Summary of H.F. 1699 (DeLaForest); S.F. 1619 (Betzold)

H.F. 1699 (DeLaForest); S.F. 1619 (Betzold), in the form of authors’ delete-all amendment H1699DE1, would authorize individuals employed in the Anoka County Achieve Program to remain in the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) following privatization of that program.

H.F. 1700 (DeLaForest); S.F. 1620 (Betzold) would allow employees who work in that program as of the privatization date to be covered by the PERA privatization chapter.

These sets of bills present two alternative treatments for Anoka County employees working in the Achieve Center Program following a privatization of that program. The treatment proposed in H.F. 1699 (DeLaForest); S.F. 1619 (Betzold) would allow the employees to remain as active PERA-General members. This approach was used in a few prior privatizations. H.F. 1700 (DeLaForest); S.F. 1620 (Betzold) would place these privatized employees under PERA’s privatization chapter, which is the treatment used most recently in privatizations.

Current Employment Situation

The Anoka County Achieve Program is currently staffed by 45 Anoka County employees covered by PERA-General, a defined benefit retirement plan. Four additional staff positions are vacant. The program provides day treatment and rehabilitation for adults with developmental disabilities. A privatization with Achieve Services, Incorporated, a 501(c)(3) nonprofit, is pending with final details to be determined based on the outcome of proposed legislation. Commission staff’s understanding, based on discussion with the personnel director for the current program, is that the new employer would agree to have the existing employees continue PERA-General coverage, and that the employees as a group prefer that treatment. The employer would provide a 401(k) program (a defined contribution plan) for new hires after the privatization date. There would be an employer contribution to that program with an optional employee contribution. If the current employees are placed under the PERA privatization chapter rather than remaining as active PERA-General members, presumably these employees would also be given the 401(k) plan coverage.

Background Information on Defined Contribution Pension Plans and Defined Benefit Pension Plans

Achieve Services, Inc., intends to offer a 401(k) plan to new hires after privatization. That plan would presumably also be offered to existing PERA-General members following privatization if the individuals are placed in the privatization chapter rather than being offered continuing PERA-General active membership, or if they are simply treated as terminated PERA-General members if no legislation is enacted.

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.

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.

Treatment Under Chapter 353F, PERA Privatized Hospital

H.F. 1700 (DeLaForest); S.F. 1620 (Betzold) would amend law to have PERA privatization chapter coverage (Chapter 353F) in the event that privatization of the Anoka County Achieve program occurs. 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.

Background Information on Health Care Facility Privatizations

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.

Policy Issues

H.F. 1699 (DeLaForest); S.F. 1619 (Betzold), in the form of delete-all amendment H1699DE1, would authorize individuals employed in the Anoka County Achieve Program to remain in the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) following privatization of that program.

H.F. 1700 (DeLaForest); S.F. 1620 (Betzold) would allow employees who work in that program as of the privatization date to be covered by the PERA privatization chapter.

These sets of bills present two alternative treatments for Anoka County employees working in the Achieve Center Program following a privatization of that program. The treatment proposed in H.F. 1699 (DeLaForest); S.F. 1619 (Betzold) would allow the employees to remain as active PERA-General members. This approach was used in a few prior privatizations. H.F. 1700 (DeLaForest); S.F. 1620 (Betzold) would place these privatized employees under PERA’s privatization chapter, which is the treatment used most recently in privatizations. The bills raise the following pension and related public policy issues:

1. Treatment Options. The Commission, in reviewing these sets of bills, has a few general options:

   1. The first option is to take no action. If neither set of bills is enacted and a privatization of the Anoka County program occurs, individuals current working in that program 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 retire 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. These augmentation rates are less favorable than is extended under the provisions of Chapter 353F.

   2. The second option is to act on H.F. 1699 (DeLaForest); S.F. 1619 (Betzold). Under this legislation the privatized Anoka County employees would remain in PERA-General as active employees for the continuing employment. This model has been used in the past, but the Commission moved away from this approach in the mid-1990s.

   3. The third option is to act on H.F. 1700 (DeLaForest); S.F. 1620 (Betzold). Under this legislation privatized Anoka County employees would be added to the PERA privatization chapter. The Commission has used this approach in recent privatizations since the late 1990s.

2. Consistency with Other Bills. The Commission may wish to be aware that there are several 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.

3. Alternative of Using Prior Model – Allowing Privatized Employees to Remain in PERA. The option proposed by 1699 (DeLaForest); S.F. 1619 (Betzold) is to revert back to using an earlier model, allowing 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 Anoka County 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. Retaining the Achieve Program personnel as active PERA members following a privatization is highly unlikely to cause a plan qualification issue, because there are only a few dozen individuals, but 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. Commission staff’s understanding is that at least with the Anoka County Achieve program employees, these employees as a group prefer PERA-General coverage, and the new employer is willing to cover the PERA employer contribution requirements. However, the LCPR may wish to hear brief testimony on that matter.

4. 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 Minnesota Statutes, Chapter 353F, the Commission and the Legislature approved the proposed treatment if 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 net actuarial losses as a result of the proposed treatment. The actuary retained by the Legislative Commission on Pensions and Retirement was able to provide an analysis for the Commission’s consideration on the current bills. The actuarial work from Milliman USA indicates the following about the proposed inclusion of the Anoka County Achieve Program employees under Minnesota Statutes, Chapter 353F. The first table below presumably is for the entire group, indicated in the table as 44 employees. The program’s personnel director recently indicated that there were 45 employees. It is possible that another individual was hired after the actuarial work was done in mid-January 2004, or that for some other reason, one employee is not showing up in PERA records.

Column (c) replicates the calculations that were performed for the prior privatization under Minnesota Statutes, Chapter 353F, before 2004. The difference between the Column (b) and Column (c) calculations relates to a difference in an actuarial cost loading to account for the Combined Service Annuity, which was increased for PERA-General by the Commission in actuarial assumption changes approved in late 2002. Milliman USA indicates its opinion that the Column (b) calculation significantly overstates the likely true cost of the inclusion of Anoka County Achieve Program employees in Minnesota Statutes, Chapter 353F, and indicates its opinion that the Column (c) calculation slightly understates the likely true cost of the inclusion of Anoka County Achieve Program employees in Minnesota Statutes, Chapter 353F.

For reasons that are not clear the actuary included a second set of results. Those results, presented below, are based on 33 employees rather than 44, by excluding 11 employees who where closest to retirement. No explanation is provided to indicate why it might be appropriate to exclude those individuals.

5. Special Consideration Due to PERA-General Actuarial Condition. The issue is the impact of either model (retention as active PERA members, or use of the privatization chapter) on PERA 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.

 

 

 

 

 

 

 

 

Assuming the legislation does become effective, PERA would be marginally harmed by the either approach, but slightly more by letting the individuals remain as active plan members. We begin by describing what occurs if no legislation passes. In that case, the privatized Anoka County employees would be treated like terminated employees under PERA-General law and PERA is likely to have a turnover gain. The treatment under the privatization chapter, chapter 353F, (which is used in H.F. 1700 (DeLaForest); S.F. 1620 (Betzold)), 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 net gain to PERA is reduced. Therefore, PERA would be in better condition without this legislation.

If the Commission decides to use the other suggested approach (H.F. 1699 (DeLaForest); S.F. 1619 (Betzold)) 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.

Because either set of bills would cause PERA to forgo some gains that will otherwise occur under the privatization, the bills raise 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.

6. Nature of Replacement Pension Plan. Commission staff’s understanding is that Achieve Services, Inc. will provide a 401(k) plan if continuing PERA-General active membership is not authorized. This is a defined contribution plan. In the not too distant past, language in privatization legislation encouraged the new employer to establish a "PERA-like" plan for the privatized employees. Presumably, that meant a defined benefit plan similar to PERA. This may influence Commission members if they choose to decide between allowing continued PERA-General coverage versus using the privatization chapter approach.

Potential Amendment for Commission Consideration

If the Commission chooses to act on H.F. 1700 (DeLaForest); S.F. 1620 (Betzold), the Commission may wish to consider amendment LCPR04-120.

LCPR04-120 removes the language in the effective date requiring actuarial work and a finding that a net gain occurs to PERA due to the privatization. That actuarial work has already been done and is presented in the memo and attachments. That amendment may be appropriate if the Commission concludes from those materials that PERA will receive a net gain under the privatization.