Due to time constraints during the 2003 Legislative Session, several retirement-related bills that are at least in part administrative in nature were either not considered during that Session or were tabled for further consideration. At the Legislative Commission on Pensions and Retirement (LCPR) interim meeting on July 14, 2003, the LCPR appointed an Administrative Legislation Subcommittee consisting of Representatives Smith and Lipman and Senators Betzold and Michel to consider the substance of these bills, and to recommend appropriate action to the full Commission. The administrative retirement bills referred to the Subcommittee for review are:

• H.F. 519 (Smith); S.F. 807 (Betzold): TRA; Administrative and Benefit Provisions
• H.F. 871 (Smith); S.F. 844 (Higgins): Various Plans; Disability Determinations by Licensed Psychologists
• H.F. 890 (Smith); S.F. 676 (Betzold): PERA; Administrative and Benefit Provisions
• H.F. 1086 (Smith); S.F. 806 (Betzold): Various Plans; Uniformed Services Employment and Reemployment Rights Act (USERRA) and Internal Revenue Code Compliance
• H.F. 1430 (Smith); S.F. 1460 (Betzold): MSRS; Administrative Provisions
• H.F. 1474 (Erickson); S.F. 1420 (Pogemiller): MnSCU; Administrative and Plan Coverage Provisions

Because the various retirement administrative bills remaining from the 2003 Legislative Session often cover similar topics but for different plans, the Commission staff recommended that the administrative bills be considered by the Subcommittee in their component parts, based on the substantive area of change, rather than as individual bills. For the Subcommittee’s first meeting on July 29, 2003, Commission staff prepared draft amendment LCPR03-220 which contained provisions from several substantive areas that were contained in the six bills previously mentioned, including various membership issues, service credit (including credit in Minnesota plans for periods of military service), salary definitions, and plan reporting. For the second Subcommittee meeting, staff has prepared draft LCPR03-223, covering various retirement annuity accrual, early retirement, disability, and Internal Revenue compliance issues. For the third Subcommittee meeting, staff has prepared a third legislative draft, LCPR03-225, covering the remaining substantive sections from the six original bills. The intention is to cover with these three amendments all of the provisions that were included in the original bills.

The source bills contain some benefit-related provisions and some of these are contained in the LCPR draft, LCPR03-223, for the second Subcommittee meeting. The benefit-related provisions in LCPR03-223 mentioned below are discretionary; they are not required due to federal law or ruling. The Subcommittee may wish to recommend that some or all of these provisions be removed as being inconsistent with administrative legislation. If not, the Subcommittee may wish to give careful consideration to these sections as the Subcommittee reviews the articles in LCPR03-223.

Benefit provisions in LCPR03-223 that will increase plan costs are the following:

• Article 15, Section 1. The section amends Legislators Plan law, reducing the number of years of service needed by a legislator to qualify for an annuity under the Legislators Plan service-in-more-than-one fund provision.

• Article 15, Section 2. This section revised combined service annuity law to create more extensive use of combined service annuities by public safety plan members who also have service in a non-public-safety plan, and is likely to lead to enhanced benefit levels during retirement.

The following two provisions are likely to increase plan costs, at least in the short term:

• Article 25, Section 1. This section will permit disability benefits to continue for six months beyond the cutoff required in existing law when MSRS disabilitants return to work.

• Article 14, Section 1. This section amends a TRA retirement accrual date provision. The proposed change may result in some individuals receiving more retirement checks during their retired lifetimes, due to revised language which permits an earlier benefit accrual date.

Benefit-related provisions in LCPR03-223 which may not increase plan costs, but which reduce plan gains or which raise other policy issues are the following:

• Article 17, Section 1. This section reduces the early retirement age in the MSRS Elected State Officers Plan from age 60 to age 55.

• Article 17, Section 2. This section reduces the early retirement age in the MSRS Judges Plan from age 62 to age 55.

• Article 18, Section 1. This section adds an actuarial reduction for early retirement to the MSRS Judges Plan, which is likely to be more generous than the reduction required in existing law.

The following two provisions are largely administrative, but have a benefit-related aspect because they give certain defined contribution plan members increased flexibility to use their account assets. These provisions have no discernable cost implications. The provisions are:

• Article 22, Section 1. This section revises an MSRS Unclassified Plan disability provision to permit more flexibility over partial payouts by permitting a payout of any portion of the disabilitant’s account value and an annuity based on the remainder.

• Article 28, Section 1. This section permits certain assets transferred to the Higher Education Individual Retirement Account Plan (IRAP) member accounts from TRA or a first class city teacher plan to be accessed by the IRAP member at termination of employment rather than at retirement.

This second draft document, like the first, contains sections from H.F. 1086 (Smith); S.F. 806 (Betzold): Various Plans; USERRA and Internal Revenue Code Compliance. These two bills contain provisions which the Teachers Retirement Association (TRA) and the St. Paul Teachers Retirement Fund Association (SPTRFA), the two organizations taking the lead on these issues, contend are required by the federal government for Minnesota public plans to retain their tax qualified status. Some of the proposed changes will impact all or nearly all plans. Given the scope of these proposed changes and the contention that these specific changes are mandated by the federal government, the Subcommittee and the Commission may require that the TRA and the SPTRFA make a convincing case for these proposed changes. For provisions in LCPR03-223 which came from H.F. 1086 (Smith); S.F. 806 (Betzold): Various Plans; USERRA and Internal Revenue Code Compliance, these two pension organizations should provide the Subcommittee with specific citations and the language in the applicable federal code, ruling, or other documents mandating these changes, and should indicate which other states have amended their laws in the manner being proposed here.

ARTICLE 14

RETIREMENT ANNUITY ACCRUAL DATES.

Section 1. Minnesota Statutes, Section 354.44, Subdivision 4, TRA’s annuity accrual date provision, is revised by striking language indicating that an annuity must not begin to accrue more than one month before the date of final salary receipt. (Page 1, lines 6 to 35.)

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 1, line 36, to page 2, line 1.)

• Impact of Proposed Change, Possible Additional Months of Benefit Receipt. TRA law, on page 1, lines 8 to 13, continues to state that an annuity can not commence before termination of service and the application for a retirement annuity. Therefore, even with the proposed change a benefit can not commence while an individual remains an active employee. Therefore, the proposed strikeout may be justifiable, presumably being directed at situations where there is considerable delay in receiving the final salary payment. However, the change may result in benefit payments to certain individuals who under current law would have to continue delaying the date of the first retirement check. The issues are whether this is a benefit improvement which the Subcommittee and Commission feel is appropriate, and the accompanying minor cost impact it will have on the TRA fund.

ARTICLE 15

RETIREMENT ANNUITY PORTABILITY

Section 1. Minnesota Statutes, Section 3A.12, Subdivision 1, the Legislator’s Plan service-in-more-than-one fund provision, is amended to permit a covered legislator to use the provision if total service in all funds is at least six years rather than at least ten years. (Page 2, lines 4 to 34.)

Section 2. Minnesota Statutes, Section 356.30, Subdivision 1, the combined service annuity provision eligibility/benefit computation provision, is amended by requiring benefits to commence within five years from the applicable included plans, rather than within one year, if the combined service annuity benefit includes a benefit from the MSRS State Patrol Plan, the PERA Police and Fire Plan (PERA-P&F) or an annuity from the Minneapolis Employees Retirement Fund (MERF) computed under applicable provisions of the PERA-P&F Plan. (Page 2, lines 35 and 36, to page 5, line 24.)

Section 3. Effective Date: Sections 1 and 2 are effective July 1, 2004. (Page 5, lines 25 and 26.)

The Legislator’s Plan service-in-more-than-one fund provision is amended to permit a covered legislator to use the provision if total service in all funds is at least six years rather than at least ten years (Section 1). The issue is:

• Benefit Improvement. Various pension plans have service-in-more-than-one-fund provisions. These provisions were predecessors to the combined service annuity provision, which remain in law. Service-in-more-than-one-fund provisions allow service in other plans to be recognized for vesting purposes in the current plan. PERA’s comparable provision is Section 353.71, the MSRS-General provision is Section 352.72, and the MSRS State Patrol Plan provision is 352B.30. Teacher plans, and I believe MERF, also have these provisions. The provisions of these other plans generally match the vesting requirement in law for the plan, which is usually three years. In many of these plans, the length of service requirements in these service-in-more-than-one fund provisions were revised when vesting requirements in a given plan were revised.

Minnesota Statutes, Section 356.30, Subdivision 1, the combined service annuity provision eligibility/ benefit computation provision, is amended by requiring benefits to commence within five years from the applicable included plans, rather than within one year, if the combined service annuity benefit includes a benefit from the MSRS State Patrol Plan, the PERA Police and Fire Plan (PERA-P&F) or an annuity from the Minneapolis Employees Retirement Fund (MERF) computed under applicable provisions of the PERA-P&F Plan (Section 2).

The combined service annuity provision is a portability provision. It permits individuals who move from employment covered by one Minnesota public pension system to employment covered by another to receive total annuities from the applicable funds which roughly approximates the annuity that would have occurred if all employment had been within a single retirement system. In computing the annuities, the high-five average salary applicable to the last employment (assuming that is the highest) is used by all the funds to compute the annuities for the individual, and all the applicable plans compute the benefit based on the law in effect when the individual left the final plan, rather than the law in effect when the individual left each plan. Under current law, for a plan to be included within a combined service annuity calculation the individual must begin to draw benefits from all the applicable plans within a one-year period. This time range is comparable to what would occur if the individual had worked within a single plan. In that case, the annuity would commence on a specific day, rather than within a one-year time period. MSRS is suggesting that the one-year period be lengthened to five years when the service includes coverage in certain public safety plans.

This proposal is in part an effort to address problems caused by the retirement ages permitted in public safety plans compared to general employee plans. Public safety plans have a low normal retirement age, age 55, and individuals can retire as early as age 50 with minimal early retirement penalties. In contrast, general employee plans have a high normal retirement age (age 65 or higher), and while individuals can begin drawing an annuity as early as age 55 from these non-public safety plans, there is a considerable reduction due to early retirement. Presumably, the intention of MSRS with this proposal is to permit more individuals who have some public safety plan-covered service and some non-public safety plan-covered service to use combined service annuities.

Under existing law, for example, an individual with service in the PERA-P&F plan who is now employed in a position covered by MSRS-General may be reluctant to delay receiving the PERA-P&F benefit beyond age 55, but is also reluctant to terminate the MSRS-General coverage employment at that age because there would be a sizable early retirement reduction from the MSRS-General plan. The individual may conclude it is preferable to begin drawing the annuity from PERA-P&F while continuing to work in MSRS-General covered employment rather than terminating the MSRS-General employment. In that case the combined service annuity provision is not used, because the situation does not meet the requirement that the individual begins drawing the annuity from all the plans to be included in the combined service annuity provision within a one-year period.

Extending the window to five years rather than one year would create many more situations where the combined service annuity provision would be used. In the example above, the individual could begin drawing the PERA-P&F annuity while working several more years in MSRS-General covered employment. Providing the individual terminates from the MSRS-General covered employment not more than five years after starting to draw the PERA-P&F annuity, the individual can elect to have both plans included in a combined service annuity.

Although no specific language is included in the draft to indicate the precise nature of the computations, presumably the PERA-P&F annuity is adjusted for post-retirement increases for up to five years after the individual retired from that plan. The annuity is then replaced by a newly computed PERA-P&F annuity based on PERA-P&F law at the time of MSRS-General plan termination (including any benefit improvements that occurred since the PERA-P&F termination), and based on a new high-five average salary. The MSRS-General annuity would also commence.

This provision raises many issues:

1. Need for Change. This change is a benefit improvement and, unlike the provision discussed above, no claim can be made that this improves policy consistency. MSRS should be prepared to justify why this change is needed and is appropriate.

2. Lack of Specificity in the Benefit Calculations. The proposed revision indicates that benefits must commence within five years for all plans included in a combined service annuity computation, if one of a few mentioned public safety plans is included in the computation, but no language is provided indicating how the benefit calculations are to be done. This should be specified. Otherwise, the Legislature is being asked to authorize pension plan administrators to provide a benefit improvement with details to be specified by the administrators. It is also likely that there will be inconsistencies between plans, as different administrators interpret the vague language of this section in different ways. One of several issues that need to be addressed in drafting is the extent to which an individual will have access to benefit improvements that occur after the individual retires from the first plan until the combined service annuity is requested as much as five years later. Is it MSRS’s intention that any benefit improvement that has occurred in any of the plans to be included in the individual’s combined service annuity are to be included in that calculation, including benefit improvements that occurred in the plan or plans from which the individual is already drawing annuities?

3. Impact on Plans Other than MSRS. If enacted, this change will create both policy and cost implications for all combined service annuity plans. not just a few MSRS plans. This is a significant benefit improvement found in a bill that was presumed to address MSRS administrative issues. Given that this proposal is a benefit enhancement and will impose costs on many pension plans, the Subcommittee may choose to delete this provision.

4. Cost Increases. To the extent that this change results in higher annuities in total from the various plans, it is likely to increase the cost of nearly all the covered plans. Given the markets in recent years, all or nearly all plans have deteriorating funding levels; a few of these plans are having serious funding problems. Given the current situation, the Subcommittee may wish to carefully consider any proposal that may increase cost.

5. Complexity/Administration Issues. The provision makes an individual’s pension situation more complex, and makes counseling individuals more difficult. It also is likely to add to administrative burden due to a need to recompute annuities and the need to provide estimates under a range of scenarios months or years after the initial benefit commenced as individuals decide whether to have the annuities recomputed under a combined service annuity, or whether to continue the existing annuity.

6. Actuarial Liability Estimating Issues. Combined service annuities add cost and funding uncertainty to the plans. The pension fund administrators are not aware of past service that their covered members may have in other plans and, even if they did, it is uncertain which of these individuals will eventually use a combined service annuity. This current proposal is likely to increase the numbers of cases where combined service annuities are used.

Until the last few years, no effort was made to estimate the liability impact of combined service annuities in actuarial work. The impact was buried within an actuarial loss item. It was decided that some effort should be made to recognize these liabilities up front so that they are recognized as part of a plan’s funding needs. Lacking a way to precisely estimate these potential liabilities, the actuaries concluded that an additional load factor, little more than a rough guess, should be added to plan liabilities to capture the impact of combined service annuities. If the MSRS proposal is enacted, use of combined service annuities will increase and the cost impact will also increase by amounts that will be difficult to estimate, creating further uncertainty.

7. Scope of Included Plans. The drafting seems intended to provide certain new authority to individuals in plans with normal retirement ages of 55 or earlier. If that is the case, other plans will need to be added, specifically, the MSRS Correctional Plan and the PERA Local Government Correctional Plan, both of which have an age 55 normal retirement age.

8. Incentive Issues/Windfalls to Certain Public Safety Plan Members. The Subcommittee may wish to give careful attention to the incentives that a five-year window creates. The proposed change creates an incentive to game the situation, which is not in the best interest of the plans, the employers, and other contributors to these plans. Any increase in the window from one year seems difficult to justify, but five years seems extreme. Given the proposed wide window for public safety plan members, there is an incentive to commence drawing annuities from the specified public safety plans. In contrast, under current law there is at least some incentive to delay receipt of annuities from the public safety pension plans that provided coverage early in the individual’s career, because if receipt commences more than one year prior to termination from the final plan the earlier plans cannot be included in a combined service annuity. Under the proposal, after several years (not to exceed five) of starting to receive annuities from some of the plans, the individual can decide, given 20-20 hindsight, whether to continue those annuities or whether to have the annuities recomputed by including them in a combined service annuity calculation. The individual will choose to recompute the annuities if, given the passage of time, the combined service annuity will create a higher payout to the individual. Some factors that will impact the individual’s decision, all of which were unknowable when the earlier annuities commenced, are:

1. The individual’s salary progression following the commencement of annuities from the prior plans,

2. The level of post-retirement increases that occurred over time with those annuities, and

3. Whether the plans were amended to provide higher benefits since the date of initial annuity commencement.

Salary increases that were generous during the last high-five years will lead to more use of the combined service annuity, because that new high-five will be used to recompute the prior annuities. Weak post-retirement increases will lead to more recomputations, since it is more likely that the existing benefit with post-retirement increases is less than the recomputed benefit. Additionally, benefit increases enacted by the Legislature for a given plan will lead to more recomputations. Presumably, the five-year window gives retirees access to additional pension plan improvements that the Legislature passed and were enacted in the period, up to five years, between the commencement of annuities from the earlier plans and final retirement from the last covered plan. In effect, benefit increase becomes retroactive to a portion of a plan’s retired membership: those individuals who remain employed elsewhere covered by other public plans, and who are considering including the prior plan or plans in a combined service annuity.

9. Alternative Long-Term Approach. The problem MSRS seeks to address stems from two factors. There are several public pension fund systems in Minnesota, rather than one, and there are considerable differences in normal retirement ages in public safety plans compared to general employee plans. Regarding the first point, the combined service annuity provision attempts to improve portability between pension systems. This portability provision could be eliminated in its present form if systems were merged into one. Regarding the second point about the young ages at which public safety offers are permitted to retire, the retirement age issue could be addressed long-term by revising these retirement age policies. The general argument for a low retirement age in public safety plans is that the work is dangerous and strenuous, and requires a young workforce. The solution that has been used to date is to have a low normal retirement age and to provide a generous benefit. Typically, these individuals do not withdraw from the workforce. They become employed elsewhere, many in non-public-safety work, but some move to other public safety employment. The age at which former public safety workers fully retire from the workforce probably is not much different than is the case for other individuals. At some point, the Legislature may wish to address this retirement age issue, creating a plan or plans which discourage receipt of benefits at relatively young ages.

ARTICLE 16

REEMPLOYED ANNUITANT LIMITS

Section 1. PERA’s reemployed annuitant provision is revised by adding a subdivision (Subdivision 1b) to define "retirement age" for reemployed annuitant purposes to be retirement age as defined in Social Security law, United States Code, Title 42, Section 416(l). (Page 5, lines 29 to 33.)

Section 2. PERA’s reemployed annuitant provision (Section 353.37, Subdivision 3) is amended by removing reductions/reallocations if a reemployed annuitant is at least "retirement age", as defined in Social Security law. (Page 5, lines 34 to 36, to page 6, lines 1 to 12.)

Section 3. Effective Date. Section 1 and 2 are effective on July 1, 2004. (Page 6, lines 13 and 14.)

PERA’s existing reemployed annuitant provision, Section 353.37, uses as a trigger for when reductions/reallocations will occur the ages and "excess income" for the applicable age as determined under Social Security law. This is further clarified by the new definition provision, found in Section 1 of this article, providing a definition of "retirement age" for purposes of PERA’s reemployed annuitant law. Social Security law has been revised by stating that once an individual reaches "retirement age" as specified in Social Security law (age 65 or above, depending upon the age cohort), "excess income" no longer exists notwithstanding the level of an individual’s wage income.

Given those changes in Social Security law, Minnesota Statutes Section 353.37, subdivision 3, paragraph (b), of PERA law, appearing on page 6, lines 5 to 7, of the draft, is stricken because it is no longer operative. That paragraph only has effect if there is excess income, and excess income no longer exists once an individual achieves retirement age. Paragraph (c), appearing in page 6, lines 8 to 10, presumably is stricken because the age of complete exemption is now retirement age, not age 70.

Policy Issues Raised by Article 16

1. Appropriateness of Continuing to Tie Minnesota Law to Social Security Law. The issue is whether the Commission believes PERA reemployed annuitant law, and similar law found in other Minnesota plans, should continue to rely on retirement age and excess income as specified in Social Security law. If the Subcommittee does wish to consider a different policy, the revisions may be beyond the scope of the current draft, but it is an issue that the Commission may wish to consider for the longer term.

   Prior to federal law changes in 2000, excess income limits existed until age 70. Currently, it no longer exists after "retirement age," which is currently about age 65 but will eventually escalate to age 67. In recent years federal law has also been revised by considerably increasing the level of exempt income, leading to a corresponding reduction in amounts declared to be excess income. These changes at the federal level appear to be an effort to encourage older workers to remain in the workforce until later old age. This reflects federal employment policy to ease labor shortages that may occur as the post-World War II baby-boom generation continues to age, and who are followed by a smaller cohort of younger workers. This policy comes in part at the expense of the Social Security Old Age Insurance System, which continues to pay considerable benefits despite the earned wage income, although the increases in Social Security "retirement age" help to reduce that effect to some degree.

   Minnesota public policy is in some ways more complex. Rather than dealing with broad labor policy, Minnesota public pension policy deals at least in part with the specific relationship between a single employer and the employees of that government unit. The Minnesota pension system was designed to attract and retain capable employees, and to out-transition those employees at the end of their productive working careers by providing a benefit sufficient to avoid any substantial reduction in lifestyle during retirement. Consistent with these notions, reemployed annuitant provisions originally were quite harsh, greatly reducing the annuity payments to a reemployed annuitant who became reemployed in the same retirement system, or eliminating the annuity payments entirely until employment ceased. The provisions served to retain older workers and to discourage individuals from terminating service, commencing receipt of a retirement annuity, and then returning to their former employers. Over the years, however, these reemployed annuitant provisions have gradually been transformed, first by reducing the annuity penalties that occurred upon reemployment, and more recently by changing the provisions to benefit deferral provisions. Under current law, any annuity payments that would have been forfeited following reemployment are now deferred, with the deferred amounts transmitted to an account for the individual, payable with interest when the individual turns age 65 or later. (These accounts are specified under Minnesota Statutes, Section 356.47.)

   The changes that occurred recently at the federal level (eliminating the excess income determination for individuals of retirement age or older, and increasing exempt income limits for those below retirement age) have the effect of reducing amounts that are transferred to the holding accounts under Section 356.47 and permitting more of the monthly retirement benefit paid by PERA to be received currently by the reemployed individual.

   The current purpose of the reemployed annuitant provisions is somewhat unclear. They might be considered as a tool to allow some individuals to transition into full retirement. However, there may be an element of windfall. The retirement benefit the individual is receiving, if he or she had long service prior to drawing the annuity, is intended to be sufficient to support an individual in full retirement without any substantial reduction in the standard of living. That benefit plus the reemployment income (plus Social Security or any other applicable benefit payments) may create situations where the total income is considerably higher than the individual would receive if he or she had continued in employment, instead of terminating employment and commencing receipt of the annuity and returning to work with the same employer, or another employer who is covered under the same retirement system.

2. Scope. MSRS, TRA, the first class city teacher plans, and possibly other plans have reemployed annuitant provisions. All of these plan provisions may need revision to remove inoperative language, given recent changes in federal law. If the Commission concludes that the changes proposed in the bill for the PERA reemployed annuitant provision are appropriate, the Subcommittee may wish to direct staff to revise language in the reemployed annuitant provisions in these plans where appropriate.

ARTICLE 17

EARLY RETIREMENT ELIGIBILITY

Section 1. Minnesota Statutes, Section 352C.031, Subdivision 2, the Elected State Officers Plan early retirement provision, is amended to permit early retirement as early as age 55 rather than age 60. (Page 6, lines 17 to 26.)

Section 2. Minnesota Statutes, Section 490.121, Subdivision 10, the Judges Plan early retirement date provision, is revised to allow early retirement as early as age 55 rather than age 62. (Page 6, lines 27 to 34.)

Section 3. Effective Date. Sections 1 and 2 are effective on July 1, 2004. (Page 6, lines 35 and 36.)

The MSRS-Elected State Officer Plan early retirement revision provision (Section 1) is revised to permit retirement as early as age 55, rather than age 60. No change is proposed in current law benefit reduction language, which requires the benefit to be reduced by one-half of one percent per month (six percent per year) from the age at retirement until age 62. Some issues are:

1. Retroactive Application. According to the most recent information we have, there are four deferred members and no active members in this plan. In general, individuals are subject to the benefit plan in law at the time of individual terminated covered plan employment. Given that interpretation, the proposed benefit change applies to no one. MSRS is proposing this change in a closed pension plan with no active members. An explanation should be provided as to why this provision is in the draft. If the intent is to apply this provision to individuals who are deferred members at the time this provision is enacted into law, the laws, rulings, or other interpretations that justify that treatment should be indicated. The concern is that enacting this provision may lead to a presumption that benefit change laws have retroactive application, which creates windfalls and could made it prohibitively expensive for the Legislature to make desirable changes in pension plans.

2. Drafting Issue. If the Subcommittee believes this section should remain in the draft, it would be advisable to add language in this provision specifying to whom this revised law is to apply.

3. Cost. It is staff’s understanding that the benefit reduction in current law is greater than a full actuarial reduction. If so, there is no recognized cost to the MSRS proposal, and there could be a gain, but there also is a cash-flow consideration. Benefit payments to constitutional officers are not paid from a retirement fund. Rather, they are covered by appropriations from the state’s General Fund. Thus, this change in benefit law could accelerate the date upon which payments from the General Fund begin for certain currently deferred annuitants, accelerating the need to make General Fund appropriations.

The Judges Plan early retirement date provision is revised to allow early retirement at age 55 rather than age 62 (Section 2). Some policy issues are:

1. Encouragement of Early Retirement. The Subcommittee may wish to consider whether there is any policy justification to encourage judges to retire early.

2. Plan Design Issues. The push for an age 55 early retirement age for the plan may reflect a problem with plan structure. The accrual rate might be excessive for an individual who becomes a judge at a relatively young age. Those individuals can create a sizable pension benefit by their mid-50s, and may be most interested in revising the plan to permit them to draw a benefit as early as age 55. In any of the teacher plans, in PERA-General, and in MSRS-General, an individual who works to the normal retirement age, approximately age 65, will have an accrual rate of 1.7 percent of the high-five average salary for each year of covered service. The Judges Plan accrual rate is 3.2 percent of the high-five average salary for each year of service, nearly twice the accrual rate in the general employee plans. That accrual rate may be justified as necessary to attract older, more experienced individuals into judicial service, but the Judges Plan accrual rate may create a lucrative windfall for individuals who enter judicial service at a relatively young age.

3. Reemployment Issues/Possible Abuse of Pension Plan Purpose. The Subcommittee may wish to consider whether permitting an age 55 early retirement in the Judges Plan may lead to relatively young judges terminating and drawing the benefit, only to have them return to judicial service, and whether that situation can be viewed as good public policy. The accrual rate in the Judges Plan is currently 3.2 percent per year. The plans does have an accrual cap of 76.8 percent of the high-five average salary, which at the current accrual rate a judge would hit after 24 years of service. (Under current law, contributions after the cap is reached are placed in a defined contribution account for the judge, in the MSRS Unclassified Program.) It is unlikely that a judge who begins drawing a retirement annuity from the plan at age 55 or shortly thereafter will withdraw from the labor market. Staff is not aware of any Judges Plan reemployed annuitant provision, which would reduce or in some way defer all or part of the Judges Plan benefit if the individual returns to employment as a judge. Under the MSRS proposal, it is possible judges could terminate service in their mid-50s, begin drawing a significant benefit, and become reemployed as a judge. The Subcommittee may wish to explore whether a retired judge who is rehired as a judge can earn a significant salary.

4. Consistency with Other Plans. Permitting early retirement at age 55 would make this Judges Plan feature consistent with early retirement policy in general employee plans covering state workers, teachers, and local and county public employees. However, an issue is whether judges are sufficiently similar to teachers and other general employee plan covered employees to warrant a similar minimum early retirement age. Judges may not face stresses, particularly physical stresses, similar to those found in some other general employee plan employment positions. Judges may also tend to have much older entry ages than other plans. If that is the case, and if the plan is appropriately structured, there is less justification for an age 55 early retirement age in the Judges Plan. The stresses of the work may not warrant it. The late entry age, if the plan accrual rate is set at a reasonable level, may not permit a typical judge to accrue a sufficient pension benefit by his mid-50s to make retirement feasible.

5. Cost. The issue is the cost of the early retirement changes. The current plan permits early retirement (at age 62 rather than age 55) with a one-half percent reduction per month from the normal retirement age (six percent per year). MSRS administrators have claimed in the past that this exceeds an actuarial reduction. The new proposal includes an actuarial reduction (discussed in the next article of this draft) if that provides a lesser penalty. Therefore, the proposal may cause the plan to forgo gains that would otherwise occur under the existing policy, and there may be more cases of early retirement.

ARTICLE 18

EARLY RETIREMENT REDUCTION

Section 1. Minnesota Statutes, Section 490.124, Subdivision 3, the Judges Plan early retirement annuity computation provision, is revised to permit an actuarial equivalent reduction if that provides a higher benefit than the one-half of one percent per month reduction in current law. (Page 7, lines 3 to 14.)

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 7, lines 15 and 16.)

The proposed change, coupled with the reduction in early retirement age to age 55 discussed under the previous article, raises the following issues:

1. Cost. The issue is the cost of the early retirement changes. The current plan permits early retirement (at age 62 rather than age 55) with a one-half percent reduction per month from the normal retirement age (six percent per year). MSRS administrators have claimed in the past that this exceeds actuarial reduction. The new proposal includes an actuarial reduction if that provides a lesser penalty. Therefore, the proposal may cause the plan to forgo gains that would otherwise occur under the existing policy, and there may be more cases of early retirement.

2. Encouraging Early Retirement. The issue is whether there is a public policy need to encourage early retirement by judges.

ARTICLE 19

DISABILITY DEFINITIONS AND ELIGIBILITY

Section 1. Minnesota Statutes, Section 352.95, Subdivision 1, the MSRS-Correctional Plan job-related disability benefit provision, is amended by clarifying the provision and by specifying that in order to qualify, the impairment must be expected to last at least one year. (Page 7, lines 19 to 33.)

Section 2. Minnesota Statutes, Section 352.95, Subdivision 2, the MSRS-Correctional Plan non-job-related disability benefit provision, is amended by clarifying the provision and by specifying that in order to quality, the impairment must be expected to last at least one year. (Page 7, lines 34 to 36, page 8, lines 1 to 9.)

Section 3. Minnesota Statutes, Section 352B.10, Subdivision 1, the State Patrol Plan job-related disability benefit provision, is amended by clarifying the provision and by specifying that in order to qualify, the impairment must be expected to last at least one year. (Page 8, lines 10 to 22.)

Section 4. Minnesota Statutes, Section 352B.10, Subdivision 2, the State Patrol Plan non-job-related disability benefit provision, is amended by clarifying the provision and by specifying that in order to qualify the impairment must be expected to last at least one year. (Page 8, lines 23 to 36, page 9, lines 1 to 3.)

Section 5. Repealer. Minnesota Statutes, Section 490.11, a probate court judge disability application provision which required the Governor to determine whether disability exists, is repealed. (Page 9, lines 4 to 5.)

Section 6. Effective Date. Sections 1 to 5 are effective on July 1, 2004. (Page 9, lines 6 and 7.)

• Nature of Change. The issue is whether the revisions to these sections reflect substantive policy changes worthy of Subcommittee review, or whether the changes are best considered as clarification or technical changes. The changes appear to be non-substantive clarifications. Several sections are amended to indicate that a disability must be expected to last at least a year to be eligible for disability benefits. This is a statement of standard policy in most plans, and is generally stated in the total and permanent disability definition section of the applicable chapter, or in related sections. Thus, adding the "at least one year" language is not a substantive change. The repeal of Section 490.11, which required the Governor to determine whether a probate court judge is disabled, has little impact, if any. In practice, the MSRS staff and the MSRS Board, who administer the MSRS Judges Plan, would have made these determinations.

ARTICLE 20

DISABILITY APPLICATIONS

Section 1. Minnesota Statutes, Section 354.48, Subdivision 2, TRA’s disability application provision, is revised to clarify that a disability benefit application must be in writing and on a form prescribed by the Executive Director. (Page 9, lines 10 to 24.)

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 9, lines 25 and 26.)

This article raises no policy issues.

ARTICLE 21

DISABILITY DETERMINATIONS; EVIDENCE;
STANDARD AND EXPERT ASSISTANCE

Section 1. Minnesota Statutes, Section 352.95, Subdivision 1, the MSRS Correctional Plan medical or psychological evidence of disability provision, is amended by clarifying that a psychologist who is assigned to examine the applicant must make a written report. (Page 9, lines 30 to 36, page 10, lines 1 to 30.)

Section 2. Minnesota Statutes, Section 352B.10, Subdivision 4, the MSRS State Patrol Plan proof of disability provision, is amended by clarifying language. (Page 10, lines 31 to 36, page 11, lines 1 to 4.)

Section 3. Minnesota Statutes, Section 353.33, Subdivision 4, PERA’s disability eligibility determination procedure, is revised by requiring a signed medical report rather than general medical evidence; and by specifically authorizing a wide range of practitioners (licensed physicians, psychologists, and chiropractors) to provide and sign disability reports. (Page 11, lines 5 to 26.)

Section 4. Minnesota Statutes, Section 353.33, Subdivision 6, PERA’s disability continuing eligibility provision, is amended by requiring a signed medical report rather than general medical evidence; and by specifically authorizing a wide range of practitioners (licensed physicians, psychologists, and chiropractors) to sign those reports. (Page 11, lines 27 to 36, page 12, lines 1 to 10.)

Section 5. Minnesota Statutes, Section 353.33, Subdivision 6b, PERA’s medical advisor duties provision, is amended by authorizing psychologists and chiropractors to act as medical examiners and by including general healthcare statements among the materials that may be reviewed. (Page 12, lines 11 to 26.)

Section 6. Minnesota Statutes, Section 354.48, Subdivision 4, the TRA evidence of disability provision, is amended to authorize licensed psychologists to provided disabilitant examinations and to file written reports. (Page 12, lines 27 to 36, page 13, lines 1 to 13.)

Section 7. Minnesota Statutes, Section 354.48, Subdivision 6, a TRA provision requiring periodic examinations for continued disabilitant eligibility, is amended to permit psychologists to provide examinations relating to a claim of mental impairment. (Page 13, lines 14 to 31.)

Section 8. Minnesota Statutes, Section 354.48, Subdivision 6a, a TRA medical advisor duties provision, is amended to permit the medical advisor to designate licensed psychologists to provide examinations relating to a claim of mental impairment. (Page 13, lines 32 to 36, page 14, lines 1 to 12.)

Section 9. Minnesota Statutes, Section 354A.36, Subdivision 4, the first class city teacher plan determination of disability provision, is amended to authorize the applicable pension fund board to designate licensed psychologists to provided disabilitant examinations and to file written reports. (Page 14, lines 13 to 36, page 15, lines 1 to 8.)

Section 10. Minnesota Statutes, Section 354A.36, Subdivision 6, a first class city teacher plan provision requiring periodic examinations for continued disabilitant eligibility, is amended to permit psychologists to provide examinations relating to a claim of mental impairment. (Page 15, lines 9 to 36, page 16, lines 1 to 11.)

Section 11. Effective Date. Sections 1 to 10 are effective on July 1, 2004. (Page 16, lines 12 and 13.)

1. Issues: Inclusion of Psychologists. The laws for several plans would be revised to permit psychologists to examine an applicant for disability and to file a report with the medical advisor to the applicable pension plan board. The new proposed language generally requires these psychologists to be licensed. The Subcommittee may wish to explore through testimony the nature of that licensing and the educational or other requirements necessary to qualify for the license. Psychiatrists are licensed physicians, so under existing law they are permitted to serve as medical advisors to a retirement board, or to perform examinations relating to disability. Adding psychologists could be viewed as reasonable and fair, or as unnecessary given the at least partial duplication in expertise provided by psychologists and psychiatrists.

2. Issues: Inclusion of Chiropractors. The issue is whether it is appropriate to authorize chiropractors to do disability examines and to file report relating to a disability claim. PERA is proposing to add that authority. It is not currently proposed to be added to the MSRS-Correctional plan disability provision, which is Section 1 of this article. However, in the existing MSRS-General disability provision dealing with medical evidence, a licensed chiropractor, physician, or psychologist is permitted to provide examinations and submit reports on these claims. The proposals in this article for TRA and the first class city teacher plans do not propose to add authority in those plans for chiropractors. Thus, current law is inconsistent, and the proposal does not create full consistency.

3. Position of Plan Administrators. The Subcommittee may wish to hear brief testimony from plan administrators regarding the changes they would support.

ARTICLE 22

DISABILITY BENEFIT AMOUNT

Section 1. Minnesota Statutes, Section 352D.065, Subdivision 2, the MSRS Unclassified Program disability provision, is revised to permit more flexibility over partial payouts by permitting a payout of any portion of the disabilitant’s account value and an annuity based on the remainder. (Page 16, lines 16 to 26.)

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 16, lines 27 to 28.)

• Impact of Change. The MSRS Unclassified Program is a defined contribution plan. The change has no cost implications for the employer and permits a disabilitant more flexibility in creating a disability benefit payment stream. The proposal does not increase the maximum lump sum payout. Under existing law, a disabilitant could choose to withdraw the full value of the account in a lump sum.

ARTICLE 23

RECOMPUTED DISABILITY BENEFIT

Section 1. Minnesota Statutes, Section 352B.105, the State Patrol Plan provision specifying the transition from disability status to normal retirement status (which occurs at age 65 or on the five-year anniversary of the effective date of the disability, whichever is later), is clarified. (Page 16, lines 31 to 36.)

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 17, lines 21 and 22.)

The proposal raises no policy issues.

ARTICLE 24

WORKERS’ COMPENSATION COORDINATION

Section 1. PERA’s disability benefits/workers compensation coordination provision (Section 353.33, Subdivision 5) is amended to delete specific forms of workers’ compensation benefits and to replace them with a general requirement to coordinate PERA disability benefits with any amounts received under workers’ compensation law that represent wage loss. (Page 17, lines 25 to 36, page 18, lines 1 to 9).

Section 2. Repealer. Minnesota Statutes, Section 353.33, Subdivision 5b, an obsolete provision which specified a one-time change in PERA disability benefit levels that was to occur on July 1, 1987, is repealed. (Page 18, lines 10 to 12.)

Section 3. Effective Date. Sections 1 and 2 are effective on July 1, 2004. (Page 18, lines 13 and 14.)

• Impact of Section 1. The issue is whether Section 1 reflects a change in policy or is simply a technical change. The present law lists certain specific types of workers’ compensation benefits with which PERA must coordinates its disability benefits. The specific types of benefits listed, and which are now being stricken, are "temporary total, permanent total, temporary partial, permanent partial," and "economic recovery compensation benefits." These are replaced with a requirement to coordinate with any workers’ compensation benefit "that represents wage loss." The proposed change may be a way for PERA keep the intent of this PERA section while avoiding a need to revise this PERA law whenever the name of a workers’ compensation benefit is changed, or a similar benefit is created. The Subcommittee may wish to verify through brief testimony that that is PERA’s intention, and to ensure that no one is harmed by the proposed change.

ARTICLE 25

TEMPORARY REEMPLOYMENT OF A DISABILITANT

Section 1. Minnesota Statutes, Section 352.113, Subdivision 7, the MSRS-General disabilitant partial reemployment provision, is amended by waiving any disability benefit reduction or termination which would otherwise apply during the first six months of employment. (Page 18, lines 17 to 25.)

Section 2. Minnesota Statutes, Section 352B.10, Subdivision 3, a MSRS State Patrol Plan provision dealing in part with partial reemployment of disabilitants, is clarified. (Page 18, lines 26 to 36, page 19, lines 1 to 3.)

Section 3. Minnesota Statutes, Section 353.33, Subdivision 7, PERA’s disabilitant partial reemployment provision, is amended by stating that the provision is applicable to individuals who continue to meet PERA’s definition of total and permanent disability and who have income from work that is not substantial gainful activity, rather than those who resume a gainful occupation. (Page 19, lines 4 to 22.)

Section 4. Section 1 is repealed on July 1, 2006. (Page 19, lines 23 to 24.)

Section 5. Sections 1 to 4 are effective on July 1, 2004. (Page 19, lines 25 to 26.)

Sections 1 and 4 are an effort by MSRS to create a temporary program to encourage individual disabilitants to return to gainful employment. Any disability benefit reduction which would otherwise apply during the first six months of employment are waived. The provision is repealed on July 1, 2006, but could be continued by legislative action to repeal the repealer if the program demonstrates that it is an effective tool to transition people back to work. Issues are:

1. Need for Change/Nature of Change. The issue is whether this is a well-crafted proposal worthy of support. Presumably, MSRS wants to create a financial incentive for disabilitants to return to work and to avoid any harm to the individual if, after a brief attempt at reemployment, the individual is unable to continue due to his or her condition. The Subcommittee may find it useful to hear from MSRS why proposed this approach, and why six months, rather than some other period, is the appropriate length of the waiver period.

2. Cost. The change will have some minor impact on the plan, probably in the form of a forgone gain. Disability benefit will not terminate until at least six months later than under existing law, leading to longer disability benefit payouts.

3. Program Design Issues. Under MSRS law, an individual who is presently disabled but is expected to recover fully can be entitled to disability benefits, because an individual who is totally disabled and is expected to remain disabled for a year qualifies for benefits. An issue is whether these "short-term" total disabilitants should be eligible for this proposed program. As this proposal is drafted, an individual who is fully expected to recover will return to work and continue to receive disability benefits for another six months. For some individuals, this program may represent a windfall rather than a necessary financial inducement to get them back to work. Perhaps it would be better to target this program only at certain "problem cases," those who have been on disability for many years, but there is no language in the draft to do that.

   Another concern is whether the design of this program will encourage some individuals to return to employment for a few months, during which they supplement their disability benefit with a partial or full salary, but then terminate prior to the end of the six-month period. Perhaps there is a need to consider how many times an individual can return to partial or full employment and have the benefit of this proposed program.

4. Concerns about Current Disabilitant Review Practice. Under existing law, MSRS, like all of the major Minnesota pension plan systems, are required to have any individual making a disability application to submit medical evidence and to be examined by one or more physicians. If the MSRS staff or board determine based on that evidence that the individual is permanently disabled, which under MSRS-General law means the individual is unable to undertake an gainful employment due to the medical condition, then disability benefits are provided. Periodically thereafter, the individual is subject to reexamination, and if the evidence indicates that the individual can hold gainful employment, applicable MSRS law states that disability benefits must terminate. If eligibility for disability benefits depends on a medical determination, it is unclear why MSRS is proposing a program which seems intended to coax people off disability. The Subcommittee may wish to hear testimony from MSRS on this matter.

ARTICLE 26

OPTIONAL DISABILITY BENEFIT FORMS

Section 1. Minnesota Statutes, Section 352B.10, Subdivision 5, an MSRS State Patrol Plan disabilitant optional annuity provision, is clarified. (Page 19, lines 29 to 36, page 20, lines 1 to 7).

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 20, lines 8 and 9.)

The article raises no policy issues.

ARTICLE 27

ERRONEOUS DEDUCTIONS

Section 1. Minnesota Statutes, Section 354.42, Subdivision 7, TRA’s erroneous salary deductions or direct payments provision, is amended by stating that any refund or transfer of erroneous deductions which, if made, would cause the plan to be out of compliance with Internal Revenue Code (IRC) qualified plan requirements must not be refunded or transferred. Instead, the employer would receive a credit against future contributions, and the employer is made responsible for refunding any amounts erroneously deducted from an employee. (Page 20, lines 12 to 36, page 21, lines 1 to 24.)

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 21 lines 25 to 26.)

This article is from the USERRA/federal compliance bill, H.F. 1086 (Smith); S.F. 806 (Betzold). As noted earlier in the introductory comments of this memo, TRA and the SPTRFA, the two lead organizations requesting these changes, should make a convincing case for these proposed changes. They should provide the Subcommittee with specific citations and the language in the applicable federal code, ruling, or other document mandating these changes, and should indicate which other states have amended their laws in the manner being proposed here.

Staff’s best reading of federal law is that Section 1 may be in response to Internal Revenue Code (IRC) Section 401(a)(2). That provision states that to retain qualified plan status, fund assets must not be used other than for the exclusive benefit of the members. When contributions are received by the fund, this exclusive benefit concern leads to the question of whether erroneous contributions can be refunded or sent to the proper retirement fund without violating the exclusive benefit rule. A statement in IRC Section 401(a)(2), indicates that after six months the contribution, even if erroneous, must remain in the fund. A TRA-supplied summary initially provided to us did not include any specific reference to federal law but claims that contributions in error can not be refunded after one year, not six months. The Commission may be interested in having TRA identify the specific provision or provisions of federal law it contends are pertinent, and justify the specific change in TRA law that it proposed in this bill.

More specific issues are:

1. Need for Change. The issue is whether the Subcommittee concludes there is a need to revise this TRA provision for IRC qualification purposes, and whether the proposed change adequately meets pertinent federal requirements.

2. Disagreements Between Fund Administrations Regarding Need for Change. The various public pension plan systems do not unanimously support this type of suggested change. MSRS has a provision similar to that of TRA (Minnesota Statutes, Section 352.04, Subdivision 9). Some months ago, Commission staff was working with MSRS on an MSRS administrative provisions/benefit improvement bill draft. Given TRA’s contention regarding changes it recommends for its erroneous salary deduction provision, presumably for federal law compliance, staff suggested that MSRS may wish to consider similar changes in the corresponding MSRS provision. After some consideration, MSRS rejected the similar suggested change. Thus, there is disagreement between retirement systems regarding the need to revise erroneous deduction provisions.

3. Scope. The issue is the proper scope, assuming some change is appropriate. If TRA is correct that this change is appropriate and that all plans must follow this policy to ensure they retain qualified plan status, then the Subcommittee may conclude that, in lieu of a change in TRA law, it would be best to direct staff to draft a provision to be coded in Chapter 356, Retirement Systems, Generally, to be applicable to all plans.

ARTICLE 28

RETIREMENT FUND TRANSFERS

Section 1. Minnesota Statutes, Section 354B.32, a provision in IRAP statutes that temporarily 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. This transfer right terminates on July 1, 2004. (Page 21, lines 29 to 36, page 22, lines 1 to 24.)

Section 2. Effective Date. Section 1 is effective on July 1, 2004. (Page 22, lines 25 and 26.)

1. Impact of Change. Under general IRAP law, individuals have access to the value of their IRAP account upon termination of service. Under Section 354B.32, however, which was passed during the 2001 First Special Session, individuals who transfer assets from TRA or a first class city teacher fund into their IRAP account are unable to access that portion of their IRAP account until retirement, rather than upon termination of service. The proposed change would allow access to all assets in the IRAP account upon termination of service. The Subcommittee may wish to hear brief testimony on why Section 354B.32, when it was considered and passed in 2001, included the requirement that the transferred assets could not be moved until retirement.

2. Timing Concern, Possible Repealer. If the Subcommittee concludes that it would be appropriate to add the right to withdraw these assets at termination of service rather than at retirement, the Subcommittee may wish to consider repealing this section rather than amending it. Under existing law, in a portion of Section 354B.32 which is not proposed for revision, the right to make a transfer expires on July 1, 2004 (see page 22, lines 23 and 24). The proposed change, however, governing access to the transferred assets, will not be effective until July 1, 2004. If Section 354B.32 were to be repealed effective July 1, 2004, the date the transfer right terminates under the existing statute, presumably all individuals who previously used this provision of law to make a transfer to their IRAP account will have their entire IRAP account governed under other provisions of law from that date forward. Since no law would require the transferred portion to be treated any differently than the remainder of the account, individuals would have access to the entire amount upon termination of employment. That should have the same effect as the proposed change in law, without the need to continue this provision in statutes.

ARTICLE 29

INTERNAL REVENUE CODE COMPLIANCE.

Section 1. New Section, proposed coding as Section 356.635, Internal Revenue Code Compliance, presumably to be applicable to all plans. Subdivision 1 requires receipt of a retirement benefit to begin by age 70½, or April 1 of the calendar year following the calendar year in which the individual terminates employment, whichever is later. Subdivision 2 requires that all distributions, including incidental death benefit provisions, conform to IRC Section 401(a)(9) requirements. Subdivision 3 requires that after December 31, 1992, terminated members be permitted to have eligible rollover distributions (distributions other than monthly disability benefits, monthly retirement benefits, or similar periodic distributions) to other eligible retirement plans. Subdivision 4 is an eligible rollover distribution definition. Subdivision 5 describes amounts which are not eligible rollovers, which include any distribution of a monthly or periodic nature, such as monthly disability benefits, monthly retirement benefits, and monthly survivor benefits. Subdivision 6 defines eligible retirement plans, which include plans under IRC sections 401(a), 403(a), 403(b), 408(b), and 457. Subdivision 7 describes eligible distributees. Section 8 specifies that any defined benefit plan must not apply forfeitures to increase the benefits any employee would otherwise receive under the plan. Subdivision 9 specifies that contributions, benefits, and service credit relating to military service must conform to USERRA requirements, unless the state provision is more generous than USERRA. (Page 22, lines 29 to 36, to page 25, line 6.)

Section 2. Effective Date. Section 1 is effective on the day following final enactment and has retroactive application as indicated within that section. (Page 25, lines 7 to 10.)

1. Need for Change. TRA and SPTRFA should provide the Subcommittee with specific citations and the language in the applicable federal code, ruling, or other documents mandating the changes contained in Section 1 of this article, and TRA and SPTRFA should indicate which other states have amended their laws in the manner being proposed here.

2. Retroactive Issues/Drafting. This new proposed section of law contains numerous statements that suggest retroactive application, and if the provision is enacted and codified, its drafting would give the reader a false impression that the provision had been enacted many years earlier. In other cases, the Legislature and Governor are being asked to enact language that is obsolete before it is enacted. The Subcommittee may wish to decide whether this inclusion of retroactive statements and obsolete provisions is appropriate.

   Legal consultants retained by TRA and SPTRFA specifically for the federal law compliance/plan qualification review insist that this retroactive language and the obsolete provision ought to remain in the draft, although it could be repealed soon afterward. The general contention is that IRS staff who would be reviewing Minnesota public pension plan laws to determine whether the applicable plan meets all requirements for qualified status would want to see a road map, indicating that a plan had in its laws applicable federal law compliance language, effective when these federal requirements were first required. In truth, however, none of these provisions would be added to Minnesota law until 2004, assuming that the Commission and Legislature recommend adoption. Thus, the drafting is deceptive and could require further legislative action in a future year to remove old effective dates stated within the section of law and to remove obsolete provisions.

   The drafting gives the impression, assuming someone at the federal level was unaware that this entire section of law was not enacted until 2004, that laws governing Minnesota public pension plans in general met all federal mandates in all prior years and at the current time. The issue should be whether the pension plans meet these requirements currently, and into the future. If the IRS had done a plan qualification review in the past and found that the plan was out of compliance, the IRS would insist that the plan have its laws revised to bring it into compliance. Therefore, it would seem that the important issue is whether the plan is in compliance now and into the future. It may not be appropriate to give an impression of past compliance, based on a law to be passed in 2004 with several retroactive start dates.

   The Subcommittee may wish to consider removing language that suggests retroactive application and removing language that is obsolete before it is enacted. Language that suggests retroactive application appears on the following pages:

   Page 22, lines 30 and 31

   Page 23, lines 1 and 2

   Page23, lines 7 and 8

   Page 24, line 7

   Page 24, line 17

   Page 25, line 3

   Language which is obsolete before it would be enacted appears on the following pages:

   Page 23, lines 25 and 26

   Page 24, lines 12 to 16

3. Forfeiture: Volunteer Fire Issue. Page 24, lines 35 and 36, page 25, lines 1 and 2, state that in defined benefit plans benefit forfeitures by some individuals may not be applied to increase the benefits any other employee would otherwise receive under the plan. This provision has been given considerable attention to craft the language to presumably be consistent with federal requirements while not inadvertently and unnecessarily harming any plan, including volunteer fire plans, but further review is warranted. The initial drafting would have applied to all plans of all types, and may have had the effect of voiding the current funding structure used by split-the-pie volunteer fire plans.

   All interested parties should carefully review the provision to ensure that the drafting of the applicable subdivision (Subdivision 8) is fully consistent with federal requirements and that it does not cause any unnecessary harm.