Summary of H.F. 911 (Carlson); S.F. 889 (Rest)

H.F. 911 (Carlson); S.F. 889 (Rest) would authorized the eligible individual (a person employed by Special School District No. 1 (Minneapolis) as a long call reserve teacher from October 1972 to June 1973 and as a school social worker for various periods of time, and who is currently employed in a position covered by the Public Retirement Association General Plan) to purchase Minneapolis Teachers Retirement Fund Association (MTRFA) service credit for a period of uncovered service as a social worker at Franklin Junior High for the 1973-74 and 1974-75 school years, and during a period from August 17, 1983, thorough January 20, 1984. The individual would pay the employee contributions that would have been required at the time, while the employer is mandated to cover the remainder of the full actuarial value.

Previous legislation for this eligible individual enacted in 2000, which did not mandate that the Minneapolis school district must subsidize the purchase by paying much of the full actuarial value on his behalf, is repealed.

General Background

The bills allow Mr. Dean Larson to purchase service credit for a period of time as a school social worker that was not covered by the MTRFA at the time the service was provided, with a mandate that the district pay much of the full actuarial value. This is not the first time Mr. Larson has requested legislation on his behalf. The Legislative Commission on Pensions and Retirement (LCPR) recommended legislation to pass for Mr. Larson covering his retirement problems, and that legislation was enacted in 2000 (Laws 2000, Chapter 461, Article 19, Section 6). That legislation authorized a service credit purchase for two of the periods that would be addressed in the current bill draft. The 2000 legislation required payment by Mr. Larson of the full actuarial value (the full increase in liability that occurs as a result of the purchase in the MTRFA, the Public Employees Retirement Fund, and any other Minnesota public pension fund which provided coverage to Mr. Larson during his career). The intention for that treatment was to hold the retirement systems harmless (in other words, to hopefully ensure that the other contributors to these pension funds are not required to subsidize this purchase). The school district is permitted to cover a large portion of that payment for him, but the district is not mandated to do so. Under the current bill drafts, the district would be mandated to pay much of the full actuarial value (any portion of the full actuarial value that remains after Mr. Larson pays employee contributions plus interest). Thus, the current bills shift much of the payment responsibility to the school district.

Background on Service Credit Purchases

Every legislative session the LCPR reviews requests for service credit purchases in Minnesota public pension plans, either in the form of special legislation or the form of general legislation. In considering these requests, the LCPR had been guided by the following statement in the Commission’s Principles of Pension Policy. The applicable principle, II.C.10., reads as follows:

If the situation involves Minnesota public or quasi-public employment, if the pension fund is not harmed by the purchase, if the purchase does not raise broader policy concerns, and if the purchase does not violate equity considerations, the LCPR generally recommended that the bill be enacted. The comments in the statement about the appropriate purchase price describe the full actuarial value concept.

The Commission may conclude that H.F. 911 (Carlson); S.F. 889 (Rest) violate equity considerations by requesting that the Commission and Legislature review old ground to provide him with a more favorable outcome. The LCPR spend considerable time dealing with Mr. Larson’s issues in 2000. The new bills are currently before the Commission because Mr. Larson is not satisfied with the treatment granted in legislation passed on his behalf during 2000. He is seeking more favorable treatment. When the LCPR heard a bill for Mr. Larson in 2000, it spent considerable time on the matter and considered a few different courses of action, including the action requested under the current bills - mandating employer payment of much of the full actuarial value. At that time, the LCPR concluded that Mr. Larson should be authorized to purchase service credit but it did not conclude that the school district created harm. The Commission therefore decided that Mr. Larson should be permitted to purchase service credit for the time period in question, but it did not mandate that the school district subsidize the purchase. The applicable language allowed the school district to further review the situation and provide a subsidy if it concluded that an error occurred. After further review, the school district was not willing to subsidize the purchase. Mr. Larson is unhappy with that outcome.

Pension Policy Issues

Many of the pension policy issues raised by H.F. 911 (Carlson); S.F. 889 (Rest) were covered in the November 29, 1999, staff memo which the Commission reviewed when it considered Mr. Larson’s issues. That memo, which presented various policy issues, is attached to this memo. A few additional items are indicated below:

1. Possible Violation of Equity Concerns. As noted above, the Commission may conclude that a request to repeal the prior authorization for this individual (Laws 2000, Chapter 461, Article 19, Section 6) and to provide more favorable terms is a violation of equity considerations, unless there is new evidence or material not identified and considered earlier by the Commission which clearly indicates employer error.
   Issues Raised by the Newly Included Service Period. The current bills do include one time period, the period from August 17, 1983, to January 20, 1984, which was not included in the 2000 legislation. The Commission may wish to focus on this period. One question is why this period was not included in the 2000 legislation. If there is justification for including this period in a service purchase request, the arguments were just as valid a few years ago when the Commission heard the bills for Mr. Larson which were enacted in 2000. The issue is whether this new period meets requirements justifying a subsidized service credit purchase, or whether the period is included largely to create a case that the current request is not identical to the 2000 session request.
   

2. Issue of Harm. The general drafting of H.F. 911 (Carlson); S.F. 889 (Rest) is appropriate if the school district harmed Mr. Larson by treating him contrary to rule of law. The Commission may wish to focus on the issue of harm, and determine whether there is any relevant new evidence that was presented in 2000. If the Commission does not conclude that the school district is responsible for harm, the bills as drafted are not appropriate, since they require the school district to subsidize Mr. Larson.
   

3. Concerns About Full Actuarial Value Methodology. The full actuarial value methodology attempts to identify the full added liability that the pension fund will receive as a result of the purchase, and to require that sufficient assets (the purchase price) be provided to cover that liability. LCPR staff is currently reviewing the method in law (found in Section 356.55) and has reservations about the method’s accuracy. It is possible, if the Commission reviews that methodology during this session, that the Commission will not have sufficient confidence in the approach. In some cases, the approach may be harming the pension fund by charging too little, or harming the individual by charging too much. It is possible that the Commission will be reluctant to recommend service credit purchases given reservations about the methodology.

4. MTRFA’s Current Actuarial Condition. The issue is the current funding condition of the MTRFA. The funding condition of the pension fund is deteriorating. The most recent funding snapshot is provided by the July 1, 2002, actuarial valuation. Mr. Larson’s case would not have any appreciable impact on this situation, but the impact may be magnified somewhat if there are many more individuals in a similar situation who will seek similar treatment. In any event, the LCPR may be reluctant to add any unfunded liability to the pension plan given the current situation. Thus, the Commission may be reluctant to provide any approach which clearly provides a subsidy (by intentionally charging less than full actuarial value) or unintentionally due to a flaw in full actuarial value methodology. The MTRFA is 62 percent funded based on the funding ratio indicated below (the actuarial value of assets divided by liabilities). However, the actuarial value of assets considerably overstates the assets the association has on hand. The MTRFA market value on July 1, 2002, was only $770,489,000. Using that value, the MTRFA is only 46 percent funded. Further funding level deterioration is expected in the coming years. The state already heavily contributes to this pension fund, as indicated on the state funding line below. The amount below reflects special aid programs to assist the MTRFA and other first class city teacher fund associations, and is in addition to any funding that comes through the state’s general school aids. The total of all contributions from all sources is deficient by $17.4 million or 6.52 percent of payroll, compared to the funding needs.

MTRFA Actuarial Condition – 2002

5. Comparable Treatment Concerns. The LCPR may be concerned that requiring the school district, or any other party, to subsidize the purchase may lead to similar requests, either through special law service credit purchase requests or general law provisions. The 1999 Legislature passed several general law service credit purchase provisions for teachers which use the full actuarial value estimation method in Section 356.55 to compute the price. These service credit purchase authorization provisions have an expiration date, originally May 2002, but later extended to May 2003. These provisions allow purchases for uncovered periods of military service, out-of-state teaching service, maternity leaves or breaks in service for which service credit was not previously received, parochial or private school teaching, Peace Corps or VISTA service, charter school teaching service, and prior uncovered teaching service at the University of Minnesota. The provisions are coded in Teachers Retirement Association (TRA) statutes as Sections 354.53 through 354.541. Similar provisions, including one for previously uncredited part-time teaching service, are coded in law for first class city teachers as Sections 354A.097 through 354A.104. The Commission may wish to determine whether Mr. Larson’s case could not be covered by one of these existing provisions. If that is the case and a subsidy is permitted for Mr. Larson, then the Commission may receive considerable pressure to intentionally provide subsidies for all other individuals in this group or groups.

Amendments

Two amendments are attached for your consideration:

1. Amendment LCPR03-105 is a technical amendment. It can be used if the Commission concludes action should be taken on H.F. 911 (Carlson); S.F. 889 (Rest), and that the subsidized treatment provided in those bills is appropriate. The amendment removes from the bills language added at Mr. Larson’s request which is inaccurate or which is inconsistent with the language the Commission deemed appropriate, as reflected in the 2000 legislation (Laws 2000, Chapter 461, Article 19, Section 6). The amendment also corrects an error in the period used to compute the interest, and removes a requirement that the purchase price by computed by the actuary retained by the LCPR.

2. Amendment LCPR03-106. This is an alternative to LCPR03-105. It can be used if the Commission concludes that the Commission should not act on the substance of H.F. 911 (Carlson); S.F. 889 (Rest). It is a delete-everything amendment which replaces H.F. 911 (Carlson); S.F. 889 (Rest) with a provision cleaning up the 2000 special law legislation, which remains in effect. This amendment adds language specifying that the service credit purchase must be made by July 1, 2003, or prior to retiring from the MTRFA, whichever is earlier, and removes a requirement that the purchase price by computed by the actuary retained by the Legislative Commission on Pensions and Retirement. If the Commission wishes to add the new purchase period included in the bills, August 17, 1983, through January 20, 1984, that can be done through a verbal amendment.