TO:

Members of the Legislative Commission on Pensions and Retirement

FROM:

Ed Burek, Deputy Director

RE:

H.F. 1474 (Erickson); S.F. 1420 (Pogemiller): MnSCU; Administrative and Plan Coverage Provisions

DATE:

April 10, 2003

Summary of H.F. 1474 (Erickson); S.F. 1420 (Pogemiller)

H.F. 1474 (Erickson); S.F. 1420 (Pogemiller):

Section-By-Section Summary

Section 1 (page 1, lines 11 to 27; page 2, lines 1 to 36; page 3, lines 1 to 16). Revises TRA’s definition of "teacher provision" by removing references to obsolete license requirements and removing obsolete references to technical colleges.

Section 2 (page 3, lines 15 to 36; page 4, lines 1 to 18). Revises TRA’s definition of salary for pension purposes by excluding from salary any compensation received by a MnSCU employee in an initial appointment where the employment is for less than 25 percent time.

Section 3 (page 4, lines 19 to 28). A TRA board powers provision requiring all school districts including MnSCU to distribute TRA board election ballots is revised by correcting an obsolete reference.

Section 4 (page 4, line 29 to 36; page 5, line 1 to 36; page 6, line 1 and 2). TRA’s computation of service credit is revised by adding paragraphs specific to MnSCU employees, stating revised requirements for how full and fractional service credit will be determined. The determinations will be based on definitions of full-time and part-time service as defined in applicable collective bargaining agreements.

Section 5 (page 6, lines 3 to 28). A TRA provision dealing with treatment of contribution shortages and other contribution errors is revised by adding a new subdivision to permit MnSCU employees who are initially excluded from TRA coverage due to part-time initial employment to receive service credit for the initial employment period if they later become TRA members. To receive that service credit, the covered employee may pay to TRA the employee contributions that would have occurred if the period were initially covered, plus 8.5 percent interest, and the employer will pay the corresponding employer contributions plus interest.

Section 6 (page 6, line 29 to 36; page 7, lines 1 to 3). TRA’s employer reporting requirements are revised to allow a reporting process specific to MnSCU for part-time service employees. Rather than covering this in payroll cycle reporting, MnSCU will report once a year, on or before July 31 for the prior fiscal year, based on the employee’s teaching assignments during that time period.

Section 7 (page 7, lines 4 to 16). The IRAP covered employment provision is amended by correcting an obsolete reference.

Section 8 (page 7, lines 17 to 30). The IRAP eligible unclassified administrative position description is amended to include administrators in general rather than "excluded" administrators.

Section 9 (page 7, lines 31 to 36; page 8 lines 1 to 5). The IRAP employee contribution rate for all members will be 4.5 percent, rather than being restricted to 4.0 percent for members who would have otherwise been in the Unclassified State Employees Retirement Program of the Minnesota State Retirement System (MSRS-Unclassified) plan in lieu of IRAP coverage.

Section 10. A temporary IRAP transfer of funds provision, which permits individuals who have less than ten years of TRA-covered service to transfer the individual’s accumulated TRA employee contributions plus six percent interest to IRAP, is revised by permitting the individual to access the transferred assets upon termination of service rather than upon retirement.

Section 11. The higher education supplemental plan eligibility provision is revised to include in the plan unclassified employees of the board, whether included in the professional/supervisory unit or excluded from that unit due to confidential status, rather than just those not in confidential status.

Section 12. Sections 1 to 11 are effective on July 1, 2003.

Policy Issues

Commission staff has been informed that the Teachers Retirement Association (TRA) may have concerns about some provisions in these bills. The Commission may wish to hear testimony from TRA.

The following are policy issues raised by Commission staff:

Sections 2 and 5. Section 2 excludes from TRA coverage any MnSCU employee who in the initial appointment is less than 25 percent full-time. Section 5 then permits any employee excluded from coverage under Section 2 and who later becomes a TRA member due to MnSCU employment to receive service credit for that excluded period by making payment of employee contributions plus interest, and the employer will pay corresponding employer contributions plus interest. Payment for the service credit is not permitted unless payment is made within a year of becoming a TRA member due to the MnSCU employment.

In general, MnSCU employees are covered by either the higher education IRAP or a K-12 teacher plan (TRA or a first class city teacher plan). Employees generally have a right to elect either form of coverage, IRAP if defined contribution coverage is preferred, and TRA or first class city teacher plan coverage (depending upon location), if defined benefit coverage is preferred. IRAP has a provision that excludes individuals from IRAP coverage for the duration of an initial appointment if the appointment is less than 25 percent of full time (Section 354B.20, Subdivision 4). Section 2 of this bill creates a comparable exclusion for TRA membership. MnSCU supports this change because it provides more consistent treatment of MnSCU employees and it saves money. MnSCU would not be required to make contributions to TRA on behalf of these quarter-time-or-less employees, many of whom may leave service. These employees are then eligible for a TRA refund of employee contributions plus interest, but employer contributions are retained by the fund. For these quarter-time-or-less employees who later become IRAP members, IRAP has a provision which allows these individuals to make contributions to the individual’s retirement account in IRAP. The employee makes the employee contribution that would have occurred if the period had been covered at the time, and the employer makes a corresponding employer contribution (Section 354B.21, Subdivision 5). These contributions do not include interest.

These sections present several issues.

  1. Problems Caused by Coverage Exclusions. Coverage exclusions from defined benefit plans cause problems. It is best to define membership as broadly as possible to avoid service credit purchase requests as individuals near retirement. MnSCU is seeking to create in TRA provisions comparable to those in IRAP for these less-than-25-percent-time employees. What works smoothly in a defined contribution plan does not necessarily work in a defined benefit plan. This has been demonstrated to the Commission recently. The Minneapolis Employees Retirement Fund (MERF) has provisions comparable to these proposed TRA provisions. In MERF’s case, intermittent employees were excluded from coverage. If they later qualified for MERF coverage and became MERF members, they were given a year to purchase service credit in MERF for the previously excluded period. Being young employees at the time, many did not value the MERF coverage and did not take advantage of the one-year window offered to them. As they approach retirement age, however, they are now interested in obtaining service credit for that period of time during which they were excluded from coverage and for which they did not take advantage of the earlier opportunity to obtain that service credit. They are now coming to the Legislature seeking to purchase that service credit at full actuarial value. The LCPR heard bills for two of these MERF employees in 2000. Last week the Commission heard other similar bills for MERF employees. By creating exclusion/purchase of service credit provisions in TRA similar to the MERF provisions, the Commission is creating a future problem for itself.

  2. Problem of Harm to TRA. The issue is that the proposed provisions do not necessarily hold TRA harmless. There will be times where the service credit being purchased may have far greater value than the contributions that TRA will receive for that service credit. These comparable provisions in IRAP do not cause financial harm or risk to MnSCU. In a defined contribution plan there is no employer liability beyond the employer contribution that MnSCU makes. In a defined benefit plan, however, the pension fund (TRA in this case) must ultimately fund whatever liability is created by the service credit purchase. That will not be knowable until the individual pension becomes payable.

At least on average, TRA is not considerably harmed provided that the contributions are received soon after the service to which they relate. If an individual is excluded due to the "25 percent rule" in the first year, and in the next becomes a TRA member, contributions will be received soon thereafter, assuming that the individual takes advantage of the opportunity. The payment procedure is similar to that used in typical leave-of-absence situations. However, there will be cases where contributions are not received shortly after the excluded period. In situations like that, the Commission generally favors a full actuarial value approach, to try to keep the pension fund whole, not a contribution-plus-interest approach. As drafted, an individual can use proposed section 5 to receive service credit for the previously excluded period provided an election is made within 60 days of the start of the member’s covered service. There will be cases where an employee does not move directly from excluded service to covered service. Individuals could leave a less-than-25-percent MnSCU employment situation, and then return many years or even decades later to covered MnSCU service. Under this language they will be able to purchase TRA service for contributions plus interest. The preferred approach, if any purchase is permitted in these situations where a long delay has occurred between the excluded and included service, is a full actuarial value purchase.

  1. Comparable Treatment Requests. In the future, the Legislature may be pressured to hear bills on behalf of individuals who contend that their situation is sufficiently similar to justify that they should also be permitted to purchase service credit for contributions plus interest. The drafting of section 5 allows the purchase if the individuals became TRA members and are now MnSCU employees. Individuals who had MnSCU excluded part-time employment and who later become TRA members, but are not employed at MnSCU, may request that they be permitted to receive service credit for the excluded MnSCU service by paying contributions plus interest, possibly paying both the employee and employer contributions.

  2. Possible Extension to First Class City Teacher Plans. The issue is whether comparable language is needed in Chapter 354A, the first class city teacher plan chapter. Given limited time, LCPR staff has not sufficiently explored that issue.

Section 9. This section revises the IRAP employee contribution rate for employees who would otherwise be covered by the MSRS-Unclassified Plan. The employee contribution rate for that group will be 4.5 percent, rather than 4.0 percent, making the employee contribution rate the same for all IRAP members.

The issue is:

  1. Reversal of Policy. Presumably, the Legislature had a reason for tying the rate for certain MnSCU employees to the Unclassified Plan rate. The Commission may wish to explore why that occurred and whether it is reasonable to now reverse that policy.

Sections 8 and 11. Section 8 revises the definition of "eligible unclassified administrative position." Since individuals in eligible unclassified administrative positions are to be covered by IRAP, this change in the definition may revise IRAP coverage. Similarly, Section 11 revises the eligibility provision for the higher education supplemental plan, which may have the impact of expanding eligibility for inclusion in that plan.

The issues are:

  1. Clarification or Coverage Expansion. The issue is whether these provisions reflect clarification or revision of obsolete employee classifications, or whether they represent a substantive change by actually altering the eligible groups for these programs. If the changes are substantive, that would raise the questions of whether these changes are justified, and the changes may have budget implications for MnSCU.

  2. Authority Issue. At least in part, the changes proposed in these two sections might reflect cases where MnSCU has extended coverage to the various groups indicated in the drafting, and a revision of law is now being proposed to conform to the policy. The Commission may wish to inquire whether that is the case.

Process Concerns

H.F. 1474 (Erickson); S.F. 1420 (Pogemiller) needs technical cleanup, and the Commission may wish to consider substantive amendments. Even if the bills are recommended to pass with various amendments, the Commission needs to be aware that various issues raised by the bills are likely to need further attention during a subsequent legislative session. We have noted problems with the TRA coverage exclusions proposed in this draft, which at the current time the Commission is unlikely to be able to fully explore or resolve. Staff has also not attempted to investigate the extent to which provisions in first class city teacher law need to be amended or added given policy reflected in these bills. The problem is time--staff time and Commission member time.

The process would be better served if MnSCU were required to follow requirements Section 356B.05. This section currently applies to Minnesota State Retirement System (MSRS), Public Employees Retirement Association (PERA), Teachers Retirement Association (TRA), first class city teacher plans, and Minneapolis Employees Retirement Fund (MERF). These plans are required to submit any administrative legislation to the government operations committees and to Commission staff by October 1 if the legislation is to be considered during the next legislative session. Commission staff is required to review the draft legislation and provide comments by November 15. That process worked reasonably well this year. Commission staff had several meetings with administrators from MSRS, PERA, TRA, and the St. Paul Teachers Retirement Fund Association (SPTRFA). Numerous drafts were reviewed and Commission staff worked with these administrators to address drafting concerns and many of the substantive issues raised by the initial proposals. Unfortunately, limited Commission time did not permit the resulting bills to be heard by the Commission. In contrast, H.F. 1474 (Erickson); S.F. 1420 (Pogemiller) was discussed in concept with MnSCU only a few weeks ago, and actual drafted language was not available until just a few days ago. To improve the process, Commission staff recommends to the Commission that MnSCU be added to the requirements of Section 356.B.05.

Amendments

Several amendments are attached for your consideration.

LCPR03-155. This amendment makes MnSCU subject to the requirements in Section 356B.05.

LCPR03-156. This is a technical amendment, intended to clarify language, avoid a need to remove obsolete dates in subsequent legislative sessions, and add subdivision headings.

LCPR03-157. This amendment addresses at least part of the controversy with service credit purchase language in section 5. It attempts to reduce cases where TRA will incur considerably more liability than is covered by the contributions it will receive. The amendment would prohibit the purchase if the uncovered service occurred more than three years prior to the individual becoming a member due to MnSCU employment. If the Commission preferred a longer or shorter window, that could be done through verbal amendment to this amendment.

LCPR03-158. This amendment would address the TRA exclusion/service credit purchase issues by deleting the two applicable sections, section 2 and section 5. The Commission could consider that policy over the interim and, if deemed appropriate, add it next year.

The Commission may also want to consider other verbal amendments to remove whole sections.