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TO: |
Members of the Legislative Commission on Pensions and Retirement |
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FROM: |
Lawrence A. Martin, Executive Director |
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RE: |
H.F. 1433 (Wasiluk); S.F. 1323 (Wiger): TRA; Temporary "Rule of 85" |
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DATE: |
April 10, 2003 |
Summary of H.F. 1433 (Wasiluk); S.F. 1323 (Wiger)
H.F. 1433 (Wasiluk); S.F. 1323 (Wiger) permits members of the Teachers Retirement Association (TRA) whose age and credited allowable service totals "85" and who retires between June 1, 2003, and July 15, 2003, to receive an unreduced early retirement annuity under the current "Rule of 90" retirement formula.
Background Information on the 1984 "Rule of 85" Early Retirement Provision
Background information on the "Rule of 85" early retirement provision enacted in 1984 and in force until 1986 is attached as Attachment A.
Discussion and Analysis
H.F. 1433 (Wasiluk); S.F. 1323 (Wiger) provides members of the Teachers Retirement Association (TRA) with a brief early retirement window under the "Rule of 85" for a six-week period, June 1, 2003, to July 15, 2003.
The proposed legislation raises a number of pension and related public policy issues for Commission consideration and discussion, as follows:
No Targeting of the Incentive. The policy issue is the appropriateness of the lack of any targeting of the early retirement incentive. 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 shortness of the early retirement incentive period does not substitute for a more careful targeting of the incentive.
Actuarial Cost of the Proposal. The policy issue is the actuarial cost to the Teachers Retirement Association (TRA) of the incentive. TRA estimates that the actuarial cost would be $53,613 per retiree and that 1,444 TRA members (two percent of the current active membership) would potentially retire under the provision. In that case, TRA would incur an unfunded actuarial accrued liability of $77.4 million. The TRA cost estimate is attached.
Although the retirement cost estimate was prepared by the TRA staff, was not prepared or reviewed by Milliman USA, the consulting actuarial firm retained by the Commission, and admittedly is a very rough estimate, the results of the estimate can be incorporated into the most recent TRA actuarial valuation results to provide a sense of the impact of the proposed legislation, as follows:
|
July 1, 2002 |
Estimated Impact of |
Resulting Actuarial |
||||
|
Membership |
||||||
|
Active Members |
71,690 |
(1,444) |
70,246 |
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|
Service Retirees |
32,231 |
1,444 |
33,675 |
|||
|
Disabilitants |
551 |
-- |
551 |
|||
|
Survivors |
2,192 |
-- |
2,192 |
|||
|
Deferred Retirees |
8,680 |
-- |
8,680 |
|||
|
Nonvested Former Members |
19,022 |
-- |
19,022 |
|||
|
Total Membership |
134,366 |
-- |
134,366 |
|||
|
Funded Status |
||||||
|
Accrued Liability |
$16,503,099,000 |
$77,400,000 |
$16,580,499,000 |
|||
|
Current Assets |
$17,378,994,000 |
-- |
$17,378,994,000 |
|||
|
Unfunded Accrued Liability |
($875,895,000) |
$77,400,000 |
($798,495,000 |
|||
|
Funding Ratio |
105.31% |
104.81% |
||||
|
Financing Requirements |
||||||
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Covered Payroll |
$3,040,422,000 |
($86,640,000) |
$2,953,782,000 |
|||
|
Benefits Payable |
$946,344,000 |
$34,656,000 |
$981,000,000 |
|||
|
Normal Cost |
8.68% |
$264,209,000 |
-- |
-- |
8.68% |
$264,209,000 |
|
Administrative Expenses |
0.44% |
$13,378,000 |
-- |
-- |
0.44% |
$13,378,000 |
|
Normal Cost & Expense |
9.12% |
$277,587,000 |
-- |
-- |
9.12% |
$277,587,000 |
|
Normal Cost & Expense |
9.12% |
$277,587,000 |
-- |
-- |
9.12% |
$277,587,000 |
|
Amortization |
(1.55%) |
($47,127,000) |
0.14% |
$4,164,000 |
(1.41%) |
($42,963,000) |
|
Total Requirements |
7.57% |
$230,460,000 |
0.14% |
$4,164,000 |
7.71% |
$234,624,000 |
|
Employee Contributions |
5.00% |
$152,031,000 |
-- |
-- |
5.00% |
$152,031,000 |
|
Employer Contributions |
5.00% |
$152,031,000 |
-- |
-- |
5.00% |
$152,031,000 |
|
Employer Add'l Cont. |
0.00% |
$0 |
-- |
-- |
0.00% |
$0 |
|
Direct State Funding |
0.00% |
$0 |
-- |
-- |
0.00% |
$0 |
|
Other Govt. Funding |
0.00% |
$0 |
-- |
-- |
0.00% |
$0 |
|
Administrative Assessment |
0.00% |
$0 |
-- |
-- |
0.00% |
$0 |
|
Total Contributions |
10.00% |
$304,062,000 |
-- |
-- |
10.00% |
$304,062,000 |
|
Total Requirements |
7.57% |
$230,460,000 |
0.14% |
$4,164,000 |
7.71% |
$234,624,000 |
|
Total Contributions |
10.00% |
$304,062,000 |
-- |
-- |
10.00% |
$304,062,000 |
|
Deficiency (Surplus) |
(2.43%) |
($73,602,000) |
0.14% |
$4,164,000 |
(2.29%) |
($69,438,000) |
There is a cautionary note that needs to be raised about the actuarial numbers set forth above. Minnesota Statutes, Section 356.215, Subdivision 1, Paragraph (f), defines the actuarial value of pension plan assets, utilizing a five-year smoothing technique that substantially overstates the value of TRA pension plan assets compared to its July 1, 2002, market value, as follows:
|
a. Asset Value Comparison: |
|
|
2002 Actuarial Value of Assets |
$17,378,994,000 |
|
2002 Market Value of Assets |
15,853,044,000 |
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Difference |
$1,525,950,000 |
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b. 2002 Funded Status Comparison: |
|
|
Actuarial Accrued Liability |
16,503,099,000 |
|
Actuarial Value of Assets |
17,378,994,000 |
|
Unfunded Actuarial Accrued Liability |
($875,895,000) |
|
Official Funded Ratio |
105.31% |
|
Actuarial Accrued Liability |
$16,503,099,000 |
|
Market Value of Assets |
15,853,044,000 |
|
Recalculated Unf. Act. Accr. Liability |
$650,055,000 |
|
Recalculated Funded Ratio |
96.06% |
Appropriateness of Restricting the Incentive to TRA. The policy issue is the appropriateness of restricting the brief "Rule of 85" window to TRA, when there are three other teacher retirement plans, the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), and the St. Paul Teachers Retirement Fund Association (SPTRFA), and two other comparable general employee retirement plans, the General Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General) and the General Employees Retirement Plan of the Public Employees Retirement Association (PERA-General). If the early retirement incentive program makes sense for TRA, but the five other comparable plans are to be excluded, some rationale for that exclusion will need to be forwarded.
Inconsistent With Commission Policy Principle. The policy issue is the appropriateness of the early retirement incentive which is inconsistent with the Commission’s Principles of Pension Policy. Commission Policy Principal II.C.19. provides:
19. Design of Early Retirement Incentive Programs
a. Early retirement incentive programs can have a valid role to play in the public sector personnel system.
b. Early retirement incentive programs should be targeted to situations when a public employer needs to reduce staffing levels beyond normal attrition.
c. Early retirement incentive programs should be financed appropriately, with the cost of the benefits provided under the early retirement incentive program borne wholly by the same public employer that gains any compensation savings from a staffing level reduction, without any subsidy from the affected public pension plan.
This early retirement incentive varies from the policy principle because the incentive is not targeted and is not financed appropriately.
Lack of Restrictions on the Reemployment of Early Retirements. The policy issue is the appropriateness of the program where the early retirement 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 purpose of the incentive 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. The 1986 "Rule of 85" is a precedent for the program, but that incentive is generally viewed as a policy error and probably would not be appropriate to replicate without testimony to indicate otherwise. Attempts after 1986 to make the "Rule of 85" a permanent provision did not succeed. The current "Rule of 90" provision applies only to pre-July 1, 1989, hirees of the major general employee statewide or major local retirement plans and is being phased out. A reestablishment of the temporary "Rule of 85" would become a precedent to re-ignite attempts to make the "Rule of 85" provision permanent in the future.