Summary

H.F. 2347 (Krinkie); S.F. 2212 (Reiter): PERA and PERA-P&F Coverage for Lake Johanna Volunteer Fire Department Employees, authorizes full-time and part-time employees of the Lake Johanna Volunteer Fire Department, Inc., who become members of the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) or the PERA Police and Fire Plan (PERA-P&F), whichever is applicable, on or before June 1, 2004, to purchase service credit in the applicable PERA plan for past service prior to becoming plan members if that service would have been covered service if provided after the membership began. The service credit purchases are at full actuarial value.

Background on the Situation

1. Similar Earlier Situation – Spring Lake Park Fire Department, Inc. The situation addressed by H.F. 2347 (Krinkie); S.F. 2212 (Reiter) is similar in several respects to legislation enacted in 2000 for employees of the Spring Lake Park Fire Department, Inc. It may be useful to first describe that earlier situation.

The Spring Lake Park Fire Department, Inc., is a nonprofit firefighting corporation (under section 501(c)(3) of federal code). This firefighting corporation provides firefighting and fire suppression services to Spring Lake Park and a few surrounding communities. In 1997, the corporation requested coverage under PERA-General and/or PERA Police and Fire (PERA-P&F) for paid employees of the firefighting corporation. PERA administrators rejected that request, indicating that the corporation lacked sufficient characteristics to be considered a governmental subdivision under PERA law. PERA provides pension coverage to employees of covered employers. The covered employers are governmental subdivisions, as defined under Section 353.01, Subdivision 6. The general definition of a governmental subdivision is "a county, city, town, school district within this state, or a department or unit of state government, or any public body whose revenues are derived from taxation, fees, assessments or from other sources."

Following that rejection, Spring Lake Park Fire Department, Inc., sought an Internal Revenue Service (IRS) opinion regarding whether the corporation had sufficient characteristics to be considered an agency or instrumentality of the state for purposes of making PERA contributions. The IRS opinion concluded that the corporation has sufficient characteristics to be considered an agency or instrumentality of the state for purposes of making contributions to a public plan. This conclusion was based on city and state funding responsibilities to the corporation, state legislation authorizing the existence of the corporation, and the degree of direction provided by city elected officials or city representatives over the corporation’s budget and activities.

Based on the IRS opinion, PERA’s Board again reviewed the situation and concluded that the PERA’s definition of governmental subdivision (Section 353.01, Subdivision 6) should be broadly interpreted to include the Spring Lake Park Fire Department. If the employees of that corporation met the other applicable requirements to be PERA-General or PERA-P&F members, then those employees should be in the applicable plan. PERA began accepting contributions on behalf of the five full- and part-time employees of the Spring Lake Park Fire Department, Inc., as of June 1, 1999. PERA-General coverage commenced as of that date for the individuals employed in clerical, secretarial, or other administrative positions, while PERA-P&F coverage commenced for the remaining individuals.


In 2000, legislation was introduced and enacted which permits these employees to purchase past service in the applicable plan for prior service that would have been covered by the applicable PERA plan if coverage had been permitted sooner. The purchases were at full actuarial value. PERA’s definition of governmental subdivision (Section 353.01, Subdivision 6), was not revised in the 2000 legislation. A few years later, when the Red Wing Environmental Learning Center and Dakota County Agricultural Society were added to the governmental subdivision provision for purpose of permitting PERA coverage for certain employees, the Spring Lake Park Volunteer Fire Department, Inc., was also added as part of technical clean-up.

2. Current Situation, Lake Johanna Volunteer Fire Department , Inc. The current situation with Lake Johanna Volunteer Fire Department , Inc., as addressed by H.F. 2347 (Krinkie); S.F. 2212 (Reiter), is similar to the above situation. One difference, though, is that Lake Johanna Volunteer Fire Department has only one employee, not several. According PERA, that employee is the fire chief who has been a paid employee of the organization for about one year. According to testimony the individual provided to PERA’s Board, the individual is covered by the volunteer fire plan, but no other pension is provided by the organization for the individual’s general duties as fire chief.
   

Pension Policy Issues

H.F. 2347 (Krinkie); S.F. 2212 (Reiter): PERA and PERA-P&F Coverage for Lake Johanna Volunteer Fire Department Employees, authorized full-time and part-time employees of the Lake Johanna Volunteer Fire Department, Inc., who become members of the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) or the PERA Police and Fire Plan (PERA-P&F), whichever is applicable, on or before June 1, 2004, to purchase service credit in the applicable PERA plan for past service prior to becoming plan members if that service would have been covered service if provided after the membership began. The service credit purchases are at full actuarial value.

Pension policy issues are:

1. Sufficient Similarity to Spring Lake Park Situation. The issue is whether this situation is sufficiently similar to the Spring Lake Park situation that PERA-General and/or PERA-P&F coverage is warranted. The Commission may wish to have testimony from Mary Vanek, Executive Director of the Public Employees Retirement Association (PERA), on whether this organization is sufficiently similar to the Spring Lake Park Fire situation to justify including the corporation as a governmental subdivision, which leads to PERA plan coverage for its employee or employees. The Commission may also wish to hear what reservations, if any, Ms. Vanek has regarding these bills in general.

2. Double Coverage Issue. The Commission usually tries to avoid creating double pension coverage. In this case, the individual does have coverage by a volunteer fire plan. The Lake Johanna Volunteer Fire Relief Association plan provides, according to the most recent Office of the State Auditor Volunteer Firefighter Relief Association Compilation Report, a pension benefit of $5,432 per year of service. After 20 years, that would amount to $108,640, or $135,800 after 25 years. This would be in addition to the PERA-P&F benefit for which the individual will eventually be eligible.
   
   It is not uncommon for individuals to have both paid fire plan and volunteer fire plan coverage. The Commission did recommend that the Spring Lake Park service credit purchase legislation should pass despite creating possible double or triple coverage.

3. Social Security Issues. PERA-P&F members do not have Social Security coverage due to the covered employment. The plan benefits are high to compensate for that assumed lack of Social Security coverage, and providing access to PERA-P&F by any individual who would have Social Security coverage due to the employment suggests an abuse. H.F. 2347 (Krinkie); S.F. 2212 (Reiter) is drafted to prohibit service credit purchases in the PERA-P&F Plan for any past period for which Social Security coverage remains in effect. The Commission may wish to seek assurances from Ms. Vanek that the individual or individuals who may become PERA-P&F members due to this legislation does not have ongoing Social Security coverage due to the employment.

4. Cost Issues/Risk of Subsidy. The draft requires payment of full actuarial value as computed under the Commission’s revised full actuarial value computation procedure. As has been stated many times previously, the revised methodology may understate the full cost, creating a subsidy, and shifting net liability risk to PERA-General or PERA-P&F. The issue is whether the service credit purchase request presented by these bills has sufficient merit to justify placing PERA-General or PERA-P&F at risk.

Amendments

The Commission may wish to consider several amendments:

LCPR04-123 would clarify that the Commission’s previous full actuarial value procedure, found in Section 356.551, would be used if the current full actuarial value methodology found in Section 356.55 has expired. This amendment is not necessary if LCPR04-124 or LCPR04-125 is adopted.

LCPR04-124 could be used if the Commission concludes that employees of the Lake Johanna Fire Department, Inc., should be made eligible for PERA-General or PERA-P&F coverage, but that service credit purchases for past similar service should not be permitted. The amendment removes section 2 (the service credit purchase provision) from the bills.

LCPR04-125 would limit the service credit purchase language to the PERA-P&F plan, eliminating language pertaining to PERA-General. This amendment may be justified if there are no individuals who would be purchasing PERA-General service credit.