Summary of H.F. 828 (Paymar); S.F. 811 (Moua)

H.F. 828 (Paymar); S.F. 811 (Moua) primarily amends Minnesota Statutes, Section 353.01, subdivisions 2d and 6, which specifies the optional membership groups of the Public Employees Retirement Association (PERA) and defines the governmental subdivisions covered by PERA, by making the following changes with respect to the St. Paul Port Authority:

1. Mandatory PERA-General Membership for Most Current St. Paul Port Authority Employees and Future Employees. Most current St. Paul Port Authority employees and all future employees are required to have prospective PERA-General retirement coverage (Section 2);

2. Optional PERA-General Membership for Older St. Paul Port Authority Employees. St. Paul Port Authority employees who were age 45 or older on January 1, 2003, are permitted, but not required, to become members of the PERA General Employees Retirement Plan (PERA-General) for future employment by the St. Paul Port Authority (Section 1);

3. Redefinition of St. Paul Port Authority as a Covered Government Subdivision. The St. Paul Port Authority is included in the listing of governmental subdivisions covered by PERA-General and excepted from the listing of governmental entities excluded from PERA coverage (Section 2); and

4. Prior Service Credit Purchase for Current St. Paul Port Authority Employees. Full-time and permanent part-time salaried employees of the St. Paul Port Authority who were employed at any time by the Authority between July 1, 1993, and July 1, 2003, and who become members of PERA-General are eligible to purchase up to ten years of PERA-General allowable service credit for that prior employment with the payment of the full actuarial value purchase amount under Minnesota Statutes, Section 356.55.

Summary of Author’s Amendment LCPR03-071

Author’s Amendment LCPR03-071 makes the following substantive changes relating to the future pension coverage of St. Paul Port Authority employees:

1. Allows PERA-Defined Contribution Plan Coverage as an Option. St. Paul Port Authority employees who elect not to become members of the General Employees Retirement Plan of the Public Employees Retirement Association (PERA-General) for future pension coverage are permitted to become members of the PERA Defined Contribution Retirement Plan for their future coverage. The change should relieve the Port Authority of the need to continue its current defined contribution pension plan for the small subgroup of its employees who are not expected to elect future PERA-General coverage; and

2. Accelerated Vesting for Port Authority Employees Electing PERA-General Coverage. Past Port Authority employment by employees who elect PERA-General coverage will be recognized by PERA-General for vesting purposes, but not for benefit calculation purposes.

Background Information Regarding PERA and the St. Paul Port Authority

The Port Authority of the City of St. Paul was created in 1932 under general port authority authorizing legislation enacted in 1929 (Laws 1929, Chapter 61). The St. Paul Port Authority is now organized under Minnesota Statutes, Section 469.084, derived from Laws 1987, Chapter 291, Section 85, which was a general recodification of housing and redevelopment authority, port authority, economic development authority, and rural development finance authority laws, as amended. The St. Paul Port Authority advertises itself as the industrial development agency for the City of St. Paul, Minnesota, specializing in real estate, construction, and equipment financing and loan guarantees and that the agency also provides customized business services, such as site selection, job training, and technical assistance, tailored to the needs of established industrial and manufacturing firms within the east metro region of the Twin Cities.

The initial enactment of the Public Employees Retirement Association (PERA) governing legislation, Laws 1931, Chapter 307, did not include port authorities and other specialized local government entities. Initially, PERA covered only employees of counties, cities, villages, boroughs, towns, and school districts. In 1959 (Laws 1959, Chapter 650), PERA coverage was extended to employees of any public body whose salary is paid wholly or partially from tax revenue. The same legislation, Laws 1959, Chapter 650, Section 2, excluded some specialized public entities from PERA coverage, specifically referencing seaway port authorities. In 1961 (Laws 1961, Chapter 746, Sections 1 and 2), the seaway port authority exclusion from PERA coverage was clarified by the elimination of the word "seaway" and by an indication of legislative intent that no port authority employee was to be eligible for PERA coverage by virtue of the 1959 enactment and that the "seaway" reference was inadvertent.

Although PERA covers most local governmental entities in Minnesota, usually by the PERA General Employee Retirement Plan (PERA-General), other entities in addition to the St. Paul Port Authority that are excluded from PERA coverage are municipal housing and redevelopment authorities organized under Minnesota Statutes, Sections 469.001 to 469.047, other port authorities organized under Minnesota Statutes, Sections 469.048 to 469.089, any pre-1975 hospital districts organized or reorganized under Minnesota Statutes, Sections 447.31 to 447.37, and the Minneapolis Community Development Agency. The Minneapolis Community Development Agency is proposed for merger into the Minneapolis Planning Agency during this session and, if the applicable legislation is enacted, would be covered by PERA-General in the future.

The St. Paul Port Authority currently has its own defined contribution employee benefit plan for all full-time employees who meet its age and length-of-service requirements. Employees participating in the plan may authorize voluntary payroll deductions ranging from 0 percent to 15 percent of their compensation as defined by the plan. The Authority provides a matching contribution of up to 3 percent. In addition, the Authority makes an additional annual contribution of approximately 3 percent to employees employed as of December 31. Total employer contributions to the current plan were $104,176 in 2001 and $90,775 in 2002.

A defined contribution plan is a pension plan where the funding for the pension plan is fixed as a dollar amount or 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.

PERA-General is a defined benefit plan, which 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.

Discussion and Analysis

H.F. 828 (Paymar); S.F. 811 (Moua) mandates PERA General Employee Retirement Plan (PERA-General) coverage for most of the St. Paul Port Authority’s 22 employees, leaves PERA-General membership optional for four St. Paul Port Authority employees who are already over age 45, and permits any St. Paul Port Authority employees who become PERA-General members to purchase with a full actuarial value payment up to ten years of PERA-General allowable service credit for their prior St. Paul Port Authority employment.

The proposed legislation will likely raise the following pension and related public policy issues for consideration and discussion by the Commission:

1. Appropriateness of Reversing the 1959-1961 Port Authority Exclusion from PERA. The policy issue is the appropriateness of revising 1959-1961 legislation that excluded port authorities from PERA coverage. Based on the 1959-1961 legislation, extending PERA coverage to port authorities was a significant issue at that time. The motivation for excluding port authorities likely came from concerns or complaints by the port authorities rather than from PERA. Commission records largely do not exist from 1959 and 1961 and the Commission was almost wholly an interim operation at that time, so there are no contemporaneous documents to shed light on the intent of this provision of PERA-General law. An opportunity should be provided in public testimony for the St. Paul Port Authority, PERA, or anyone else to provide the Commission with a summary of the 1959-1961 arguments and to advise the Commission about the implications of the proposed change.

2. Potential for an Extension to Other Port Authorities. The policy issue is the potential for the proposed legislation to spawn an extension to other port authorities, either at this legislative session or in the future. St. Paul Port Authority officials indicate that there is only one other port authority that has not reconstituted itself as an economic development authority and that directly employ employees, the Duluth Seaway Port Authority. St. Paul Port Authority officials apparently have informed the Duluth Seaway Port Authority, but have no sense of its reaction to the St. Paul Port Authority’s movement to PERA. Economic development authorities are covered by PERA-General.

3. Need to Revisit Other Exclusions from PERA. The policy issue is the appropriateness of taking this opportunity to revisit the exclusion of other employing units from PERA and to redetermine whether or not the exclusion remains good policy. The strength of any multiple employer public retirement plan is the breadth of its coverage, since a public pension plan that covers all public employees in a state will provide more comprehensive coverage, more benefit continuity, and more portability than a system of separate and disconnected pension plans. The currently excluded public employers beyond port authorities are housing and redevelopment authorities and some public hospital districts. The Minneapolis Community Development Authority is being reorganized by proposed legislation this session, with consequent PERA-General coverage. Since a broader review of the other PERA excluded employing units may unfairly burden this potential legislation, the Commission may wish to undertake any broader review during the interim.

4. Appropriateness of Defined Benefit Plan Coverage for St. Paul Port Authority Employees. The policy issue is the appropriateness of the fit of a defined benefit plan such as PERA-General for employees of the St. Paul Port Authority. The Authority currently has a defined contribution retirement plan and has maintained the plan since 1993. The Authority’s Executive Director, Kenneth R. Johnson, and the Authority’s Chief Financial Officer, Laurie J. Hansen, have indicated to the Commission staff that their motivation to make the retirement coverage change is the limited past access that the Authority has to competitive pension products on the outside market, the difficulties in administering the current St. Paul Port Authority pension plan, and the expense in time and money to manage the current plan. The Authority officials also indicate that its employees are largely drawn initially from the private sector, but that they are frequently sought after by other public sector employers. The officials also indicate that all 22 current employees have met with PERA, understand the PERA-General plan, and all but a handful of employees are comfortable making the retirement plan switch. Defined contribution plans now predominate in the private sector and, for employees who have left the private sector and expect to return to the private sector and who value the portability that a defined contribution plan provides, continued defined contribution plan coverage is the better choice. Defined benefit plans predominate in the public sector and, for employees who expect to have most or all of their careers in the public sector in the same state, early access to defined benefit plan coverage is a good choice.

5. Appropriateness of the Optional PERA-General Membership for Older St. Paul Port Authority Employees. The policy issue is the appropriateness of providing the St. Paul Port Authority employees who are age 45 or older with the option of becoming members of PERA-General. Sixteen of the 22 Port Authority employees are currently age 45 or older. Normally, pension coverage changes are done on an entire group basis rather than splitting a potential coverage group into subgroups and providing some portion an option to elect out of the change. The categorization of the St. Paul Port Authority employees into an age 45 and older group and an under age 45 group was suggested by the Port Authority based on the initial reactions of the affected employees, rather than any philosophical position. The subgrouping and the optional PERA-General provision appear to be a practical transitional accommodation. There is some precedent for this type of coverage exception, such as Minnesota Statutes, Section 352.91, Subdivision 3b, which exempts certain individuals from the State Correctional Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional) who were age 45 or over upon hiring, since an early retirement/early mandatory retirement age retirement plan would not appropriately fit these older employees. Categorizing these employees by age rather than by some other factor, however, may run afoul of federal age discrimination statutes. If a non-age related factor could be found by the St. Paul Port Authority that would separate out the same employees, it would be desirable to utilize that factor rather than age.

6. Appropriateness of PERA-General Coverage in Light of Disadvantageous Factors. The policy issue is the appropriateness of the Legislature mandating PERA-General coverage for most St. Paul Port Authority employees because of inherent disadvantages of PERA-General coverage for both the St. Paul Port Authority and St. Paul Port Authority employees. From an employee perspective, PERA-General coverage does not include the "Rule of 90" early normal retirement age provision for some or all Port Authority employees, although the St. Paul Port Authority employees would be making the same employee contribution as the pre-1989 PERA-General members who do have access to the "Rule of 90," and the PERA-General member contribution is higher, at 5.10 percent of covered pay, than for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), at 4.00 percent of covered pay, and for the Teachers Retirement Association (TRA), at 5.00 percent, for essentially the same benefit coverage. From the perspective of the St. Paul Port Authority, which will not add to the existing PERA-General unfunded actuarial accrued liability by making the coverage change, the Authority will be paying a greater employer contribution than the member contribution in order to amortize the PERA-General unfunded actuarial accrued liability. Because St. Paul Port Authority employees will have less advantageous pension coverage than many current PERA-General members for the same contribution as those PERA-General members and will pay a greater contribution than MSRS-General and TRA members also and because the St. Paul Port Authority inherits an obligation to help amortize a PERA-General unfunded actuarial accrued liability that it did not help create, joining PERA-General at this time is a questionable proposition.

7. Appropriateness of PERA-General Coverage in Light of Alternative Arrangements. The policy issue is the appropriateness of initiating PERA-General coverage for most St. Paul Port Authority employees when there are other ways to provide retirement coverage to the employees. If the primary motivation of the St. Paul Port Authority to undertake PERA-General coverage is the administrative simplicity and savings gained by shedding its own pension plan, that same advantage could be gained by simply rolling the current St. Paul Port Authority defined contribution plan into one of the various established defined contribution plan administrations, either the PERA Defined Contribution Plan, the Unclassified State Employees Retirement Program of the Minnesota State Retirement System (MSRS-Unclassified), or the Minnesota State Colleges and Universities System Individual Retirement Account Plan (MnSCU IRAP).

8. Appropriateness of the Plan Consolidation Through Individualized Service Credit Purchases. The policy issue is the appropriateness of an actual consolidation of the current St. Paul Port Authority retirement plan into PERA-General through the mechanism of individualized service credit purchases. Of question is the accuracy of the service credit purchase payment amount determination procedure under Minnesota Statutes, Section 356.55, the appropriateness of requiring the full funding of the service credit purchase for a plan (PERA-General) that is not fully funded, and the appropriateness of effecting a consolidation through individual service credit purchases. The potential legislation utilizes Minnesota Statutes, Section 356.55, although that payment determination procedure will expire on July 1, 2003. The Minnesota Statutes, Section 356.55, procedure has not necessarily produced full actuarial value payments in the past, but instead has tended to produce very large actuarial losses for retiree purchasers and near-retirement age purchasers and has tended to produce modest actuarial gains for younger age purchasers, which sometimes netted out in total. Under current law, after July 1, 2003, the prior service credit purchase payment determination procedure shifts to Minnesota Statutes, Section 356.551, which typically requires a larger prior service credit purchase amount. The prior service credit purchase arrangement, if it does produce a full actuarial value payment, would fully fund the past service liability for these new PERA-General employees, even though PERA-General is only 85.02 percent funded (or 77.42 percent at the current market value of assets) and the St. Paul Port Authority will be obligated to make an employer additional contribution to cover the PERA-General amortization obligation it is inheriting but to which it did not contribute. Most prior pension plan consolidations have been accomplished by trust fund transfers rather than by individual service credit purchases. The sole prior consolidation accomplished on a service credit purchase basis was the 1977 consolidation of the Eveleth Police Relief Association and of the Eveleth Fire Relief Association, where the adverse funded condition of the two relief associations and the limited financial resources of the city required the purchase of PERA-P&F allowable service credit for only a portion of the prior Eveleth police officer or firefighter service. The Eveleth consolidation generated complaints from active Eveleth police officers and firefighters for a number of years following the 1977 consolidation.

9. Appropriateness of the Proposed Plan Consolidation in Light of an Alternative Consolidation Procedure. The policy issue is the appropriateness of a potential consolidation of the St. Paul Port Authority pension plan into PERA-General proposed in the potential legislation when there is an alternative consolidation procedure. If the model of other consolidations, including the 1978 Metropolitan Transit Commission – Transit Operating Division Retirement Plan consolidation into MSRS-General or of the 1978 University of Minnesota Police Pension Plan consolidation into PERA-P&F were used, the accrued liability for all prior service of the St. Paul Port Authority employees to be transferred to PERA-General coverage would be determined under the PERA-General benefit plan and assets equal to 85.02 percent of the derived accrued liability figure would be transferred to PERA-General. If there were insufficient assets in the St. Paul Port Authority pension plan to meet the current PERA-General funding ratio, a special multi-year additional payment schedule for the St. Paul Port Authority would be established to cover the asset shortfall. The Port Authority employees would then receive full pension coverage for past service, the St. Paul Port Authority would join the PERA-General employer group on essentially the same financial basis as prior employers, and all liability amounts would be calculated with greater actuarial accuracy. If this alternative consolidation approach is of interest, the Commission staff could develop the appropriate amendatory language.