H.F. 1432 (Ozment); S.F. 858 (Pogemiller) establishes four programs that may be of assistance in producing State government budget savings, which are:

1. Temporary Targeted Early Retirement Incentive. A temporary targeted early retirement incentive program is established, applicable to the period following final enactment to September 1, 2003, for an executive or a legislative branch employee who has at least five years of major Minnesota defined benefit pension plan coverage, who is immediately eligible to a retirement annuity upon retirement, who terminates State service between final enactment and September 1, 2003, and who is offered the incentive by the State employee�s employing unit. The incentive is a dollar amount up to $15,000, which may be used only in one of three ways:

   1. for deposit in the employee�s healthcare savings plan under Minnesota Statutes, Section 352.98;

   2. for the purchase of allowable service credit for unperformed employment sufficient in combination with proceeds from the person�s deferred compensation program account to qualify for the "Rule of 90" early normal retirement age provision if employment terminates after July 15, 2003; or

   3. for the purchase of a term certain annuity or a life annuity under the Minnesota State Retirement System Unclassified State Employees Retirement Program (MSRS-Unclassified). (Section 1)

2. Reduced Employment and Retirement Annuity Receipt. Additionally, a State employee covered under the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the State Correctional Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional), or the Unclassified State Employees Retirement Program of the Minnesota State Retirement System (MSRS-Unclassified) 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 2)

3. Reduction in Employment to Half Time. Also, a State employee is permitted to reduce their work hours to half-time and continue to make full member contributions, have full employer contributions made on their behalf, and receive full allowable service from the applicable pension plan administered by MSRS. (Section 3)

4. 1,040 Hour Voluntary Leave. In addition, a State government employer may allow State employees to take a voluntary leave of 1,040 hours during the fiscal years 2004-2005 biennium and continue to make the balance of full member and employer contributions during the leave. (Section 4)

Minnesota has utilized several early retirement incentives in connection with its public employee workforce over the past several years. 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 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. 1432 (Ozment); S.F. 858 (Pogemiller) creates four early retirement incentive or related programs, as follows:

1. Early Retirement Incentive. An executive or legislative branch employing unit may offer up to $15,000 to an employee who is immediately eligible to retire, who has at least five years of Minnesota public pension plan coverage, and who retires before September 1, 2003. The incentive may be deposited into the person�s post-retirement healthcare savings account, or used in combination with Deferred Compensation Program assets to purchase enough service credit to qualify for the "Rule of 90," or used to purchase an annuity from the Unclassified State Employees Retirement Program of the Minnesota State Retirement System (MSRS-Unclassified);

2. Phased Retirement Option. An MSRS-General State Employees Retirement Plan (MSRS-General) member who is employed on a half-time basis or more, agrees to a reduced work schedule of 25 percent down to no more than half-time, and qualifies for an immediate unreduced MSRS-General annuity may receive the annuity without any reemployed annuitant earnings limitation reduction or suspension;

3. Voluntary Hour Reduction Plan. A State employee who is employed on at least a half-time basis and who is covered by a pension plan administered by MSRS may reduce work hours to half-time or less and may receive full pension plan allowable service credit with the payment of full member contributions. The employing unit would pay the full employer contributions; and

4. Voluntary Unpaid Leave of Absence. A State employing unit may allow an employee to take an unpaid leave of absence for up to 1,040 hours during the fiscal years 2004-2005 biennium, with the employee eligible to pay the member and employer contributions during the leave period.

The proposed legislation raises several pension and related public policy issues that may merit Commission consideration and discussion, as follows:

1. Ambiguity in Specifying Agencies Allowed to Offer Incentive. The policy issue is the ambiguity in the provision in specifying the State agencies that would be permitted to offer the early retirement incentive. The provision references "an agency in the executive branch" or "a legislative employer." There is confusion about which agencies are in the executive branch, such as the Minnesota State Colleges and Universities System (MnSCU), the University of Minnesota, the Minnesota State Retirement System (MSRS), or the Minnesota Historical Society. The intent of the provision appears to be the provision of a personnel management tool to agencies funded wholly or significantly from the State General Fund that will be the most affected by the fiscal year 2003 and fiscal year 2004 budget balancing efforts. The incentive program would benefit from a more careful delineation of the employing entities that the provision is intended to cover. Amendment LCPR03-083 attempts to define the entities in the executive branch which may make the early retirement incentive offer.

2. No Monitoring of or Final Approval Over the Designation of Employees to be Offered Incentive as Check on Fiscal Impact. The policy issue is the lack of any mechanism for the monitoring of or granting final approval over agency designation of employees to be offered an early retirement incentive in order to insure that there is an actual fiscal savings and in order to minimize any potential discrimination or other impropriety in making the designations and offers. While the up-front cost to the employing unit of up to $15,000 in offering an early retirement incentive should insure that the early retirement incentive program in each agency is targeted, inadvertent mistakes are still possible that could be avoided if some review or approval process is utilized and some mischief could occur where State employees with political, social, or family connections are inappropriately included in the early retirement incentive offer, but could be avoided with a "second look" review or approval process. Amendment LCPR03-084 requires approval from the Commissioner of Finance before an early retirement incentive offer can be made.

3. Using Pension Plan Service Credit Does Not Necessarily Target Long-Term, Higher-Paid State Employees. The policy issue is the appropriateness of using a minimum of five years of total public pension plan service credit as a suitable measure for selecting eligible State employees. The usual rationale for an early retirement incentive program is that inducing early retirements by long-service employees who are higher on the salary ladder and who are closer to retirement produces a more positive budget balancing impact than layoffs, which target the least senior and least well-paid employees. However, the proposed legislative conditions the incentive on a minimum of five years of service credit in any of Minnesota�s statewide or major local pension plans. Thus, someone with four years of teaching service in the Duluth Teachers Retirement Fund Association (DTRFA) who may have changed careers (or may even have retired from DTRFA) and now has an additional year of State employment could qualify for the $15,000 incentive, which likely would cost more than a layoff. A better measure to gain long-term State employees would be to focus the qualifications to State employment. The Department of Employee Relations (DOER) maintains records of State employment for seniority, vacation leave accrual, and sick leave accrual purposes and could be used as an appropriate mechanism for verifying the employment duration requirement. Amendment LCPR03-085 would require 20 years of State employment rather than five years of State employment and uses Department of Employee Relations records to measure the duration of State employment.

4. Retirement Incentive Could Include Reemployed Annuitants Rather than Career State Employees. The policy issue is the appropriateness of potentially including public pension plan annuitants who have become reemployed in State employment and are unlikely to produce the type of salary savings that are needed to offset a $15,000 expenditure over the remainder of this or the next biennium. Many local police and paid firefighter relief associations permitted retirements at age 50 and those retirees may have sought second careers in State employment and would now qualify for the incentive. State Patrol Retirement Plan retirees, who typically retire at age 55, are not covered by any reemployed annuitant earnings limitations and routinely are reemployed in State employment and could qualify for the incentive. These State employees are unlikely to be a good target group for the salary savings hoped to be gained by the incentive. Disallowing employees who have already retired from another Minnesota public pension plan will avoid second career reemployed annuitants from eligibility, thereby maintaining the targeting on long-term career State employees. Amendment LCPR03-086 excludes other public pension plan annuitants who have been reemployed by the State from the incentive.

5. Retirement Incentive Eligibility Has No Upper Age Limit. The policy issue is the appropriateness of attempting to provide an early retirement incentive for employees who are older than the generally applicable normal retirement age. The proposed legislation, in effect, sets a minimum age of 55, but has no upper-end age or surrogate condition. If a State employee already is eligible to receive an unreduced normal retirement annuity, their continuation in employment likely has some other rationale and they consequently would be unlikely to utilize the incentive. Any incentive applied to these State employees could simply become a windfall for them, especially if the change in working conditions and workload following a budget balancing effort could easily lead them to retire without an incentive. Amendment LCPR03-087 excludes persons who are eligible for unreduced Social Security benefits from the early retirement incentive.

6. Incentive Has No Clear Election Process. The policy issue is the unclear manner in which an eligible State employee in a designated employment position elects to take the incentive. Under the proposed legislation, it appears that the eligible State employee would accept the early retirement incentive offer simply by terminating State employment. While that action is a perfectly acceptable manner to indicate agreement to some offers, retirement is a very serious life-changing event and utilizing a written acceptance rather than acceptance through employment termination would provide more clarity in the process. Amendment LCPR03-088 provides for a formal early retirement incentive offer and requires that the offer be accepted in writing.

7. The Incentive Does Not Clearly Allow for Term Certain and Not for Life Annuity. The policy issue is the usefulness of a term certain annuity as a mechanism for redeeming the incentive if the term certain annuity is also for life. Using a term certain annuity that is also not for life as part of the incentive, with a consequent shorter average payout period, will permit the incentive annuity to be used as a bridging device between employment and a regular retirement annuity at a later age. If the term certain annuity is the usual term certain annuity currently provided by Minnesota public pension plans (i.e., for a period of years and for life) the $15,000 incentive amount likely will produce too small a monthly amount (about $100 per month at age 65, about $95 per month at age 60, and about $90 per month at age 58) to permit this bridging. Amendment LCPR03-089 clarifies that the term certain annuity is a true term certain annuity, and is not payable for life also.

8. Incentive Service Credit Purchase Provision is Likely Subsidized. The policy issue is the potential or likely subsidy that the early retirement incentive will provide to retiring State employees who take the service credit purchase option. Minnesota Statutes, Section 356.55, which is the full actuarial value service credit purchase payment amount determination provision in force until May 15, 2003, apparently is extended in force until September 1, 2003, and does not guarantee that no pension plan subsidy will be involved in the purchase. Commission longstanding policy has opposed any provision of a subsidy in a service credit purchase from the retirement plan. A continuing question with the Minnesota Statutes, Section 356.55, full actuarial value estimation procedure is whether that estimation technique produces more accurate full actuarial value estimates. As part of the 1998 full actuarial value estimation procedure, during each annual actuarial valuation, the Commission-retained actuary compares the prior service credit purchase payment with the actuarial valuation liability change associated with the purchase. The following summarizes these comparisons for the Minnesota State Retirement System General State Employees Retirement Plan (MSRS-General):

 

In no case for the 21 MSRS-General service credit purchases or the 955 service credit purchases in all plans occurring 2000-2002 did the service credit purchase amount exactly match the additional liability due to the purchase noted in the next actuarial valuation report, and the two amounts are rarely even close. The pattern observed is that most active member purchases (purchases by individuals who remained active members at the next actuarial valuation) resulted in a gain to the plan (the added liability due to the purchase as recognized in the next actuarial valuation was less than the purchase price). The opposite result is seen for those individuals who purchase service credit and then retired by the next actuarial valuation (the "retired purchases"). When the purchase price is compared to the change in liability reflected in the next actuarial valuation due to the purchase, most retired purchases resulted in losses to the fund. Amendment LCPR03-090 clarifies the language of the service credit purchase and requires that the purchase payment amount calculated under the pre-1998 payment method, avoiding the subsidy that appears to occur under Minnesota Statutes, Section 356.55.

9. $15,000 Incentive May Have Limited Appeal. The policy issue is the potential disparity between the expectations for the success of this proposed incentive in encouraging large salary savings accruing to the State general fund through the accelerated or premature retirement of numerous senior high-paid State employees and its actual performance. In a retirement setting, $15,000 is less significant than it might initially appear. For all retirees from the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the present value of their retirement benefits is in excess of $150,000. The present value of the retirement benefit of a new retiree at age 60, with 30 years of service credit, and a $50,000 highest five successive years average salary approaches $300,000. Thus, an additional $15,000 in value is not a large percentage increase in retirement value. For State employees contemplating retirement at a relatively early age (age 55 or thereabouts), with an average life expectancy of at least 78 years, the $15,000 incentive value may be spread very thin, meaning that fewer State employees will be induced to prematurely terminate State employment than may have been expected by the designers of the incentive.

10. Incentive May Provide a Windfall to Some Retirees. The policy issue is the potential that the proposed early retirement incentive may be offered to some State employees who would have terminated State employment before September 1, 2003, without the incentive, thereby providing them with a windfall and reducing the actual net savings that the State would receive. The windfall potential can only be countered by careful targeting by affected agencies, where the State agency has a good sense of the future plans of its employees who will retire before September 1, 2003, anyway, induced by increasing workloads or other post-budget reduction employment conditions, and its employees for whom up to $15,000 would provide the necessary nudge into a premature retirement and adjusts accordingly.

11. Incentive Will be Futile if Substantial Rehirings Occur. The policy issue is the futility potentially involved with the proposed early retirement incentive if State employees who take the incentive are reemployed by the State or retained as a consultant by the State in the near term following retirement. The incentive will produce the most salary savings if the position of the retiring employee is not filled and if total State employment is reduced on balance by the incentive. One way to insure that maximum savings is to prohibit the retiree receiving the incentive from being reemployed by the State or from being retained as a consultant by the State for a period of years after retirement. Amendment LCPR03-091 prohibits recipients of an early retirement incentive from being reemployed by the State or retained as a consultant by the State for a three-year period.