H.F. 856 (Dempsey); S.F. 786 (Murphy) allows a class of individuals, likely limited to John W. LaValla of St. Charles, Minnesota, by the recitation of a number of biographic factors specific to him, to elect retirement coverage for his Minnesota State Colleges and Universities System (MnSCU) teaching service by the Teachers Retirement Association (TRA) rather than the Individual Retirement Account Plan (IRAP) on or before September 1, 2003, and if he does elect TRA coverage, to have prior contributions and interest transferred from the MnSCU-IRAP to TRA back to his August 22, 2003, MnSCU hiring date.

Pension plans, whether in the public sector or in the private sector, are classified as being of one of two types, either a defined contribution plan or a defined benefit plan. The question is whether the pension plan is focused on the certainty of inputs or outputs. The Minnesota State Colleges and Universities System Individual Retirement Account Plan (MnSCU-IRAP) is a defined contribution plan. The Teachers Retirement Association (TRA) is a defined benefit plan.

A defined contribution plan is a pension plan where the funding for the pension plan is fixed as a dollar amount or as a percentage of payroll and the fixed element of funding leaves a variable element, which is the benefit amount that is ultimately payable. Under a defined contribution plan, the plan member bears the inflation and investment risks. If there is poor investment performance, the plan member’s pension assets will be depressed. If inflation impacts the immediate pre-retirement standard of living, the plan member’s benefit will be less adequate in meeting the person’s pre-retirement standard of living. The employer loses any turnover gain potential, where past plan funding becomes more concentrated on a subgroup of total plan membership. A defined contribution plan favors employees who are very employment mobile, where employment changes beyond a single employer or a multiple-employer group. It also favors short-term employees in comparison to defined benefit plans. It also favors employees with very stable and modestly increasing salary histories and employees who work considerably beyond the plan’s normal retirement age.

A defined benefit plan is a pension plan where the pension benefit amount that is ultimately payable is pre-determinable or fixed using a formula or comparable arrangement. The fixed element of the benefit amount leaves a variable element, which is the funding required to provide that benefit. As a defined benefit plan, PERA-General and the employing units covered by the plan have the inflation and investment risks. If the investment return on plan assets is poor or if inflation produces ever-increasing final salaries and benefit payouts, that risk is borne by the plan and its associated employers. The member has the turnover risks. If a plan member terminates with modest service having been rendered or at an early age, the member will receive either no benefit or an inadequate benefit. A defined benefit plan favors long-term or long-service employees. It also favors employees who receive regular promotions and sizable salary increases throughout their careers or who achieve substantial salary increases in their compensation at the end of their career. It also favors employees who retire at or before the plan’s normal retirement age.

Defined contribution pension plans predominate in the private sector, while defined benefit pension plans predominate in the public sector. The U.S. Department of Labor, in a study by the Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, 2002, indicates that 36 percent of all private sector employees are covered by a defined contribution plan and that only 18 percent of private sector employees are covered by a defined benefit plan. In a study Employee Benefits In State and Local Governments, 1998, the Bureau of Labor Statistics reports that 90 percent of public employees are covered by a defined benefit plan and only 14 percent of public employees are covered by a defined contribution plan. In both studies, the total of the percentages for the two types of plans exceeds the total number of employees covered by pension plans because some employees are covered by more than one plan.

Mr. John (Jack) W. LaValla is a 42-year-old teacher with 20 years of allowable service credit in the Teachers Retirement Association (TRA) who recently was hired by the Minnesota State Colleges and Universities System (MnSCU) for the Riverland Community College as a farm business management instructor located at Lewiston, Minnesota.

Mr. LaValla was hired by MnSCU on August 22, 2002, while he was still on the Independent School District No. 858 (St. Charles) payroll, was given the MnSCU retirement plan election form on August 27, 2002 (MnSCU’s records administrator, Wells Fargo, supplied a copy of a signed receipt document), but failed to submit a retirement coverage election by December 4, 2002, 100 days after receiving the retirement plan election, and consequently received the default retirement coverage for MnSCU faculty members, the MnSCU Individual Retirement Account Plan (IRAP) under Minnesota Statutes, Section 354B.21, Subdivisions 2 and 3.

Mr. LaValla apparently desires to have TRA coverage for his future Riverland Community College teaching service, regrets his inaction which caused him to receive future MnSCU-IRAP coverage by default, and desires to gain a brief window to elect future TRA retirement coverage instead.

H.F. 856 (Dempsey); S.F. 786 (Murphy) is proposed special legislation to permit John W. LaValla, a 42-year-old former 20-year teacher and current Minnesota State Colleges and Universities System (MnSCU) farm education instructor employed by the Riverland Community College who failed to elect to retain Teachers Retirement Association (TRA) retirement coverage in a timely manner, to have a second chance retirement coverage election until September 1, 2003.

The proposed special legislation for John W. LaValla will raise a number of pension and other related public policy issues for potential discussion and consideration by the Commission, as follows:

1. Precedent. The policy issue is the past precedent that may exist for the potential special legislation and the precedent that the potential special legislation may set for future deadline waivers or extensions. The primary on-point precedent for this potential special legislation is Laws 1991, Chapter 341, Section 33, a post-Commission amendment to the 1991 TRA administrative legislation, which permitted a long-time TRA member who apparently mistakenly elected future IRAP coverage to elect to change back to TRA for all subsequent employment, but did not permit any transfer of any past IRAP contributions to TRA. The potential legislation and the 1991 legislation differ in their handling of the transfer of past contribution amounts, and that may be a point of controversy. In 1991, transfers from TRA to IRAP were a contentious issue and the contribution transfer ban in the special legislation may have represented an application of the same thinking to the reverse situation. The potential special legislation could become a problematic precedent for other IRAP coverage transfer and related proposed legislation where the motivation does not appear to be an inattention to time and detail as with Mr. LaValla, but a suddenly found dislike for defined contribution pension plans following a significant investment market decline. If an adverse precedent is to be avoided, the factors to support Mr. LaValla’s legislation should be clearly presented on the record so that other coverage transfer proposals can be more easily distinguished.

2. Equitable Considerations. The policy issue is the weight and extent of equitable considerations favoring Mr. LaValla’s proposal in comparison to adverse equitable considerations. Mr. LaValla’s public pension problem appears to be a result of his inattention to detail in this matter. Mr. LaValla did question whether the 90-day election period under Minnesota Statutes, Section 354B.21, Subdivision 2, Paragraph (6), had actually run, since his TRA-covered school district employment and MnSCU employment apparently overlapped for a period of time, but the Wells Fargo-provided documents clearly reflect that the 90-day period had run by December 4, 2002, since the time period under Minnesota Statutes, Section 354B.21, Subdivision 2, began when he received notice from MnSCU of his retirement coverage options on August 27, 2002. Mr. LaValla does not contend that he did not receive notice of his options or that the explanation of those options was inadequate or faulty, which are frequently equitable arguments made in this type of situation. With the length of Mr. LaValla’s TRA-covered service, a reasonable person would have expected him to retain TRA coverage for future Minnesota teaching service, absent any other relevant information, such as national job market career change plans he may have had. However, absent-mindedness, lethargy, or inattention may not be a sufficient basis to justify a second chance retirement coverage option.

3. Potential Need to Review the Retirement Coverage Defaults for MnSCU Community and Technical College Faculty. The policy issue is whether or not Mr. LaValla’s situation is indicative of a broader problem that defined contribution pension plan coverage is an inappropriate default for MnSCU community college or technical college faculty members. IRAP stems from the late 1980s, when state university and state college teachers and related employees sought retirement coverage by a defined contribution plan rather than the Teachers Retirement Association (TRA). IRAP was established in 1988 (Laws 1988, Chapter 709, Article 11) as a late addition to the conference committee report on the omnibus pension bill of that session. The plan was expanded to include technical college managerial employees in 1993 and to include technical college faculty in 1994. When IRAP was initially implemented, IRAP coverage was mandatory for new hirees without prior covered service, while employees in eligible positions who had prior TRA service were given an option to elect IRAP rather than continuation of defined benefit coverage. Election rights and election procedures were frequently revised over the years. In 1994, the current procedure was established, which permits individuals with prior defined benefit plan coverage to continue that coverage or elect IRAP, and permits new hirees to choose between IRAP and the defined benefit plan that would otherwise provide the coverage. The election period is 90 days and the election is irrevocable. The argument made by initial proponents of a defined contribution plan for higher education faculty and administrators is that higher education faculty, as a group, are highly mobile. If the individual changes employment to another college in another state, the individual retains the full value of the IRAP account, and that account continues to grow in value over time due to the continuing investment earnings on the account. In 1994, in connection with the IRAP administrative and related provisions proposed legislation (1994 Session S.F. 1960 (Riveness); H.F. 2124 (Kahn)), the appropriateness of the inclusion of technical college faculty members in IRAP was raised before the Commission and was resolved. While State University and Community College faculty do operate in a national market to some degree and need the potential national portability that a defined contribution retirement plan can provide, the evidence that technical college teachers operate in a similar measure in a national market was unclear in 1994. No evidence was presented by MnSCU or by technical college teacher representatives in 1994 that technical college teachers are in a national market to a substantial degree, but the Commission determined that providing individual technical college teachers with an opportunity to elect IRAP was appropriate no matter how large or small the proportion of teachers who were well suited for that type of coverage. The Commission may wish to utilize this potential special legislation as an indication that it should revisit the issue, gather data on the number of community and technical college faculty who are affirmatively electing IRAP, who are affirmatively electing TRA (or one of the first class city teacher retirement plans), or who are electing IRAP by default, and determine the continuing appropriateness of the current coverage default provision, at least for community college and technical college faculty.