H.F. 1386 (Krinkie); S.F. 1361 (Pogemiller) establishes three programs which may be of assistance in producing county and local government budget savings. These programs would apply to public employees covered by the various Public Employee Retirement Association (PERA) plans. The programs are:

1. Option A: Reduced Employment and Retirement Annuity Receipt. A PERA plan-covered public employee (an individual with coverage under the General Employees Retirement Plan of the Public Employees Retirement Association (PERA-General), the Local Government Correction Service Retirement Plan (PERA-Correctional), or the Public Employees Police and Fire Retirement Plan (PERA-P&F)) who is employed for at least half time, who agrees to a reduction of 25 percent in their regularly scheduled work hours, and who is eligible for an immediate unreduced retirement annuity from the applicable plan is permitted to continue active employment as agreed, without earning additional service credit, and receive a retirement annuity without any reemployed retirement annuity limitation (Section 1).

2. Option B: Reduction in Employment to Half Time. A public employee is permitted to reduce their work hours to half-time or less and continue to make full member contributions, have full employer contributions made on their behalf, and receive full allowable service from the applicable PERA pension plan (Section 2).

3. Option C: Voluntary Leave. In addition, a government subdivision may allow public employees to take a voluntary leave of unspecified duration during the fiscal years 2004-2005 biennium and continue to make the balance of full member and employer contributions during the leave (Section 3).

A government subdivision must designate the job classifications or positions within job classifications which qualify for each option. These designations may be modified at any time, and implementation of these programs is not an unfair labor practice under the Public Employee Labor Relations Act (PELRA) and in is not an unfair discriminatory practice (Section 4).

If an eligible employee selects option A above, he or she may not utilize option B or C at the same time, or at a later time (Section 5).

An eligible employee who selects option B may later select option A, or may be covered by option C during an earlier or later time period (Section 5).

H.F. 1386 (Krinkie); S.F. 1361 (Pogemiller) are similar but not identical to H.F. 1432 (Ozment); S.F. 858 (Pogemiller): MSRS-General; Early Retirement Incentives, which the Commission heard on Tuesday, April 8, 2003. One key difference is that the PERA bills do not include the program that would offer a $15,000 cash incentive to induce individuals to retire. Another difference is that the unpaid leave provision (Section 3 of the PERA bills) is for an unspecified length, rather than a leave not to exceed 1,040 hours as stated in the MSRS bills. Given the similarity between the PERA bills (H.F. 1386; S.F. 1361) and the MSRS bills heard last week, many of the same policy issues are raised. If the Legislature does decide to offer these retirement incentive/budget savings bills, it may wish to consider making comparable changes where appropriate in both sets of bills. Last week, the Commission heard a staff presentation of possible amendments to the MSRS bills, but laid the bills over without taking any action on amendments, pending a response from the Commissioner of Finance and Commissioner of the Department of Employee Relations.

Minnesota has utilized several early retirement incentives in connection with its public employee workforce over recent decades. Prior to 1982, there was little systematic legislative experience with early retirement incentives for Minnesota public employees other than the teacher mobility provisions of the mid-1970s. Since 1982, the following early retirement incentives have been enacted to apply to Minnesota public employees:

The various early retirement incentives have been enacted or implemented for a variety of reasons. Most of the early retirement incentives were apparently implemented to assist in resolving state or local government budget difficulties by encouraging retirements instead of layoffs or other involuntary terminations. Those early retirement incentives were enacted not primarily to benefit public employees, but to use a potentially advantageous benefit to induce higher-paid, longer-service employees to terminate active public employment at an earlier age than they otherwise would retire. The savings that potentially will accrue to the public employer in this circumstance are dependent on the employer not filling the employment position with another employee or on the employer filling the employment position with another employee at a much smaller salary.

When a public pension plan provides an early retirement incentive, the public pension plan is fulfilling its prescribed function within the overall personnel compensation and benefit system. Public employee pension plans exist primarily to assist the public employer's personnel system by aiding in the recruitment of new public employees, the retention of existing trained and productive public employees, and the predictable systematic out-transitioning of public employees who have reached the end of their regularly expected productive working career. This is done by adopting a retirement plan that provides a sufficient post-retirement income (adequate based on pre-retirement earnings) and that is competitive with other potential employers. In providing an early retirement incentive, the public employee pension plan is emphasizing the out-transitioning function and is attempting to speed up its timing. Other employment benefit coverage, such as severance pay or employer-paid early retirement health insurance premiums, can also assist in this out-transitioning function.

H.F. 1386 (Krinkie); S.F. 1361 (Pogemiller) establishes three programs which may be of assistance in producing county and local government budget savings. These programs would apply to public employees covered by the various Public Employee Retirement Association (PERA) plans, described on page 1. Policy issues are:

1. Possible Need to Limit Agencies Offering Incentives. The commission may wish to consider the scope of included employing units and whether that scope is appropriate. Section 1 is the proposal referred to as Option A above, the phased retirement program under which an individual cuts back work hours at least 25 percent and begins drawing an annuity without ever terminating service. Under PERA, any governmental subdivision (employer) can offer that option to its public employees if the employees are covered by PERA-General, PERA-Correctional, or PERA-P&F. "Governmental subdivision" is defined to include the Public Employees Retirement Association. Thus, PERA’s administrators and other staff of that retirement organization can be eligible for the proposed incentives. These options presumably are being proposed as budget savings tools. PERA is not subject to usual state or local budgeting processes. The employees are paid from the assets of the pension fund.

The Commission may wish to consider whether to adopt an amendment to exclude PERA’s administrators and retirement plan staff from these incentives. LCPR03-144, attached, would do that. If the Commission concluded that other organizations should be excluded from these incentives, another amendment would be needed. Minnesota Statutes, Section 353.01, Subdivision 6, is the definition of governmental subdivision. Paragraph (b) of that definition includes as governmental subdivisions the Spring Lake Park Fire Department, Incorporated, the League of Cities, and various other organizations which may or may not be appropriate for inclusion as eligible employers to provide these incentives.

2. Clarification of Applicable Plans. The eligible groups for options A, B, and C, are not consistent. It is unclear whether this was intended or inadvertent. Option A (Section 1) can be offered to members of PERA-General, PERA-Correctional, and PERA-P&F. Option B would be available to "public employees" covered by "a pension plan administered by the public employees retirement association" (page 2, lines 28 to 32). This would include all the plans indicated in section 1, plus the PERA Defined Contribution (PEDC) Plan. The PEDC covers various physicians working for local governments, basic and advanced life support emergency medical service personnel, and also local government elected officials who were first elected before July 1, 2002, and who chose PEDC coverage. The Commission may wish to consider whether the PEDC should be excluded from Option B.
   
   The eligibility group for Option C is not particularly clear. Page 3, line 30, refers only to "governmental subdivision," without any statement of the applicable plans.
   
   The Commission may wish to consider LCPR03-145 which would restrict Options A, B, and C to exclude individuals with PEDC coverage.

3. Incentives Could Include Reemployed Annuitants Rather than Career State Employees. The policy issue is the appropriateness of including public pension plan annuitants who have become employed in local government employment in these incentives. None of the options prohibit use by reemployed public plan annuitants, and none of the options place limitations on the amount of service credit an individual must have to qualify for the coverage. A public pension plan retiree could become employed in local government and use Option B to build another annuity in a PERA plan, creating an artificial high-five average salary based on full-time equivalent salary, although the individual is working only a fraction of full-time. Under Option C, he or she would not need to work at all to build another pension. The Commission might consider this to be an abuse, and consider an amendment to address this issue. Disallowing employees who have already retired from another Minnesota public pension plan will maintain the targeting on long-term career employees.

4. Windfall Problems. The general policy issue is the potential that the proposed incentives may be offered to employees who would have terminated employment without these incentives, thereby providing them with a windfall and reducing the actual net savings that the employers would receive. Increased retirements will occur without any options being offered due to increasing workloads or other post-budget reduction employment conditions. Option A may induce some individual, who would have otherwise terminated service and retired, to remain employed. Option B may have a similar effect for individuals near the end of their career, and, as noted earlier, options B and C could lead to abuse by individuals who are returning annuitants. In some cases, Option C could be used by some individuals, including reemployed annuitants, to have the employer pay to buy a high-five average salary for the individual although the individual is providing little service (Option B) or no service (Option C).

Amendment LCPR03-146 excludes anyone who has commenced receipt of an annuity from any plan included under the combined service annuity provision or from any policy or paid fire plan from inclusion in any of these options.

5. Retirement Incentive Eligibility Has No Upper Age Limit. The policy issue is the lack of any upper age limit in eligibility requirements. When applied to individuals who are already eligible to retire, Options A through C have no clear purpose. Option A allows the individual to draw an annuity without terminating service. This will keep a presumably highly paid individual on the payroll, although at a reduced salary rather than full salary. Perhaps there would be more budget savings if these individuals were encouraged to terminate and were not rehired. Similarly, Options B and C are questionable if used by individuals who are already at or above normal retirement age. Under Option B the employer continues to make contributions based on full time equivalent salary. This option might be reasonable if used by somewhat younger employees who wish to transition into retirement, but for individuals who have already reached normal retirement age it is unclear why there is any need to provide a transition. Similarly, there seems no public policy reason why an individual who is already at normal retirement age or above should be given an unpaid leave of absence, with a requirement (page 4, lines 14 to 23) that the employer continue to make full-time equivalent salary retirement contributions to the applicable fund. This is unlikely to save money for the employer.
   
   Amendment LCPR03-147 excludes persons who are eligible for unreduced Social Security benefits from any of these incentives.

6. Incentives Have No Clear Election Process. The policy issue is the unclear manner in which an eligible employee in a designated employment position elects to take any of these options. These options alter employee rights and, in some cases, bind the employee to making full-time equivalent employee contributions although the individual is employed only part-time, or is on an unpaid leave. To avoid confusion and at least reduce later claims by employees that they were not aware of the consequences of the election, Amendment LCPR03-148 provides for a formal offer of the incentive package to the employee and requires that the offer be accepted in writing.

7. Option A: Conflicts With Established Policies. Option A, which permits individuals to begin drawing PERA annuities while remaining employed without any termination occurring, is at conflict with the basic pension policy that retirement annuities are intended to provide sufficient income in retirement. All pension plans require that an individual must terminate service to be able to commence receipt of an annuity from the applicable plan. The only exception that Commission staff is aware of is a provision enacted a few years ago for a White Bear Lake fire chief to enable the individual to commence receipt to a pension from the local volunteer fire relief association while remaining employed.
   
   To avoid what could be significant pressure to make a general revision in pension policy in pension plans, we suggest consideration of LCPR03-149. The amendment generally follows a process placed in law some years ago for Minnesota State Colleges and Universities System (MnSCU) employees, in what was presented as a phase-into-retirement provision (now coded as Section 354.445). Following that approach, the individuals had to have a reasonable amount of service provided to date, and they had to terminate service and commence receipt of the retirement annuity to which they were eligible. Under a prior agreement with the employer, they were rehired to provide part-time employment, and reemployed annuity provisions were waived.

8. Justification for "Unreduced" Retirement Language. Option A has an eligibility requirement that the individual must be eligible for an "unreduced" retirement benefit (page 1, line 20) from the applicable PERA plan to be eligible for Option A. The term has no generally agreed-upon meaning. If an unreduced benefit means that the individual must be at least of normal retirement age, then the eligible group is narrowly restricted to a group that perhaps should be encouraged to retire, rather than being encouraged to continue part-time and violating pension policy (by not requiring a termination of employment to commence receipt of an annuity and by waiving reemployed annuitant reallocations). The amendment described above (LCPR03-149) includes revised language which does not restrict eligibility to those eligible for "unreduced" annuities.

9. Possible Abuse Due to Statement of Applicable Work Periods. H.F. 1386 (Krinkie); S.F. 1361 (Pogemiller) has statements within the bills indicating the periods during which the options apply. This language is found on page 2, lines 25 and 26, and on page 3, lines 27 and 28. This language differs from the language in corresponding MSRS bills, H.F. 1432 (Ozment); S.F. 858 (Pogemiller). The MSRS bills include language stating that the option offered under that particular section "may apply only to work through June 30, 2005." That places a define time limit. The PERA bill language does not. The PERA bill language is "An agreement under this section may apply only to work arrangements entered into before June 30, 2005." Option A (the work reduction with receipt of annuity while remaining employed and with a waiver of reemployed annuitant provisions) could continue indefinitely, providing the employee and employer agree to that arrangement before June 30, 2005. Similarly, a continuing right to Option B (a work reduction arrangement with a permanent right to build a high-five average salary as though the individual were working full time) could be created under section 2 of the PERA bills, provided that agreement was made before June 30, 2005. To avoid abuse, the Commission may wish to consider LCPR03-150, which would use language on the duration of these arrangements more consistent with that found in the MSRS bills.
   
   The Commission may wish to hear brief testimony from PERA or any other party that might be knowledgeable about why these work period provisions were drafted differently than the corresponding MSRS bill language.

10. Possible Abuse, Employment Covered in Two Plans. The Commission may wish to consider language to prohibit use of any of these options if the individual is employed or becomes employed during the duration of these arrangements in other employment covered by any PERA plan or any other Minnesota public plan, other than a volunteer fire plan. The concern is abuse. For example, as these bills are currently drafted, an individual could be employed by a PERA-covered employer, working full-time. The individual could enter into an arrangement with the employer for Option B, which would allow the individual to considerably cut back service to that employer and continue to receive salary and service credit in PERA consistent with the previous full-time service. The individual could then become employed with another PERA-covered employer, working full time. Combining this new employment with the Option B arrangement with the other employer, the individual earns double salary credit in PERA, which if the individual is close to retirement age will greatly inflate the individual’s high-five average salary to be used to compute the eventual pension. The problem could be particularly serious when combined with the problem noted in the prior policy point--as drafted in the PERA bills, these options do not necessarily terminate after June 30, 2005. They could be continued indefinitely.
    
    A similar situation could be created by an individual using Option B with a PERA employer to receive full-time salary and service credit in PERA, while remaining employed or becoming newly employed in a position covered by an MSRS plan. The individual can earn salary credit for two full-time positions, although the individual may be providing almost no service to the PERA employer.
    
    Section 3, the voluntary unpaid leave provision with possible full-time equivalent salary and service credit, is similarly problematic, although it does appear that at least that provision cannot be used after June 30, 2005. As drafted, an individual could be on leave from one PERA employer while working full-time for another, or on leave from a PERA employer and working full time for an MSRS or teacher plan employer, receiving credit in Minnesota pension plans based on two full-time salaries.
    
    Similar problems exist within the MSRS bills the Commission heard last week. Amendment LCPR03-151 seeks to craft a solution for the PERA bills which the Commission may wish to consider. The amendment prohibits use of any of these options if the individual has more than one PERA employer, or if the individual earns service credit in any other Minnesota public plan during the period covered by the applicable option, other than a volunteer fire plan.