H.F. 2672 (Koenen); S.F. 1871 (Kubly) includes RenVilla Nursing Home employees under the provisions of Chapter 353F, Privatized Public Hospital, Public Employees Retirement Association (PERA) Pension Benefits, if the facility is privatized (the facility will be operated by or purchased by a private sector or a non-profit sector entity, rather than a by public entity). The act would be effective if local approval is provided and if the bill does not create an actuarial loss for the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General).

The RenVilla Nursing Home is currently owned by the city of Renville, and its approximately 75 full-time employees and 35 part-time employees (i.e., those meeting a $425 per month minimum salary threshold) have retirement coverage by the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), a defined benefit retirement plan. The nursing home has 60 beds, and there are various attached housing units where assisted care services are provided. The nursing home complex is expected to be sold to a private or non-profit organization, Renville Regional Senior Services, possibly in mid-March. If that sale occurs, it is likely that the RenVilla Nursing Home complex employees will no longer be eligible for continued PERA-General coverage. The new employer may provide the employees with some other form of retirement coverage for their ongoing employment at the facility.

Following privatization, the employer might choose to provide a defined contribution plan for the employees. 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.

The other general plan type is a defined benefit plan. 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. The fixing 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 paying into the plan, rather than the employee, bear 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 at an early age, or with modest service, 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 entitled 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 entitled 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.

H.F. 2672 (Koenen); S.F. 1871 (Kubly) would amend law to provide PERA privatization chapter coverage (Chapter 353F) for the RenVilla Nursing Home employees if that facility is privatized. When the privatization of a PERA-covered employing unit occurs, the employees no longer qualify as public employees and no longer qualify for continued PERA-General coverage. However, if these employees are made eligible for Chapter 353F, they will have certain benefits that differ from the typical treatment of terminated employees. One justification for this different treatment is that the privatized employees did not choose to leave public service and public retirement plan coverage. Their employee status changed from public to non-public due to an action by the employer that transferred ownership of the facility, rather than by an exercise of free will on the part of the employee.

Under a privatization, Chapter 353F provides the following special coverage provisions to the privatized employees:

1. Vested Benefit with Any Service Length. The normal three-year PERA vesting period is waived, so a privatized employee with less than three years of PERA-covered service would be entitled to receive a PERA retirement annuity, notwithstanding general law.

2. Increased Deferred Annuity Augmentation Rate. For the period between the date of privatization and the date of eventual retirement, the privatized employee’s deferred PERA retirement annuity will increase at the rate of 5.5 percent rather than three percent until age 55 and at the rate of 7.5 percent rather than five percent after age 54.

3. "Rule of 90" Eligibility with Post-Privatization Service. For privatized employees with actual or potential long service who could have retired early with an unreduced retirement annuity from PERA under the "Rule of 90" (combination of age and total service credit totals 90), the employee will be able to count future privatized service with the hospital for eligibility purposes, but not for benefit computation purposes.

1. Privatization Trend. There has been a trend among health care facilities to convert from public sector ownership to private sector or quasi-public sector ownership. These conversions have involved selling, leasing, or transferring the facility, and transferring the existing employees to that reorganized health care facility. The privatization of health care facilities is occurring among both large and small hospitals, clinics, and related healthcare providers. The privatizations typically increase organizational flexibility and reduce various costs to remain financially competitive. One area of potential savings is that of retirement coverage by PERA, or another public pension plan, if applicable, which may be eliminated by the privatization.

2. Privatization Impact on Retirement Coverage. When a privatization occurs and employees no longer qualify as public employees for PERA pension purposes, membership in PERA terminates and retirement benefit coverage problems may emerge. Under current PERA law, three years of PERA coverage is required for vesting. For employees who terminate PERA membership without vesting, no deferred retirement annuity right typically is available. The member may elect a refund of accumulated member contributions with six percent interest, or the individual may leave the contributions at PERA, perhaps in the expectation that the individual will change employment in the future and again become a covered public employee. For a vested employee who terminates PERA membership with at least three years of service, there is a choice between a deferred retirement annuity right or a refund. The deferred retirement annuity is augmented by three percent per year under age 55 and five percent per year thereafter until retirement.

   When a privatization occurs and employees lose the right to continue coverage by the public plan, all of the employees are impacted. The employee may be terminated from employment at the time of the sale, transfer, or reorganization. Those employees will lose both continued employment and continued retirement coverage. For employees who remain employed after transfer to the newly organized healthcare facility, the privatization interrupts their benefit coverage. If there is no pension plan established by the privatized health care facility, the employees will suffer a loss of overall benefit coverage beyond Social Security. If the new employer does provide a plan, portability problems between the old plan and the new plan are likely.

3. Evolution of Privatization Treatment. The Legislature has dealt with privatizations on several occasions over the past few decades, primarily healthcare privatizations. The treatment has evolved over time. At times, in addition to any benefit that the employee may have been eligible for under a public pension plan as a deferred annuitant, the individual was offered an enhanced refund (employee plus employer contributions) plus interest. On at least one occasion, the individuals were permitted to remain in PERA, although that practice has not been favored in more recent years. The following summarizes treatments used since 1984:

   • In 1984, relating to the privatization of the Owatonna City Hospital, legislation allowed the affected employees to receive a deferred retirement annuity with at least five years of service or to receive a refund of employee and employer contributions, plus interest at six percent, compounded annually.

   • In 1986, relating to the St. Paul Ramsey Medical Center reorganization, legislation allowed only a delayed right to withdraw from PERA and receipt of a refund of only member contributions plus interest at five percent, compounded annually.

   • In 1987, relating to the Albany Community Hospital and the Canby Community Hospital, legislation allowed the affected employees to receive a deferred retirement annuity with a five-year vesting period or to receive a refund of both employee and employer contributions, plus compound annual interest at six percent.

   • In 1988, relating to the Gillette Children’s Hospital employees, legislation continued the membership of the affected employees in the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), but excluded new employees from public pension plan coverage.

   • In 1994, relating to the St. Paul Ramsey Medical Center again, legislation continued the PERA membership of existing employees who were PERA members unless the employee elected to terminate PERA membership before July 1, 1995.

   • Beginning in 1995, two approaches have been used:

   1. Public Pension Plan Membership Discontinuation with Local Employer Option. In this model, continuing PERA coverage ends for all employees at the time of the transfer of the healthcare facility to the new ownership. The new healthcare entity may provide a "PERA-like" plan for individuals who are transferred with the facility and remain as employees of the new entity. For individuals who are terminated at the time of the transfer, and who were not vested in PERA, the city may match any refund with interest that the individual receives from PERA. This model was used with the Olmsted County Medical Center privatization (1995), the Itasca County Medical Center (1995 and 1996), and Jackson Medical Center, Melrose Hospital, Pine Villa Nursing Home, and the Tracy Municipal Hospital and Clinic (1997), and the Luverne Community Hospital (1998) privatizations.

   2. Special Continuing Public Pension Plan Rights After Membership Discontinuation. This approach was first used in 1996 and is the model that has been followed in the most recent privatizations. It is the model upon which the PERA privatization chapter, chapter 353F, is based. In this model, termination of coverage by the public plan occurs at the time of the privatization, but the employees who terminated coverage (even those who were not vested) were permitted deferred annuities from the public plan with an augmentation rate that exceeded that used under general law, and the employees were allowed to use service with the new organization to meet age/service requirements for qualifying for the "Rule of 90" under the public plan. This approach was used in 1996 for the University of Minnesota Hospital-Fairview merger, and was coded as Chapter 352F. The plan that had previously provided coverage to the transferred employees was the General Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General).

   • In 1999, the Legislature passed legislation for PERA privatizations based on the model used in the 1996 University of Minnesota Hospital-Fairview merger. That process is coded as Minnesota Statutes, Chapter 353F, and provides the waiver of vesting requirements, enhanced deferred annuity augmentation, and "Rule of 90" eligibility provisions previously described.

H.F. 2672 (Koenen); S.F. 1871 (Kubly) includes RenVilla Nursing Home employees under the provisions of Chapter 353F, Privatized Public Hospital, Public Employees Retirement Association (PERA) Pension Benefits, if the facility is privatized (the facility will be operated by or purchased by a private sector or a non-profit sector entity, rather than a by public entity). The act would be effective if local approval is provided and if the bill does not create an actuarial loss for PERA-General.

The legislation raises the following pension and related public policy issues:

Consistency with Other Bills. The Commission may wish to be aware that there are several similar bills on this agenda. Proposals for other privatized employee groups (H.F.1699 (DeLaForest); S.F. 1619 (Betzold)/ H.F.1700 (DeLaForest); S.F. 1620 (Betzold): PERA: Coverage for Anoka County Achieve Program Former Employees), and a few other bills, directly raise issue of whether the Commission should continue with the present privatization model found in Chapter 352F and 353F, or revert back to an older practice of permitting privatized employees to remain as active members in the public plan. H.F.1699 (DeLaForest); S.F. 1619 (Betzold) would allow privatized Anoka County Achieve Program employees to remain in PERA, while the alternative, H.F.1700 (DeLaForest); S.F. 1620 (Betzold), would have these individuals placed under the PERA privatization chapter. In making decisions regarding H.F. 2672 (Koenen); S.F. 1871 (Kubly), and the various similar bills on this agenda, the Commission may wish to be consistent in treating the various groups, at least to the extent that the parties impacted by the bills desire that consistency. Some privatized employee groups and their new employers may not wish to continue with public plan coverage.

Need for Action. H.F. 2672 (Koenen); S.F. 1871 (Kubly) would place RenVilla Nursing Home employees in the privatization chapter. Assuming the Commission decides to continue using that model for privatizations, the issue is whether the situation addressed by H.F. 2672 (Koenen); S.F. 1871 (Kubly) is sufficiently similar to recent prior privatizations to justify revising the PERA privatization chapter to include this group. If the Commission were to decide to take no action on H.F. 2672 (Koenen); S.F. 1871 (Kubly) and a privatization occurs, the individual would be treated under PERA-General law and would have the same options as any other public employee who terminates employment. The individual would have a right to a refund of employee contributions plus interest. If the individual has at least three years of covered service but cannot or chooses not to retire, the individual can have a deferred annuity in lieu of a refund. The deferred annuity would augment at three percent per year up to age 55 and at five percent per year thereafter, which is a less favorable augmentation than is extended under the provisions of Chapter 353F.

Alternative of Using Prior Model – Allowing Privatized Employees to Remain in PERA. An alternative to the proposed treatment is to permit the individuals to remain as active members in PERA-General. For PERA situations, this approach was last used in 1994 for the St. Paul Ramsey Medical Center privatization. This approach was also used in a Minnesota State Retirement System (MSRS) privatization in 1993, when the University of Minnesota heating plan was privatized. If the Commission were to allow the privatized RenVilla Nursing Home employees to remain in PERA, a few questions are raised.

1. The first is whether allowing privatized employees to remain in PERA or another public plan would jeopardize the tax-qualified status of the public plans. PERA and MSRS administrators raised that concern in the past. That concern was one reason the Legislature began to move away from permitting privatized employees to remain in public plans. A public plan will retain its tax-qualified status providing the membership is primarily public employees, and non-public employees are a minimal part of the plan membership. The question is how the Internal Revenue Service (IRS) or other federal agencies would decide what constitutes a minimal percentage. While any single privatization treated in this manner is unlikely to cause a plan qualification issue, PERA may be concerned that reverting to this treatment could be a significant issue if that model is followed for larger privatizations that may occur in the future. This is some limit beyond which it may not be appropriate to go. The Commission may wish to have testimony from PERA’s Executive Director on this matter.

2. The second issue is the impact that this reversal of policy would have on recent prior privatization groups. Groups now covered by the MSRS and PERA privatization chapters, Minnesota Statutes, Chapter 352F and 353F, respectively, may request treatment that reinstates their active membership in PERA-General or MSRS-General, as applicable. This could be problematic, and in part would require the Commission to address the issue of what treatment to provide to individuals who retired following the privatization.

3. A third issue is whether the employees and employers impacted by the privatization bills on the agenda would want to retain PERA-General coverage, rather than be covered by the privatization chapter.

Actuarial Cost of the Special Benefit Provisions and Gain/Loss Issues. In the Fairview/University hospital merger, and in the PERA privatizations where employees have been extended the treatment under Chapter 353F, the Commission and the Legislature approved the proposed treatment providing that the pension plan from which the employees were terminating (MSRS-General in the case of the Fairview/University Hospital merger and PERA-General in the case of the PERA privatizations) was not expected to suffer an actuarial loss as a result of the proposed treatment. In most cases, the actuary was able to provide that analysis in time for the Commission’s consideration. In cases where the information was not available at the time of Commission consideration, the legislation’s approval was conditional upon the receipt of actuarial analysis by the Commission-retained actuary indicating that a gain to the applicable pension plan, rather than a loss, was expected due to the combination of the privatization and the enhanced benefits provided by Chapter 353F. H.F. 2672 (Koenen); S.F. 1871 (Kubly) is consistent with Commission practice by including language in the effective date making the legislation conditional upon the receipt of actuarial work from the Commission-retained actuary, and certification by PERA that the analysis indicates that a net gain to the fund is expected.

Special Consideration Due to PERA-General Actuarial Condition. The issue is whether H.F. 2672 (Koenen); S.F. 1871 (Kubly) should be recommended to pass given PERA-General’s current funding problems. PERA-General has had a contribution deficiency in the last few years. The results from PERA-General’s most recent actuarial valuation (July 1, 2003), summarized below, indicate a current contribution deficiency of 1.24 percent of payroll, or $52.8 million.

PERA-General
July 1, 2003, Actuarial Valuation Results

PERA would be harmed by the proposed legislation although the impact is marginal. If the RenVilla Nursing Home employees were treated like terminated employees under PERA-General law, PERA is likely to have a gain. The treatment under Chapter 353F, the privatization chapter, shares some of that gain with these employees by providing enhanced deferred annuities and "Rule of 90" rights, where applicable. Because those rights have value, the gain to PERA is reduced. Therefore, PERA would be in better condition without this legislation. This raises the question of whether the legislation should be recommended to pass, given that the last few PERA-General actuarial reports have indicated that the plan has a contribution deficiency (the contributions are less than the contribution level that the actuary has determined to be necessary to finance the plan in the long run, and to pay off all unfunded liabilities by the full funding date, July 1, 2030).

In the past few years, Chapter 353F has been amended to include employees from a few organizations despite PERA-General’s contribution deficiency. In 2003, legislation passed which authorized the Renville County Hospital in Olivia to be added to the privatization chapter. Consistent with policy followed with recent privatizations, local approval was required along with a finding by the actuary that there was some net gain to PERA. Commission staff is unsure whether local approval has occurred. A note in the 2003 Minnesota Statutes Supplement indicates that the approval had not occurred as of the date the supplement was compiled, and the applicable language was not included in the supplement. The language passed the Legislature as Laws 2003, Chapter 12, Article 5. There is no record of the Commission as a whole hearing the provision or making a recommendation on the legislation. The language was added to the Senate position through a Senate amendment and was included in the pension legislation that passed.

In February 2002, the Commission heard H.F. 2782 (Erickson); S.F. 2555 (Stevens): PERA Privatized Employees: Adding Kanabec Hospital Employees to PERA Privatized Employee Chapter Following Privatization. Commission recommended that proposal to pass despite PERA’s contribution deficiency situation, and the legislation passed as Laws 2002, Chapter 392, Article 5.

If the Commission decides to use another approach, reverting back to permitting privatized employees to remain as active PERA-General members, PERA receives no termination gains because the individuals do not terminate following privatization, assuming those employees remain employed at the privatized facility. Thus, PERA is likely to be harmed more (have more forgone gains) by letting the individuals remain in the plan than by having them placed in the privatization chapter.

6. Replacement Pension Plan. The Commission may be interested in the pension plan coverage the private employer will provide for these privatized employees for the service provided after privatization. Commission staff does not have any information on that issue, but presumably someone can provide testimony summarizing the new coverage. In the not too distant past, it was hoped that the new employer would establish a "PERA-like" plan for the privatized employees. If the pension plan coverage provided by the employer following privatization is deemed to be inadequate, it may be a reason for the Commission to reconsider at some future date the policy used in privatizations.

7. Local Support/Covering Cost of Actuarial Work. H.F. 2672 (Koenen); S.F. 1871 (Kubly) requires that the cost of the actuarial work must be covered by the City of Renville, which is the current employer, or by the purchaser of the facility. The issue is whether the city supports this legislation and whether the existing or prospective employer is willing to cover that cost. If not, there is little reason to spend legislative time on the issue. Judging from prior privatizations, Commission staff would expect that cost to be between $1,000 and $3,000. There are no funds in the Commission budget to cover the cost of the actuarial work.

8. Retroactive Legislation. The policy issue is the appropriateness of retroactivity, having the legislation apply for a period before the enactment date. The privatization may occur in mid-March 2004, which is before the legislation could likely be enacted. Prior privatizations were prospective, allowing public employees on the verge of privatization to better plan. The retroactive application should not cause any policy or practical problems unless some of the privatized employees take a PERA refund after the date of the privatization and before the legislation can be become effective. The bill would need to pass the Legislature, which might occur in April or May 2004, and would then need local approval, which would add additional time. If individuals take a PERA refund (which has the effect of terminating all further rights under PERA-General or the privatization chapter) after privatization but before the legislation can be come effective, and then desire the benefits under Minnesota Statutes, Chapter 353F, additional remedial legislation may need to be considered. It would be wise for RenVilla Nursing Home complex employees to seek PERA counseling and to avoid taking refunds until they know whether they have been included in the privatization chapter.

The Commission may wish to consider amendment LCPR04-122, which would allow these individuals to remain as PERA-General members.

LCPR04-122 is a delete-everything amendment to H.F. 2672 (Koenen); S.F. 1871 (Kubly). The amendment would leave the RenVilla employees in PERA-General following the privatization. If the Commission wishes to consider this treatment, the Commission may wish to hear brief testimony from employee and employer representatives to determine whether the parties desire this treatment. The Commission may also wish to have the Executive Director of PERA testify regarding any concerns PERA may have regarding this treatment. Policy concerns about this approach were stated previously in this memo.