H.F. 1313 (Murphy); S.F. 1156 (Pogemiller) amends Minnesota Statutes, Chapter 354B, governing the Minnesota State Colleges and Universities System (MnSCU) Individual Retirement Account Plan (IRAP), by adding two new sections which authorize the MnSCU Board of Trustees to establish an early separation incentive program consisting of employer-paid post-employment health insurance coverage, cash incentives, employer contributions to the Minnesota State Retirement System (MSRS) post-retirement health savings plan, or a combination of the three, and permits the incentives to be offered by MnSCU college or university presidents to personnel consistent with MnSCU Board of Trustee eligibility requirements, with the cost of the incentives to be borne by the applicable college or university. The incentive program is exempted from the Public Employees Labor Relations Act (PELRA) unfair labor practice prohibition and the PELRA former employee benefit limit provision.

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. 1313 (Murphy); S.F. 1156 (Pogemiller) authorizes the Minnesota State Colleges and Universities System (MnSCU) to establish an early separation incentive program of employer-paid post-employment health insurance coverage, cash payments, employer contributions to the Minnesota State Retirement System (MSRS) post-retirement health care savings plan, or a combination of the three, under eligibility requirements specified by the MnSCU Board of Trustees and offered to personnel positions specified by the MnSCU college or university president.

The proposed legislation raises several pension and related public policy issues for potential Commission consideration and discussion, including the following:

Sufficiency of the Targeting of the Incentives. The policy issue is the sufficiency of any eligibility requirements in a MnSCU early retirement incentive to target the program. The proposed legislation requires the MnSCU Board of Trustees to specify the eligibility requirements for an incentive program, but does not specify any minimum eligibility content requirements, thus giving the MnSCU Board of Trustees full discretion in designing the program. The 1986 Department of Finance study of the 1984-1986 temporary "Rule of 85" early retirement incentive program and the 1995 Office of the Legislative Auditor, Program Evaluation Division, study of the 1993 early retirement incentives both concluded that those incentive programs provided significant benefit windfalls to personnel who were likely to retire shortly after the incentive anyway because the programs were not sufficiently targeted. The proposed legislation assumes that requiring each MnSCU college or university to bear the cost of the incentive program will induce the MnSCU Board to establish appropriate and sufficient targeting requirements and to induce MnSCU college or university presidents to implement the program in a cost-effective manner. Theoretically, the broad delegation to MnSCU should work, but there are no guarantees that it will and little or no available remedies if this broad delegation does not operate as planned.

Lack of Any Limits on Incentives. The policy issue is the appropriateness of the proposed incentive program because there are no limits on them, including the cash payment incentive. Without some limits, the Legislature may be disconcerted in the future when very sizable incentives are granted. The proposed incentive program is an "early separation incentive program" rather than an "early retirement incentive program," presumably countenancing the potential that beneficiaries of the incentive could be substantially younger than normal retirement ages. In addition to providing incentives to relatively young MnSCU employees to terminate their employment, the insurance incentive could include types of coverage that are not normally in force for other MnSCU employees or beneficiaries not usually covered in State medical insurance coverage, the cash payments could approach or exceed a person’s annual salary without reference to the person’s subsequent employment status or subsequent career compensation, the employer contribution to the post-retirement health care savings plan could exceed federal tax law limits, or the combination of incentives in amount could be deemed by the public as excessive.

Incentive Program Campus Implementation Lacks Approval or Review Process. The policy issue is the appropriateness of an incentive program which is implemented on a decentralized basis without any formal approval or review process. As set forth in the proposed legislation, the MnSCU Board will specify the package of incentive benefits and will specify the broad eligibility requirements to qualify for the incentive and each MnSCU institution president would actually offer the incentive to particular designated programs or departments at the institution. The college or university president would not be required to justify making the incentive offer to the applicable personnel, on a financial basis or otherwise, to any other entity within MnSCU or outside of MnSCU. Thus, incentives that cost more financially than they gain or incentives that are offered for nepotism or other inappropriate reasons could be granted by a college or university president and could not be revoked before the damage occurs. While MnSCU college and university presidents clearly merit trust and discretion in managing these institutions, that discretion should be handled consistent with MnSCU’s public mission and MnSCU’s need to be accountable to the public, which are factors that argue for some procedural constraints.

Incentive Program Authority Lacks Sunset or Expiration Date. The policy issue is the appropriateness of the Legislature’s establishing an incentive program within MnSCU that is permanent. Early retirement incentive programs have most typically been characterized as a budget-balancing tool, attempting to substitute a few retirements by relatively highly compensated personnel for a more widespread layoff of junior, less significantly compensated, personnel. Budget problems occur periodically, but infrequently enough that incentives can or should be fashioned to match the need when budget problems do arise. A permanent early retirement incentive program conveys a difficult potential policy rationale, where older or long-service employees are not valued by the employing unit or where compensation caps should be imposed on the personnel system to insure that valued financial resources are not "wasted" by increasing employees’ compensation over time. If MnSCU desires to limit the number of its senior high-paid faculty and its senior high-paid administrative staff because those personnel do not provide productivity to match their increased cost, perhaps revising MnSCU’s entire compensation and related systems would be a more appropriate response to the problem than the creation of a permanent program that induces the premature departure of some selected personnel.

Dissonance of Having a Management Tool Sponsored by an Employee Organization. The policy issue is the appropriateness of an early separation incentive management tool that is being proposed by the applicable employee organization rather than by MnSCU. Early retirement incentive programs that are used sparingly and are employed in a well-targeted fashion can be an effective management tool to correct for workforce imbalances. Early retirement incentive programs that are framed as, or become, additional employee entitlement programs supplant the conventional employment benefit program and lose their management effectiveness. When proposed by an employee organization rather than by the employer, policy makers should be suspicious about the motivations for the program and should give the proposal additional scrutiny. When the incentive program is proposed by the employee organization and the program is very vague and requires additional bargaining or programmatic development, the employee organization may be selling the program using management rhetoric, but maybe anticipates taking advantages of collective bargaining or other policy-making weaknesses of the employer to actually fashion the incentive program as an additional benefit package.

Problem of Differential Cost/Benefit Timing. The policy issue is the existence of a potential problem arising from a difference in the timing of incurring incentive costs and in the timing of achieving incentive benefits. The Inter-Faculty Organization (IFO) argues that the incentive program has adequate protections because each institution has to bear the cost of any incentive offered. While the salary savings potential is less subject to timing concerns, the incentive benefit costs have different timings, with insurance premium costs representing a long deferred potential cost. If the salary savings occurs in the short run, but the insurance premium costs are borne over a long period, the actual fiscal benefit of the incentive program to the employer may be masked or may be impossible to determine. The salary savings can also be overstated if the position vacated by a program incentive recipient is in an employment position that must be replaced (i.e., college president, department chair, chief financial aid officer, or chief boiler engineer) or if the person vacating the position would have actually retired in the short run otherwise. Without having a clear mechanism for determining the potential cost or benefit of an early separation incentive, the program will have little or none of the accountability argued by the IFO.

Lack of Restrictions on the Reemployment of Early Separations. The policy issue is the appropriateness of the program where the early separation incentive program lacks any restrictions on the reemployment of the person by the State or the person’s retention as a consultant. If the incentive is intended to induce the person to leave State employment, the person will defeat the program if the person subsequently can reemerge in State employment or subsequently can be retained as a State consultant. While the reemployment/retention restriction should not be so long as to be punitive or unreasonable, it should be long enough to avoid a potential "revolving door" phenomenon.

Precedent. The policy issue is the existing precedent for the incentive program and the incentive program’s potential to become a precedent for extensions to other employees or other employers. While there are precedents for early retirement incentives, there are no precedents for an early retirement incentive without specific qualifications, limits, and expiration dates. The pair of Metropolitan Council early retirement incentive programs stands for the counter-precedent. If this proposed early retirement incentive program was enacted, there is little about the MnSCU economic or personnel circumstances that could be distinguished from another public employer when the Legislature is considering a proposed extension of this authority to another agency in the future.