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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: |
Consideration of Accommodations for the Fiscal Year 2004 – Fiscal Year 2005 Biennium Commission Appropriation Allocation |
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DATE: |
July 9, 2003 |
Introduction
The Legislative Commission on Pensions and Retirement is beginning the Fiscal Year 2004 – Fiscal Year 2005 biennium with a severely constrained budget and faces longer term budgetary and operational issues. How the Commission resolves the immediate budget problem and the longer term budget challenges will likely require either significant staffing changes, significant actuarial services changes, or significant additional revenues from the various statewide and major local retirement plans. This memorandum summarizes the Commission’s budget situation and outlines the various approaches that the Commission could utilize in accommodating its Fiscal Year 2004 – Fiscal Year 2005 biennial budget.
Background Information on the Legislative Commission on Pensions and Retirement
The Legislature has dealt with the topic of public employee retirement coverage by utilizing a joint legislative commission since 1943. A predecessor to the Legislative Commission on Pensions and Retirement to study the Minneapolis public retirement systems was created in 1943. Interim commissions to study public retirement issues in Minnesota generally were initially created in 1955 and were renewed in four out of the next five bienniums (1957-1958, 1959-1960, 1963-1964, and 1965-1966). The Legislative Commission on Pensions and Retirement was created as an ongoing commission in 1967, with a scheduled sunset in 1973. The sunset date for the Commission was eliminated in 1971.
The Legislative Commission on Pensions and Retirement was created in 1955 principally to resolve the problem of underfunded Minnesota public pension plans, especially the Public Employees Retirement Association (PERA,) which was expected to default on benefit payments before 1960. During the period 1955-1967, the Pension Commission functioned to develop recommendations to the Legislature during the 18 month interim between legislative sessions, for translation into proposed legislation and disposition by the Legislature during the subsequent legislative session. The Pension Commission did not function to review proposed pension legislation during this period. During the period 1955-1967, the Pension Commission contributed to the following pension policy accomplishments:
The Legislative Commission on Pensions and Retirement has shifted from a purely legislative interim study panel to its current structure and function since 1968. The Pension Commission now functions both during the legislative session and during the interim. During the legislative session, the Pension Commission functions as a joint meeting of the House and Senate subcommittees on pensions, processing an average of 50 pension bills during each legislative session and forwarding its recommendations and suggested amendments to the House and Senate standing committees with jurisdiction over public pensions. The Commission staff assists with the staffing of those standing committees when pension legislation is considered and with pension legislation conference committees. The Pension Commission also assembles actuarial cost estimates for proposed pension legislation. During the annual interims between legislative sessions, the Pension Commission continues to study broader public pension topics and to develop options for further legislative action. Interim topics tend to arise from pending pension legislation from the prior legislative session, for which the Commission lacked sufficient time to reach a resolution or which required additional testimony, development and research. In addition to interim studies, the Pension Commission manages the preparation of the actuarial reporting for the various statewide and major local public pension plans, collects investment performance information from the major public pension plans, and provides general oversight of the operation of the various public pension plans.
During the period 1969 to date, the Pension Commission contributed to the following pension policy accomplishments:
The 1943-1945 Legislative Interim Commission to Study Minnesota Pension Systems apparently employed no staff. The 1955-1967 interim commissions on pensions and retirement employed one professional staff member and one clerical staff member. As a permanent commission since 1967, the Pension Commission employed one professional staff member and one clerical staff member for the period 1967-1969, two professional staff members and one clerical staff member for the period 1969-1973, two professional staff members, one clerical staff member, and occasional temporary legislative session clerical help for the period 1973-1977, two professional staff members and one clerical staff member for the period 1977-1993, and two professional staff members, one full-time clerical staff member, and one part-time clerical staff member for the period 1993-present.
Background Information on the Provision of Actuarial Services to the Legislative Commission on Pensions and Retirement
The Legislative Commission on Pensions and Retirement and its predecessor legislative commissions have always utilized the services of a consulting actuarial firm, but the nature of the consulting actuarial firm’s services have changed over time.
In 1943, the Legislative Interim Commission to Study Minneapolis Pension Systems retained the actuarial firm of Wolfe, Corcoran & Linder, and the consultant reviewed the existing actuarial work and advised the Commission on the available actuarial conditions and options. The interim pension commissions (1955-1967) and the early permanent pension commission (1967-1984) retained a consulting actuarial firm, George V. Stennes & Associates (1955-1979), Franklin C. Smith (1979-1981), Towers, Perrin, Forester, & Crosby (1981), and James Bordewick (1982-1984), and the consulting actuary reviewed the actuarial work produced by the consulting actuaries retained by the various retirement plans and provided other applicable consulting services. In 1984, apparently disturbed by the lack of consistency and reliability in the actuarial cost estimates of the temporary "Rule of 85" considered and enacted in 1984, the Pension Commission enhanced the duties of the Commission-retained consulting actuary, requiring the Commission-retained actuary to perform the regular actuarial valuations and experience studies of the statewide and major local retirement plans. The Pension Commission retained The Wyatt Company 1984-1991 and Milliman & Robertson, Inc./Milliman USA 1991 to present.
The Normal Commission Budget and Appropriations Process, the Legislative Coordinating Commission, and the 2003 Session
In 1955, when the Legislative Commission on Pensions and Retirement was created (as the Legislative Commission to Report on Retirement Benefit Plans Available to Government Employees), the Commission was a separate governmental entity in the legislative branch and received a direct legislative appropriation.
In 1973, the Legislative Coordinating Commission was created (as the "joint coordinating committee") and was given jurisdiction over the Office of the Revisor of Statutes, the Legislative Reference Library, and an Office of Legislative Research. In 1978, the Legislative Coordinating Commission was given the responsibility to review and comment on the budget requests of any statutory legislative commission before the submission of that request to the appropriation committees of the Legislature. Joint legislative commissions also were prohibited from hiring additional staff or from increasing staff salaries without receiving the recommendation of the Legislative Coordinating Commission.
Until 1995, the Legislative Commission on Pensions and Retirement received a specific direct appropriation from the Legislature. Laws 1995, Chapter 254, Article 1, Section 2, Subdivision 4, modified that process, combining various joint legislative agency budget amounts into a single appropriation to the Legislative Coordinating Commission and specifically allocating appropriation amounts only to the Office of the Revisor of Statutes, the Legislative Reference Library, and the Office of the Legislative Officer. This began the current practice where the Legislative Coordinating Commission allocates to the Legislative Commission on Pensions and Retirement its biennial budget and those of other commissions and entities.
Usually, during each budget (odd-numbered year) session, the Commission staff prepares a budget proposal within the guidelines established by the Legislative Coordinating Commission, presents the budget proposal to the Commission for its approval, and forwards the Commission’s budget request to the Salary and Budget Review Subcommittee of the Legislative Coordinating Commission for its review and for review by the Legislative Coordinating Commission. The recommendation of the Legislative Coordinating Commission on the budget request of the Legislative Coordinating Commission is then normally forwarded to the State Government Finance Committee of the House of Representatives and to the State Government Budget Division of the Senate Finance Committee for action by those committees and eventual incorporation into the State Departments Appropriations Bill.
The 2003 Session did not utilize the normal budget process. The Legislative Coordinating Commission never established budget proposal guidelines, the Salary and Budget Review Subcommittee of the Legislative Coordinating Commission has only met once, on July 9, 2003, the Legislative Coordinating Commission has only met once since the start of the 2003 Legislative Session, on July 9, 2003, and the overall budgetary appropriation to the Legislative Coordinating Commission by the 2003 Legislature was not settled until late into the First 2003 Special Session.
Fiscal Year 2004 – Fiscal Year 2005 Appropriation Allocation from the Legislative Coordinating Commission
The likely appropriation allocation to the Legislative Commission on Pensions and Retirement from the Legislative Coordinating Commission is $465,000 for Fiscal Year 2004 and $465,000 for Fiscal Year 2005. This is 3.61 percent of the total Fiscal Year 2004 $12.9 million and Fiscal Year 2005 $12.9 million appropriation to the Legislative Coordinating Commission.
The Fiscal Year 2002 and Fiscal Year 2003 appropriation allocations to the Legislative Commission on Pensions and Retirement from the Legislative Coordinating Commission were $584,335 and $589,000, so the Fiscal Year 2004 and Fiscal Year 2005 appropriation allocations represent a 20.74 percent reduction over the prior biennium.
The $930,000 biennial appropriation allocations from the Legislative Coordinating Commission to the Legislative Commission on Pensions and Retirement is the smallest Commission budget since Fiscal Year 1992 – Fiscal Year 1993 biennium, when the actual expenditures of the Commission totaled $926,687.
The Fiscal Year 2004 – Fiscal Year 2005 biennium appropriation allocation by the Legislative Coordinating Commission for the Legislative Commission on Pensions and Retirement follows a 2001 State Departments Appropriations Bill error, in which the appropriations for the two years in the biennium for the Legislative Coordinating Commission were reversed, inadvertently downsizing the base year for the Fiscal Year 2004 – Fiscal Year 2005 budget, and follows budget reductions at the conclusion of the Ventura administration and at the start of the Pawlenty administration.
In addition to the Commission’s Fiscal Year 2004 – Fiscal Year 2005 base appropriation, the Legislative Coordinating Commission has provided the Pension Commission with an additional $25,000 in a one-time (non-base) appropriation.
Legislative Commission on Pensions and Retirement Biennial Budget Requirements
To continue functioning in the same manner that the Legislative Commission on Pensions and Retirement has operated in the past, the Commission has budgetary needs for the Fiscal Year 2004 – Fiscal Year 2005 Biennium of $1,078,459. The broad breakdown of those needs, on an annual basis, is as follows:
FY2004
FY2005
Staffing Costs: Salaries
$230,618
$230,618
Fringe
60,430
65,330
Operational Costs
5,000
5,000
Actuarial Consultant
205,000
265,000
*
Commission Member Costs
5,600
5,600
Total
$506,648
$571,811
* Includes the cost of the 2004 quadrennial experience studies for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA) and the full set of 14 valuations at the Milliman USA quoted rates, although the current actuarial contract with Milliman USA expires on June 30, 2004, without an extension by the Commission after resolution of issues of limitations on potential Milliman USA legal liabilities and dispute resolution raised by Milliman USA in 2002.
The difference between the Fiscal Year 2004 – Fiscal Year 2005 Biennium base and additional allocations to the Legislative Commission on Pensions and Retirement and the Commission’s budgetary needs at the current level of staffing and effort is $123,459, or $16,648 during the first year of the biennium and $106,811 during the second year of the biennium.
Potential Approaches to Balancing the Commission Budget
The Commission staff has identified ten options for handling the Fiscal Year 2004 – Fiscal Year 2005 Biennium Commission appropriation shortfall, with two options not involving legislation and with eight options involving legislation.
A summary of the budget coping options for Commission consideration and a brief policy issue evaluation of each option (ordered as non-legislative options first and legislative options second and not ordered by Commission staff preference) are as follows:
Non-Legislative Option: Salary Savings Leaves by Commission Professional Staff.
Summary: At least for Fiscal Year 2004, the Commission could balance its budget by having its professional staff (i.e., Executive Director and Deputy Director) take 25 percent (one-quarter time) salary savings leave during the 2003 Session – 2004 Session interim and the 2004 Session – 2005 Session interim. The two positions would be at full-time for the half year during which the Session occurs and half-time during the remainder of each year. A 25 percent leave will produce savings of $84,057.50 for the biennium, assuming that full retirement coverage and health insurance coverage continues under the salary savings leave authority contained in First Special Session Laws 2003, Chapter 1, Section 130.
Policy and Other Impacts: A potential 25 percent salary savings leave would generate enough savings to more than cover the Fiscal Year 2004 budget shortfall, but would not produce enough savings to cover the Fiscal Year 2005 budget shortfall, which includes the cost of the next set of experience studies for the three major plans. A potential 37 percent salary savings leave (full-time during session and one-third time during the interim) would cover the total biennial shortfall. A salary savings leave by both professional staff members during the Fiscal Year 2003 – Fiscal Year 2004 Interim will either limit or eliminate the staffing resources that would be available to the Commission in undertaking interim topics. The Commission, because of its late appointment and its limited period of available hearing time during the 2003 Legislative Session, left a considerable quantity of proposed legislation for potential interim work, including six bills dealing with administrative matters. The potential lack of Commission staffing resources will require the Commission to either reduce the number of interim projects undertaken or to do more of the work on interim projects in longer or more frequent Commission hearings rather than through Commission staff efforts. Mandated salary savings leaves will affect staff morale and may induce one or both professional Commission staff members to seek alternative employment.
Non-Legislative Option: Commission Staff Layoffs.
Summary: The Commission could balance its budget by laying off one of its professional staff for the balance of the biennium. The savings that the Commission could accrue from laying off the Executive Director or the Deputy Director would range from $137,000 to $189,000, which is the salary and employment benefit costs for 23 months after adjusting for the health insurance continuation period provided for in the Legislative Coordinating Commission benefit manual and adjusting for unemployment compensation charges.
Policy and Other Impacts. The potential layoff of either Commission professional staff member would resolve the Commission budget shortfall for the biennium. The layoff of either professional staff person will severely limit the capacity of the Commission staff to support Commission consideration of pending pension legislation during the 2004 or 2005 Legislative Sessions and of conducting any extended number of interim projects during the 2003-2004 Interim or the 2004-2005 Interim.
Legislative Option: Implement Most Modest Custis Actuarial Service Change Proposal (LCPR03-214).
Summary: In response to a Commission staff inquiry, Thomas K. Custis, F.S.A., of Milliman USA, prepared some options for downsizing the actuarial services that his firm provides the Commission. The least dramatic downsizing of actuarial services suggested by Mr. Custis would reduce the Commission’s actuarial expenditures by $20,000 per year and the option is contained in Draft Legislation LCPR03-214. Draft Legislation LCPR03-214 amends Minnesota Statutes, Section 3.85, which governs the operations and functions of the Legislative Commission on Pensions and Retirement, Section 356.215, which governs the content items for retirement plan actuarial valuations, and Section 356.55, which governs the prior service credit purchase payment amount determination procedure, by making the following changes:
Elimination of Legislators Retirement Plan and Elected State Officers Retirement Plan Actuarial Valuation Requirement. The requirement for the performance of annual actuarial valuations of the Legislators Retirement Plan and of the Elected State Officers Retirement Plan is eliminated (Section 1).
Reduction of Gains and Loss Analysis. The actuarial gains and loss analysis exhibit of the required actuarial valuations is downsized to reduce the analysis to a determination of the gains and losses from mortality and from investment performance.
Elimination of Report on Prior Service Credit Purchases. The report required of the consulting actuary retained by the Commission that compares prior service credit purchase payment amounts with the associated actuarial accrued liability increase is repealed.
Policy and Other Impacts. The most modest reduction in actuarial services would reduce, but not eliminate, the Commission’s budget shortfall for the biennium, accounting for $40,000 of the $123,459 shortfall. The reduction in the actuarial compensation payable by the Commission to Milliman USA will also reduce the amount recouped from the various retirement plans to the benefit of the State’s General Fund, potentially impacting the State’s overall budget. The elimination of the various services, proposed to be retroactive to the July 1, 2003, actuarial valuation cycle, would require the Commission to discontinue the affected actuarial services in advance of the authorizing legislation. The elimination of the Elected State Officers Retirement Plan actuarial valuation, which is without active members and is funded entirely on a pay-as-you-go basis, and the elimination of the Legislators Retirement Plan actuarial valuation, which has a diminishing number of active members and was recently shifted to a pay-as-you-go basis, will not cause the Commission any likely problems, but their elimination could complicate the State’s financial reporting. The reduction in the level of detail in the experience gain and loss analysis will deprive the Commission of some useful information on potential problems in some actuarial assumptions. The elimination of the prior service credit purchase payment and the liability comparison report will deprive the Commission of a tool for monitoring the continuing appropriateness of the 1998-1999 prior service credit purchase payment amount determination procedure, if that procedure is to be extended beyond its current sunset date of May 2004.
Legislative Option: Option 3 Plus Delay in Upcoming Experience Studies (LCPR03-215).
Summary: The option contained in Draft Legislation LCPR03-215 replicates Option 3 with the addition of a two-year delay (from Fiscal Year 2005 to Fiscal Year 2007) in the experience studies of the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA). The option would save an estimated $20,000 in Fiscal Year 2004 and an estimated $80,000 in Fiscal Year 2005.
Policy and Other Impacts. Option 4 would make a greater contribution to balancing the Commission’s budget shortfall for the Fiscal Year 2004 – Fiscal Year 2005 biennium, accounting for $100,000 of the $123,459 shortfall. The option has the other policy and related impacts of Option 3, plus the policy question of the advisability of the delay in the Fiscal Year 2005 experience studies. The Commission approved a large number of actuarial assumption changes in 2002, arising out of the experience studies that were performed in Fiscal Year 2001. Delaying the Fiscal Year 2005 experience studies would delay any refinement in the 2002 actuarial assumption changes for two years, either delaying the recognition of higher actuarial costs or temporarily foregoing the realization of lower actuarial costs. The principal issue seems to be timing, since the Fiscal Year 2007 experience studies could cover a seven-year period rather than the normal five-year period.
Legislative Option: Implement More Drastic Custis Actuarial Services Change Proposal (LCPR03-213).
Summary: The option contained in Draft Legislation LCPR03-213 was suggested by Thomas K. Custis as a more significant modification in the actuarial services provided to the Commission replicates Option 3 with the addition of the elimination of the consulting actuarial firm’s summary report of the annual actuarial valuations. The option would save an estimated $35,000 in each fiscal year, or $70,000 for the biennium.
Policy and Other Impacts: Option 5 would reduce the Commission’s $123,459 biennial budget shortfall by $70,000. The option has the policy impacts outlined for Option 3, plus the question of the policy advisability of elimination the annual valuation report. Mr. Custis indicates that the loss of the annual valuation report would be very significant. Since the report has become the primary occasion for Milliman USA to directly interact with the Commission, the report is very important for Milliman USA. The use and value of the annual valuation summary report for the Commission, the various retirement plans, the Department of Finance, and for other interested parties is unclear and the Commission should consider taking testimony on the issue.
Legislative Option: Option 5 Plus Delay in Upcoming Experience Studies (LCPR03-216).
Summary: The option contained in Draft Legislation LCPR03-216 replicates Option 5 with the addition of a two-year delay (from Fiscal Year 2005 to Fiscal Year 2007) in the experience studies of MSRS-General, PERA-General, and TRA. The option would save an estimated $130,000 for the biennium.
Policy and Other Impacts: Option 6 would offset the Commission’s budget shortfalls for both Fiscal Year 2004 and Fiscal Year 2005. The option would have the additional policy concerns outlined for Option 4 and Option 5.
Legislative Option: Alternating Biennial Actuarial Valuations for Smaller Retirement Plans (LCPR03-212).
Summary: The option contained in Draft Legislation LCPR03-212 replicates Option 6 and additionally amends Minnesota Statutes, Section 3.85, which governs the operations and functions of the Legislative Commission on Pensions and Retirement, Section 356.215, which governs the content items for retirement plan actuarial valuations, retroactive to July 1, 2003, by making the following additional changes:
Less Frequent Actuarial Valuations. The actuarial valuations of the state’s 14 statewide and major local defined benefit retirement plans would be made generally less frequent, as follows (Sections 1, 2, 4, and 5:
|
Annual |
Alternating Biennially |
Eliminated |
|
1. General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General) |
1. State Correctional Employees Retirement Plan of the Minnesota State Retirement System (MSRS-Correctional) |
1. Legislator’s Retirement Plan |
|
2. General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) |
2. State Patrol Retirement Plan |
2. Elected State Officers Retirement Plan |
|
3. Teachers Retirement Association (TRA) |
3. Minneapolis Employees Retirement Fund (MERF) |
|
|
4. Judges Retirement Plan |
||
|
5. Public Employees Police and Fire Retirement Plan (PERA-P&F) |
||
|
6. Duluth Teachers Retirement Fund Association (DTRFA) |
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7. Minneapolis Teachers Retirement Fund Association (MTRFA) |
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8. St. Paul Teachers Retirement Fund Association (SPTRFA) |
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9. PERA Local Government Correctional Employees Retirement Plan (PERA-Correctional) |
Makes Commission Actuarial Valuation Function Contingent on Available Appropriations. The actuarial valuations and related actuarial work to be prepared by the consulting actuary retained by the Commission is made contingent on the available appropriation of the Commission (Section 2).
Governmental Accounting Exhibits Made Directly Payable by the Applicable Retirement Plan. The current actuarial valuation governmental accounting exhibits are excluded from the actuarial work required to be prepared on behalf of the Commission, but are made the direct financial responsibility of the applicable retirement plan (Section 6).
While Thomas K. Custis has not been asked to prepare an estimate of the actuarial cost savings of the changes, the Commission staff believes that the savings should be in the neighborhood of $80,000 in each fiscal year, or $160,000 for the biennium.
Policy and Other Impacts: Option 7 would offset the pending $123,459 biennial Commission budgetary shortfall. The option has the policy issues outlined for Options 3, 4, 5, and 6. Additionally, the option would shift from annual actuarial valuations to biennial valuations for all but the three largest retirement plans, MSRS-General, PERA-General, and TRA. Since the Legislature, upon Commission recommendation, has required actuarial valuations in 1957, the frequency of the valuations has varied, with biennial actuarial valuations common for all plans in the 1950s and 1960s and for local police and paid firefighter relief associations until the 1980s. The actuarial valuation report provides the Commission, the Legislature, and other interested parties with a measure of the adequacy of the amassing of pension plan assets in comparison to pension plan liabilities in total and annually. Requiring biennial actuarial valuations would not eliminate that function, but would reduce the frequency of the acquisition of that information by half. In eliminating the Commission-generated actuarial valuation for the nine affected plans every other year, the option would not prevent the affected plan administration from contracting for an off-year valuation by the Commission-retained actuary on their own or from generating an off-year valuation prepared by another qualified actuary. When retirement plans are well funded (i.e., assets closely approaching or exceeding actuarial accrued liabilities), the need for very frequent actuarial valuations is likely reduced unless policy makers are contemplating granting benefit increases. For plans that are less well funded, such as the Minneapolis Teachers Retirement Fund Association (MTRFA) and the St. Paul Teachers Retirement Fund Association (SPTRFA), frequent actuarial valuations would be preferable in order to keep the funding issue in the forefront and to better monitor any further erosion in the plan’s level of contributions compared to its total actuarial requirements.
Legislative Option: Additional Retirement Plan Recoupment Charge for Commission Special Projects Budget and Revolving Account Establishment (LCPR03-217).
Summary: The option contained in Draft Legislation LCPR03-217 amends Minnesota Statutes, Section 3.85, Subdivision 12, which governs the recoupment of Legislative Commission on Pensions and Retirement actuarial costs for the preparation of actuarial valuations from the various statewide and major local retirement plans, by requiring each retirement plan to pay an additional special actuarial services recoupment amount ($9,000 annually each for MSRS-General, PERA-General, and TRA; $3,000 annually each for the remaining retirement plans) which would be deposited into a separate revolving account to fund special actuarial services undertaken by the Commission. The potential legislation would be effective on July 1, 2004. The option would produce a special actuarial services budget of $54,000 for Fiscal Year 2005.
Policy and Other Impacts: The option provides a funding source for the Legislative Commission on Pensions and Retirement special actuarial projects budget for Fiscal Year 2005, which formerly was funded from the General Fund and was eliminated as a consequence of budget cuts during the Venture and Pawlenty administrations. The option represents a generalized user fee on the various retirement plans for the costing out of benefit increase and related actuarial proposals related to those plans. The user fee is greater for the three major retirement plans ($9,000) than of the other nine smaller membership retirement plans, reflecting the greater general demand for special actuarial projects from the three major plans. The user fee is to be deposited into a revolving account for the Commission, thereby augmenting its current budget.
Legislative Option: Ten-Year Phase-In of Conversion of Actuarial Valuation Recoupment into a Revolving Account (LCPR03-218).
Summary: The option contained in Draft Legislation LCPR03-218 amends Minnesota Statutes, Section 3.85, Subdivision 12, which governs the recoupment by the Legislative Commission on Pensions and Retirement of its costs for the preparation of actuarial valuations from the statewide and major local retirement plans, by crediting the recoupment amounts to a separate revolving account rather than the General Fund on a phased basis over a ten-year period. The change would add $20,500 to the Commission budget for Fiscal Year 2004 and $47,000 to the Commission budget for Fiscal Year 2005.
Policy and Other Impacts: The option begins the conversion of the recouping of actuarial costs for the benefit of the State General Fund to a newly created revolving account and would resolve approximately 55 percent of the Commission’s Fiscal Year 2004 and Fiscal Year 2005 biennial budget shortfall. Creation of a revolving account rather than depending on State General Fund appropriations will provide some long-term stability in funding the Commission’s actuarial process, which varies in its financial requirements over a period longer than a biennium (three years of valuations only followed by one year of valuations and experience studies). The shift to a revolving account will have a negative financial on the State General Fund and the ten-year phase-out phase-in will need to be accommodated in the appropriations process. The appropriations committees of the Legislature also have been traditionally opposed to the creation of revolving accounts because those accounts tend to avoid or evade legislative scrutiny.
Legislative Option: Add Retirement Plan Charge to Recoup Commission Administrative Legislation Processing and Oversight Costs (LCPR03-219).
Summary: The option contained in Draft Legislation LCPR03-219 amends Minnesota Statutes, Section 3.85, Subdivision 12, which governs the recoupment of actuarial valuation preparation costs from the statewide and major local retirement plans by the Legislative Commission on Pensions and Retirement, by requiring the additional recoupment by the Commission from the various retirement plans of a portion of the Commission’s budget expended to consider proposed administrative legislation and to conduct administrative oversight. The recoupment would be 0.0015 percent of the most current reported administrative expenses of the retirement plan, or $90,000 during the Fiscal Year 2005 and Fiscal Year 2005 biennium, and would be deposited into a Commission revolving fund.
Policy and Other Impacts. The option creates an additional user charge to be borne by the retirement plans to offset some of the Commission member and staff costs arising from the review of proposed retirement plan administrative legislation each Fall, consideration of those proposals and other proposed administrative legislation each legislative session, Commission staff review of pension plan governing board minutes, valuations, comprehensive annual financial reports, audits, investment performance reviews, and other documents, and Commission staff attendance at retirement plan governing board and State Board of Investment meetings. The recoupment charges would add $90,000 to the Commission’s Fiscal Year 2004 – Fiscal Year 2005 biennial budget through the use of a revolving account, or approximately 72 percent of the Commission’s budgetary shortfall. The charge would increase the administrative expenses of the 12 retirement plans, although the impact would be modest, as follows:
|
Plan |
Proposed |
2002 |
Resulting |
|
MSRS-General |
0.15% |
$4,081,000 |
$6,121.50 |
|
PERA-General |
0.15 |
9,125,000 |
13,687.50 |
|
TRA |
0.15 |
13,378,000 |
20,067.00 |
|
MSRS-Correctional |
0.15 |
276,000 |
414.00 |
|
State Patrol |
0.15 |
103,000 |
154.50 |
|
PERA-P&F |
0.15 |
650,000 |
975.00 |
|
PERA-Correctional |
0.15 |
149,000 |
223.50 |
|
DTRFA |
0.15 |
424,000 |
636.00 |
|
MTRFA |
0.15 |
719,000 |
1,078.50 |
|
SPTRFA |
0.15 |
451,000 |
676.50 |
|
MERF |
0.15 |
778,000 |
1167.00 |
|
Judges |
0.15 |
59,000 |
88.50 |
|
Total |
$30,193,000 |
$45,289.50 |
1 Source: 2002 Actuarial Valuations, Table 11
Conclusion
The Commission staff recommends that the Commission approve one option or a combination of options to resolve the biennial budget shortfall. Option 1 or 2 resolve most or all of the budgetary shortfall, but seriously change the manner in which the Commission will be staffed and the amount of proposed legislation and the number of policy issues the Commission can process or study each year. Options 3, 4, 5, 6, or 7 resolve most or all of the budgetary shortfall, but seriously diminish the amount of actuarial information for the Commission to assist in future pension changes and would require making some changes in statutorily required actuarial work in advance of the enactment of the authorizing legislation. Option 9 resolves most of the budgetary shortfall, but would diminish resources currently returning to the State General Fund and would create a revolving account within the Commission. Options 8 or 10 resolve most or all of the budgetary shortfall, but would increase the financial burden of the various retirement plans subject to oversight by the Commission and would create revolving accounts within the Commission.