was revised to exclude any newly elected local government officials (those first taking office after July 1, 2002) from PERA-General coverage for that elected or appointed service (Laws 2001, First Special Session, Chapter 10, Article 11, Section 4).

For a period of time Ms. Erickson retained her non-elected position with the county in addition to being a city council member. However, she recently quit her position with Beltrami County, retaining only her elected city council position. Ms. Erickson’s wants to draw a PERA-General annuity but is unable to do so, because she remains an active member of that plan due to her election of PERA-General coverage for her city council service.

Ms. Erickson is seeking legislative help to address a pension problem that appears to be self-inflicted. Ms. Erickson indicated that she did not contact PERA prior to terminating her job with the county. However, she did contact individuals at the county and city, who correctly advised her that if she terminated the county employment she would not be able to begin drawing a PERA-General annuity because she would remain an active PERA member due to the coverage she elected after becoming a city council member. Although Ms. Erickson received correct advice, she chose to terminate her county employment anyway, relying on the Legislature to address her problem by allowing her to begin drawing a PERA-General annuity.

The General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) is governed by Minnesota Statutes, Chapter 353, and various other provisions of law. It is a defined benefit retirement plan that provides disability coverage, survivor benefits, and retirement coverage to over 137,000 non-public safety employees throughout the state. PERA-General provides coverage to public employees (other than public safety employees) who work for the counties, cities, and in non-teaching positions in school districts. PERA currently has over 43,000 retirees and 29,000 deferred retirees. PERA-General assets exceed $11 billion, but liabilities exceed $12.9 billion, creating a funding ratio of 85 percent.

PERA-General is a defined benefit plan, meaning that the retirement benefit the plan provides is determined by formulas in law, which are based on the average of salary close to retirement (the average of the five consecutive years that provides the highest average salary), the percentage of that high-five salary that the individual receives per year of service (called an accrual rate), and the number of years of service. For an individual who started county service in 1991, as Ms. Erickson did, the normal retirement age is 66. That is the age at which an individual, following termination of coverage service, can receive an annuity without any penalty due to early commencement of the benefit. Under law, a terminated employee may begin drawing annuity as early as age 55, but with a reduction due to early retirement.

In PERA-General or in any other of our defined benefit plans for paid public employees, the individual must terminate from the covered public employment prior to drawing the annuity. An individual can not be an active member of a plan (in other words, an individual who continues to provide service covered by the plan and who makes contributions due to that service) and draw an annuity. This reflects the basic idea that retirement benefits are for retirees. Ms. Erickson’s problem is that she remains as active PERA-General member, due to the coverage that she voluntarily chose for the elected city council service, so she is not permitted under general law to begin receiving the PERA-General annuity. She would need to terminate from the council to do that.

The PERA Defined Contribution Plan (PEDC), governed under Minnesota Statutes, Chapter 353D, and various other law, is an entirely different type of plan than PERA-General. Under a defined contribution plan, the benefit is not specified; rather, the contribution rates to the plan are specified or defined in law. The eventual benefit is determined by the accumulated value of the contributions made to the individual’s account over time, plus the investment earnings on those contributions. The account’s value at the time of retirement or disability is referred to as the "terminal value." The monthly benefit that can be paid is the monthly value that can be supported given the terminal value and the individual’s expected remaining lifetime. Under the PEDC, the terminal value is payable in a lump sum at the withdrawal date, or the individual may specify that the amount be transferred to an insurance company or other annuity provider, with the proceeds used to purchase an annuity.

The PEDC began in 1987, with the enactment by the Legislature of a defined contribution plan (the Ambulance Service Retirement Fund) for certain basic and advanced life support emergency medical service personnel. In 1990, the plan was renamed the Public Employees Defined Contribution Plan (PEDC) and membership was expanded to include elected and appointed local government officials other than county sheriffs (county sheriffs are members of the Public Employees Police and Fire Retirement Plan). Because of the change in possible coverage, local government officials who were PERA-General members were given a chance to elect, prior to July 1, 1990, to terminate PERA-General coverage and to become members of the defined contribution plan, retaining a right in PERA-General to a refund or deferred annuity. If a local elected official did not have PERA-General coverage or coverage by some other plan for the prior elected service, the participating elected local government official was authorized to make prior service contributions to the defined contribution plan equal to the contributions that would have occurred if the plan had been in effect, plus six percent interest. PEDC coverage was again expanded in 1996 to allow certain physicians who are local government employees to elect PEDC coverage rather than PERA-General.

Ms. Erickson wants to begin drawing a PERA-General annuity but cannot at the current time because she chose PERA-General coverage for the elected service. She therefore remains a PERA-General Plan active member due to her continuing covered city council service. If she elected no coverage, or if she chose PEDC coverage, she could begin drawing the PERA-General annuity.

Commission staff reviewed all provisions that were enacted relating to local elected officials from 1987 to the current date and found no situations that exactly match Ms. Erickson’s situation. Some legislation that passed in 1990, 1993, and 1998 may provide some guidance, with the 1998 situation being most comparable to that of Ms. Erickson.

1. 1990 Legislation. When PERA’s defined contribution plan was first expanded to include elected local government officials, officials with prior PERA-General coverage for the elected service were given a chance to elect, prior to July 1, 1990, to terminate PERA-General coverage and to become members of the PEDC Plan, retaining a right in PERA-General to a refund or deferred annuity. Presumably, the Legislature created defined contribution plan coverage for elected officials because it felt that this form of coverage was more suitable, at least for some. The provision to allow previously elected officials to transfer coverage to the PEDC presumably reflects a legislative position that these individuals should not be forced to retain defined benefit coverage now that a more suitable option had been created. This is a different situation than that of Ms. Erickson. At the time Ms. Erickson made the decision regarding coverage for elected service, all options were available to her – defined benefit coverage (PERA-General), defined contribution coverage (PEDC), or no coverage at all. Ms. Erickson made a choice she now regrets, and the Legislature is being asked to correct harm that appears to have been created by Ms. Erickson herself.

2. 1993 Legislation. In 1993, the Legislature was asked to authorize another election for elected officials to transfer prospective coverage to the PEDC (1993 Session S.F. 871 (Lessard); H.F. 1214 (Anderson)). The election would have had to be made by July 1, 1993. The Legislative Commission on Pensions and Retirement (LCPR) heard the bill and recommended that it not pass.

A provision did pass as part of an omnibus pension bill in 1993 which addressed a pension problem for an individual who would have been covered by the Lessard/Anderson bills, but the provision went beyond the treatment proposed in the Lessard/Anderson bills. The provision permitted a Deer River City employee, who was born on March 3, 1939, who was an elected official of Blackberry Township from 1972 to March 1990, to make contributions to the PEDC based on that past elected service, and authorized a transfer of prospective city employment service coverage to the PEDC. However, the language did include a requirement that no refunds or annuities could commence from any plan until the individual had terminated all service covered by PERA-General and the PEDC. The provision presents considerable pension policy issues, and LCPR staff has found no record that the provision was ever heard or approved by the LCPR. The provision may have become part of the pension bill through a floor amendment.

3. 1998 Legislation. In 1998, the LCPR considered a blind amendment, LCPR98-47, to allow a PERA Coordinated member, who contributed to the plan due to Suburban Hennepin County Regional Park district employment and also due to employment as a current elected member of the Minneapolis Park and Recreation Board, to begin drawing an annuity upon termination from the non-elective position although he continues as an elected official. The high-five average salary would be computed on the salary from his non-elected service position only. Relating to the elected or appointed service, within one year the individual could elect a refund of past contributions due to that service or Public Employees Defined Contribution Plan coverage. If the defined contribution plan coverage is elected, past contributions (employee and employer) due to appointed or elected service on the park board will transfer to the defined contribution plan with six percent interest. LCPR98-47 was recommended to pass and became Laws 1998, Chapter 390, Article 3, Section 19.

H.F. 841 (Fuller); S.F. 843 (Rudd) allows a Public Employees Retirement Association (PERA) Coordinated member, who was covered by PERA-General for Beltrami County employment, who terminated from that employment but continues as a active PERA-General member due to elected service for which the individual chose PERA-General coverage, to be treated as a PERA-General terminated member and to begin drawing an annuity.

The proposed legislation raises the following pension and related public policy issues:

1. Sufficient Need for Legislative Action. The issue is whether this situation warrants legislative attention given the other matters before the Commission and the Legislature during this session. Ms. Erickson indicated that she was informed by the city and/or county that she would not be able to begin drawing a PERA-General annuity if she terminated Beltrami County employment because she remains an active PERA-General member due to the PERA-General coverage she elected for her city council service. Despite being aware of the consequences before the termination occurred, Ms. Erickson did terminate service and now seeks legislative action to allow her to begin drawing an annuity.

2. Personal Responsibility; Equity Issues. Unless it can be documented that Ms. Erickson was somehow misled, the Commission may conclude that no legislative action is warranted. Ms. Erickson made a bad decision to terminate service, and she presumably knew that decision was ill advised before she took that action. The case would have more merit if she had sought legislative action before terminating service. Terminating service undermined arguments of equity and need, and suggests that Ms. Erickson is prepared and capable of living with the consequences of her actions.

3. Consequences of Ms. Erickson’s Coverage Election. In deciding whether to take action to assist Ms. Erickson, the Commission may wish to consider the consequences of the coverage she elected. Ms. Erickson made pension coverage decisions and employment decisions that were not wise. While the harm seems self-inflected, the harm is real. At the current time, the coverage is not ideal. When Ms. Erickson elected PERA-General coverage for her elected service, she may have been influenced by the impact that coverage would have on her high-five average salary. If she retained the county employment and the elected city employment, both salaries would be added together to boost her high-five average salary and the eventual benefit to which she would be entitled. However, it appears she worked in both positions simultaneously for only several months prior to terminating the county employment. After that termination, her remaining salary due to the city council employment is presumably much less than the previous combined salary. Ms. Erickson is earning some additional PERA-General service credit, which would tend to increase her eventual pension, but now she is harming her high-five average salary. The situation is similar to any public employee in a defined benefit plan who works part-time late in his or her career. In teacher plans, for example, the qualified part-time teacher provisions allow individuals to work part-time late in a teacher’s career while making full-time equivalent contributions, thus protecting the high-five average salary. Ms. Erickson has no similar protection.

4. Prior Legislative Actions, Proper Model for Legislation. H.F. 841 (Fuller); S.F. 843 (Rudd), as drafted, can be criticized as a model for handling situations similar to that of Ms. Erickson. The individual wants to be treated as though the elected service did not or is not occurring. This enables the individual to be treated as a terminated plan member, permitting the individual to begin drawing the annuity. However, the bills allow the annuity to be computed based on the sum of the county employment and the city council employment. If the city council service is to be ignored to allow the individual to start drawing the annuity, consistency suggests that salary from that city council service also ought to be ignored for purposes of determining the annuity amount, to avoid potentially abusive situations.
   
   As noted previously, Commission staff is aware of few situations involving elected local government officials who were permitted to revise coverage, either to another plan or to drop all coverage, after coverage had commenced. The question is whether any of the legislation passed to handle those situations provides a better model for handling the current situation than the approach used in H.F. 841 (Fuller); S.F. 843 (Rudd). In 1993, a certain Deer River employee who also was a prior elected official in Blackberry Township, was allowed to revise coverage, but that provision reflects unusual pension policies and is controversial. At this time, Commission staff has found no record of any Commission consideration of that proposal. The Commission may decide that approach should not be followed as a model in this case. A provision passed in 1998 seems most similar to Ms. Erickson’s circumstance and the Commission may decide that the treatment used in that 1998 model is preferable. An amendment using the approach used in 1998 is attached for the Commission’s consideration.

5. Pressure for Additional Requests. The Commission may wish to consider that authorizing any change in coverage or deletion of coverage, so that Ms. Erickson can commence drawing an annuity, may lead to other requests for comparable treatment.

6. Self-Help Remedy. Given the policy issues raised by any legislative effort to address Ms. Erickson’s problem, the Commission may wish to consider that she has a self-help remedy. Ms. Erickson can resign from the Bemidji City Council, at which point she will have terminated all covered PERA-General employment and can begin drawing an annuity.

Amendment LCPR03-079 presents another option for dealing with Ms. Erickson’s pension problem. LCPR03-079 is modeled on the approach the Legislature took on a similar situation in 1998, with some modification to deal with an employee who already terminated from non-elected employment.

Like the 1998 legislation, LCPR03-079 attempts to treat the individual as though she had chosen PEDC coverage for the elected service. This allows her to commence receipt of the PERA-General annuity. The PERA-General annuity is computed based on the county service only. The elected service salary and service credit is eliminated from the PERA-General benefit computation. If the individual wishes to have PEDC coverage for the elected service, that can be elected. If that election is made, the prior contributions to PERA-General made on the elected service transfer to a PEDC account for the individual, plus six percent interest. If the individual does not want that defined contribution plan coverage, the individual will receive a refund with interest from PERA-General based on the employee contributions that the individual made to that fund for the elected service.

This amendment should not require a local approval clause. If the individual were to elect PEDC coverage, the employer contribution is five percent of pay. That is less than the employer contribution to PERA-General (5.53 percent of pay). Thus, the amendment provides a savings to the city compared to the current law situation, but it is not as advantageous to the city as H.F. 841 (Fuller); S.F. 843 (Rudd), under which all contributions would cease.