TO: |
Members of the Legislative Commission on Pensions and Retirement |
FROM: |
Ed Burek, Deputy Director |
RE: |
H.F. 2422 (Smith); S.F. 2507 (Pogemiller): Various Plans; Service Credit Purchase Deadlines Extension |
DATE: |
March 8, 2004 |
Summary
H.F. 2422 (Smith); S.F. 2507 (Pogemiller): Various Plans; Service Credit Purchase Deadlines Extension, would extend from 2004 until 2009 the revised full actuarial value determination procedure enacted in 1998, and nearly all general law full actuarial value service credit purchase procedures enacted in 1999 and later. These full actuarial value service credit purchase provisions and the years in which they were enacted are as follows:
1999
2000
2001
Background Information on Purchases of Service Credit
It is useful to begin by reviewing recent history, starting with the Commission’s service credit purchase policy statement as it appears in the Legislative Commission on Pensions and Retirement Principles of Pension Policy. That general policy statement, last revised in 1996, guided the Commission for a few decades. Recently, the Legislature has enacted several general law service credit purchase provisions, which are set to expire, which deviate from this policy document.
The Commission’s Principles of Pension Policy states in relevant part that any period of time proposed to be purchased should have a Minnesota connection. An individual providing out-of-state teaching service is not providing a service to Minnesota. Thus, there is no clear justification why Minnesota taxpayers should take on the risk involved in ensuring payment of the additional pension that would result from another year of teaching service in a Minnesota public plan.
10. Purchases of Prior Service Credit
Purchases of public pension plan credit for periods of prior service should be permitted only if, on a case-by-case basis, it is determined that the period to be purchased is public employment or substantially akin to public employment, that the prior service period must have a significant connection to Minnesota, that the purchase payment from the member or from a combination of the member and the employer must equal the actuarial liability to be incurred by the pension plan for the benefit associated with the purchase, appropriately calculated, without the provision of a subsidy from the pension plan, and that the purchase must not violate notions of equity.
This principle has the following elements:
Individual Review. The Commission considers each service credit purchase request separately, whether the request is proposed legislation for a single person or is proposed legislation relating to a group of similarly situated individuals.
Public Employment. The period requested for purchase should be a period of public employment or service that is substantially akin to public employment.
Minnesota Connection. The employment period to be purchased should have a significant Minnesota connection.
Presumption of Active Member Status at the Time of Purchase. The principle states that contributions should be made by the member or in combination by the member and by the employer. It is presumed that the individual covered by the service purchase request is an active employee, because retirees generally are not considered to be "members" of a plan and these individuals no longer have a public employer.
Presumption of Purchase in a Defined Benefit Plan. The prior service credit purchase contributions in total should match the associated actuarial liability. The specific procedures in Minnesota Statutes and law for computing service credit purchase amounts, Minnesota Statutes, Sections 356.55 and 356.551, presume that the purchase is in a defined benefit plan with a benefit based on the individual’s high-five average salary.
Full Actuarial Value Purchase. The pension fund should receive a payment from the employee, or from the employee and employer in combination, which equals the additional liability placed on the fund due to the purchase. This amount is referred to as the full actuarial value of the service credit purchase.
No Violation of Equity Considerations. Purchases of service credit should not violate equity considerations. Equity is a resort to general principles of fairness and justice whenever the existing law is inadequate.
In 2000, more service credit purchase provisions were added to law, this time for non-teacher plans, providing a full actuarial value service credit provision for individuals who had military service prior to becoming a public employee, or who failed to pay contribution requirements in a timely manner under other military leave service credit purchase provisions. These provisions enacted in 2000 were comparable to the military service credit provisions added to teacher plan law a year earlier. In 2000, teacher plan law was also revised to permit full actuarial value service credit purchases for nonprofit community-based teaching service.In 2001, several other service credit purchase provisions were enacted. An out-of-country teaching service credit purchase provision was created in teacher plan law, and also one for Development Achievement Center teaching. These new provisions included sections of law permitting purchase of service credit, not to exceed ten years, in the teacher plans for service while teaching at the University of Minnesota which was not covered by a pension plan at the University. These provisions stemmed from a legislative request for the executive director of the Minneapolis Employees Retirement Fund MERF), who many years earlier taught some accounting courses at the University while employed in a position that was excluded from pension plan coverage. The final generalized service credit provision enacted was a family leave provision permitting individuals who may be covered by a teacher plan, or any of several other general employee and public safety plans, to purchase service credit for the past family leaves or family-related breaks-in-service.
A more complete summary of each of these generalized service credit purchase provisions, including statutory citations and comments, and conflicts between the provision and the Commission’s policy statement, is attached as an appendix.
Justification of Legislative Support. There are a few reasons why the Commission and Legislature may have supported the above provisions. First, the provisions were intended to be temporary. Each was set to expire a few years after enactment. The departure from policy may have been viewed as a short-term departure from established policy to address short-term market conditions for teachers. Second, the Legislature was given assurances that the provisions created no financial harm to the pension funds because the purchases would be at full actuarial value. The methodology to compute full actuarial value purchase prices had been revised in 1998, and the teacher unions and the administrators of the teacher pension funds were confident the procedures would produce accurate price estimates, thereby shielding other fund contributors from subsidizing these purchases. When the revised methodology was enacted in 1998 as Section 356.55, the section included a provision requiring data to be retained and analyzed on every service credit purchase made using the procedure, and the section included an expiration date. If legislative review of these purchases suggested that the procedure was not accurate and was causing subsidies to occur, the section would be permitted to expire. If it expired, a previous procedure used to estimate full actuarial value, coded as Section 356.551, would again become effective. That prior procedure in Section 356.551 tended to produce higher cost estimates than the revised procedure. Teacher unions and other constituent groups favor continuing the revised procedure in Section 356.55, because it tends to produce lower prices. From a policy standpoint, the Section 356.55 procedure is better if it is more accurate than the prior procedure. If the lower prices are resulting in subsidies, its use harms the pension funds.
The extension to May or July 2004 of the service credit purchase provisions and method for computing the prices was a result of action during the 2003 Session. The Commission heard a bill that as drafted would have made the purchase provisions and the pricing method permanent, rather than expiring during 2003. The Commission chose instead to recommend extending the purchase provisions and the methodology one more year, pending a thorough review of the pricing method and purchase provisions.During the 2003 Interim, the Commission reviewed these matters over the course of three meetings, hearing testimony from fund directors, teacher union representatives and other interested parties, and considered the three Commission staff memos provided for those meetings. The first meeting was on September 9, 2003, and the staff memo provided a general overview. The second meeting was on October 7, 2003, and the staff memo reviewed each generalized service credit purchase provision enacted after 1998, noted conflicts with the Commission’s policy document and other policy concerns, and reviewed the accuracy of the service credit purchase methodology. To review that methodology, Commission staff examined the purchase price produced by the procedure and paid by the individual to the pension plan, and compared that to the additional liability created in the next actuarial valuation due to the specific purchase. The plans and the actuary were required by law to retain and report that information to permit study of the procedure. In reviewing several hundred purchases, in no case did the purchase price match the liability due to that purchase as reflected in the plan actuarial valuation following the purchase. Differences tended to be large, generally several thousands of dollars, and in many cases tens of thousands of dollars. This raised concerns that the pricing method was not accurately estimating the full actuarial value of the service credit purchases, resulting in considerable subsidies in many cases, and possible overcharges in others.
The data suggested that individuals who purchase service credit very shortly before retirement tend to be considerably undercharged relative to the full additional liability the purchase adds to the plan. Those purchases by individuals further from retirement may be less likely to be subsidized, and might be overcharged. However, a broader view of the situation suggests that even those who appear to be overcharged may eventually impose additional liability on the fund. Estimating the proper price to charge involves a few actuarial assumptions, including estimating when the individual will retire, projecting the individual’s salary until retirement, and assumptions about life spans. To the extent that future events do not match these estimates, errors are created, exposing the fund to risk. Perhaps the biggest concern is that the computed purchase price is keyed to the benefits offered by the current pension plan. If benefit improvements are enacted after the purchase occurs, and the improved benefit applies to all years of service (including those that were purchased), then the individual receives a windfall. That service credit was more valuable than was recognized at the time it was purchased. If a benefit improvement were expected in the future, it would be economically wise for teachers or other public employees to purchase service credit now. Despite efforts to accurately price the service credit, the price is actually discounted. Thus, viewing the results in a fuller context, the data suggests that under the current procedures, individuals purchasing service credit very close to retirement are likely to be subsidized. The pension fund also is exposed to risk for those further from retirement, because the individuals may live longer than currently estimated due to medical advances over time, and because of benefit improvements enacted after the purchase but prior to retirement which may increase the value of the purchased service.
The review of results from the full actuarial pricing methodology concerned Commission members. Commission members were aware that the various full actuarial value service credit purchase provisions enacted in 1999 and later conflicted with the Commission’s policy statement by including purchases for periods of private or nonprofit employment rather than public employment, and in other cases by lack of any Minnesota connection. But these policy departures were believed to create no burden on the pension funds. The Commission’s review of results of those purchases raises considerable doubt about the accuracy of the current pricing method, and also whether any system could be devised that can be consistently accurate, because any method must use assumptions about future events. If the Commission cannot be confident in the pricing mechanism, it cannot be confident that the pension funds are not being harmed. Departures from policy, which were assumed to cause no financial harm, may have monetary consequences.
The various general law service credit provisions added to law since 1998 have greatly increased the number of purchases than would have otherwise occurred. While the Commission will need a full actuarial value methodology in place for those situations where it must be used, the Commission may decide to take the position of limiting its use by allowing the various full actuarial value service credit provisions to expire. The Commission reviewed this option and various others at the third meeting on this topic, on November 4, 2003.
Service Credit Purchases Reviewed
Numerous plans are included in the service credit purchase provisions, but the bulk of the purchases are in the teacher plans. The information was grouped under two categories – "active member" and "retired member," although active members of the applicable funds made all the purchases. These terms refer to the status of the individual on the actuarial valuation date. The "active member" category includes all purchases during the year made by active members where the member remained active on the actuarial valuation date. The "retired member" category includes all purchases made during the year by an active member who had retired by the actuarial valuation date.
Table 1 summarizes the information for each pension plan in which full actuarial value service credit purchases occurred.
Table 1
Summary of Service Credit Purchase Data
Number of Purchases (Table 1)
TRA has far more service credit purchases than any other plan. In fact, TRA members made more than three times the number of service credit purchases than occurred in all of the other plans combined. For the three-year period, there were 612 TRA service credit purchases by individuals who remained active at the next actuarial valuation date, and 103 purchases by individuals who retired by the next actuarial valuation date, for a total of 725 purchases. The total number of purchases in all other plans combined was 230.
Pattern of Gains and Losses (Table 1)
In no case did the service credit purchase amount exactly match the additional liability due to the purchase noted in the next actuarial report, and the amounts are rarely even close. The pattern observed is that most active purchases (purchases by individuals who remained active members at the next actuarial valuation) resulted in a gain to the plan (the added liability due to the purchase as recognized in the next actuarial valuation was less than the purchase price). The opposite result is seen for those individuals who purchase service credit and then retired by the next actuarial valuation (the "retired purchases"). When the purchase price is compared to the change in liability reflected in the next actuarial valuation due to the purchase, most retired purchases resulted in losses to the fund.
Size of Reported Gains (Table 2)
In Table 2, TRA active and retired purchase gains are examined in more detail (Table 3 will examine TRA losses in detail). While this information covers only TRA, the results for TRA are generally indicative of the results for other funds.
Table 2
Examination of TRA Gains
TRA: Examination of Fund Gains |
TRA: Examination of Fund Gains - |
|||||||||||||||
2000 |
2001 |
2002 |
Total |
2000 |
2001 |
2002 |
Total |
|||||||||
Active |
||||||||||||||||
Total # of Purchases |
143 |
166 |
303 |
612 |
39 |
34 |
103 |
176 |
||||||||
With Gain |
124 |
87% |
126 |
76% |
253 |
83% |
503 |
82% |
30 |
77% |
20 |
59% |
84 |
82% |
134 |
76% |
Average Gain |
$5,465 |
$6,199 |
$6,498 |
$6,169 |
$6,214 |
$8,903 |
$8,250 |
$7,892 |
||||||||
Gain $40,000 or more |
3 |
2% |
3 |
2% |
3 |
1% |
9 |
2% |
1 |
3% |
1 |
5% |
2 |
2% |
4 |
3% |
Gain $20,000-$39,999 |
4 |
3% |
3 |
2% |
10 |
4% |
17 |
3% |
1 |
3% |
0 |
0% |
3 |
4% |
4 |
3% |
Gain $10,000-$19,999 |
10 |
8% |
12 |
10% |
31 |
12% |
53 |
11% |
2 |
7% |
3 |
15% |
16 |
19% |
21 |
16% |
Gain $5,000-$9,999 |
21 |
17% |
24 |
19% |
74 |
29% |
119 |
24% |
9 |
30% |
5 |
25% |
32 |
38% |
46 |
34% |
Gain $1,000-$4,999 |
59 |
48% |
68 |
54% |
106 |
42% |
233 |
46% |
10 |
33% |
9 |
45% |
21 |
25% |
40 |
30% |
Gain $1-$999 |
27 |
22% |
16 |
13% |
29 |
11% |
72 |
14% |
7 |
23% |
2 |
10% |
10 |
12% |
19 |
14% |
Retired |
||||||||||||||||
Total # of Purchases |
41 |
34 |
28 |
103 |
4 |
5 |
6 |
15 |
||||||||
With Gain |
16 |
39% |
14 |
41% |
9 |
32% |
39 |
38% |
2 |
50% |
3 |
60% |
2 |
33% |
7 |
47% |
Average Gain |
$8,671 |
$43,094 |
$47,202 |
$29,920 |
$11,650 |
$44,988 |
$8,250 |
$30,895 |
||||||||
Gain $40,000 or more |
0 |
0% |
4 |
29% |
3 |
33% |
7 |
18% |
0 |
0% |
1 |
33% |
1 |
50% |
2 |
29% |
Gain $20,000-$39,999 |
2 |
13% |
2 |
14% |
1 |
11% |
5 |
13% |
0 |
0% |
1 |
33% |
0 |
0% |
1 |
14% |
Gain $10,000-$19,999 |
5 |
31% |
3 |
21% |
1 |
11% |
9 |
23% |
1 |
50% |
1 |
33% |
0 |
0% |
2 |
29% |
Gain $5,000-$9,999 |
3 |
19% |
0 |
0% |
0 |
0% |
3 |
8% |
1 |
50% |
0 |
0% |
0 |
0% |
1 |
14% |
Gain $1,000-$4,999 |
5 |
31% |
3 |
21% |
3 |
33% |
11 |
28% |
0 |
0% |
0 |
0% |
1 |
50% |
1 |
14% |
Gain $1-$999 |
1 |
6% |
2 |
14% |
1 |
11% |
4 |
10% |
0 |
0% |
0 |
0% |
0 |
0% |
0 |
0% |
The first four columns of data in Table 2 provide information on all gains by year and for the three years combined. There were 612 TRA active purchases in total, and 503 of those (82 percent) were noted as creating gains to the fund. If most of those gains were small, suggesting a close tracking between the purchase price and the liability that results from the purchase as indicated in the next actuarial valuation, it would seem to provide some assurance that the members purchasing the service credit are not being harmed. The table indicates that only 14 percent of the active purchases that were gains had purchase prices within $1,000 of the change in liability indicated in the next actuarial valuation due to that purchase. In 46 percent of the cases, the difference between the purchase price and the added liability recognized due to that purchase was between $1,000 and $5,000. In 24 percent of the cases, the difference was between $5,000 and $10,000. Eleven percent of the cases had differences between $10,000 and $20,000. In three percent of the cases, the difference was between $20,000 and $40,000. In two percent of the cases, the difference was more than $40,000.
Although losses occurred far more frequently than gains for the retired group, there were 39 cases where gains occurred over the three-year period. For some unknown reason, a smaller percentage of these retiree gains were comparatively small, under $5,000. For the active group for the three years as a whole, 60 percent of the gains were $5,000 or less (this results from combining the first two active groups noted above, the 14 percent of the cases with gain under $1,000 and the 46 percent of cases where the gain was
$1,000 to $5,000). For the retired group, only 38 percent of the gains were less than $5,000. When recorded gains occurred they tended to be large. Twenty–three percent were between $10,000 and $20,000, 13 percent were between $20,000 and $40,000, and 18 percent were $40,000 or more.
The system Milliman USA uses to compute the actuarial valuations deals in full-year increments only. The actuary has raised concern that estimates of gains or losses may be distorted (overstated) whenever individuals purchase service credit that is not in full-year increments. Therefore, the last four columns of Table 2 examine TRA cases representing only full-year purchases.
When examining the gain situations, using the full-year-only purchase data tends to increase variability rather than reducing it. Using full-year-only data, the sample size decreases considerably, from 612 active purchases to 176 and from 103 retired purchases to 15. For the active group, 14 percent of full-year-only purchases resulted in gains less than $1,000, the same percentage as occurred when all records were used, and 30 percent created recorded gains of $1,000 to $5,000, compared to 46 percent of total purchases. The percent of the gains in the $5,000 to $10,000 range actually increases to 34 percent for full-year-only purchases from 24 percent previously, and there continues to be a large percentage of even higher value gains, including six percent (six cases) in excess of $20,000.
For the retired group the full-year-only sample size is very small; only 15 purchases occurred and only seven of these were gains. There is a high percentage increase in high value gains in the $10,000 to $20,000 range, the $20,000 to $40,000 range, and above, although those percentages are based on very few cases.
Size of Reported Losses (Table 3)
Table 3 provides the same type of comparisons as Table 2, except that it deals with cases where losses occurred. For the active group using all data, most losses were clustered in the lower value ranges. Most of the losses were less than $10,000, and 61 percent of the losses were in the $1,000 to $5,000 range. For the full-year-only data, there again is a very high percentage of losses (69 percent) clustered at the $1,000 to $5,000 range.
In contrast, retired group losses are clustered in the highest value ranges. When all data are used, only 13 percent of the losses were less than $10,000, while 87 percent were losses of $10,000 or greater. For the full-year purchase data, all losses are at least $5,000 or more. The highest percentage of losses (38 percent) occurs in the $20,000 to $40,000 range, but the sample size is very small.
Table 3
Examination of TRA Losses
TRA: Examination of Fund Losses |
TRA: Examination of Fund Losses - |
|||||||||||||||
2000 |
2001 |
2002 |
Total |
2000 |
2001 |
2002 |
Total |
|||||||||
Active |
||||||||||||||||
Total # of Purchases |
143 |
166 |
303 |
612 |
39 |
34 |
103 |
176 |
||||||||
w/Loss |
19 |
13% |
40 |
24% |
50 |
17% |
109 |
18% |
9 |
23% |
14 |
41% |
19 |
18% |
42 |
24% |
Average Loss |
($2,933) |
($4,255) |
($5,182) |
($4,450) |
($3,542) |
($3,286) |
($3,891) |
($3,615) |
||||||||
Loss $40,000 or more |
0 |
0% |
0 |
0% |
1 |
2% |
1 |
1% |
0 |
0% |
0 |
0% |
0 |
0% |
0 |
0% |
Loss $20,000-$39,999 |
0 |
0% |
0 |
0% |
1 |
2% |
1 |
1% |
0 |
0% |
0 |
0% |
0 |
0% |
0 |
0% |
Loss $10,000-$19,999 |
1 |
5% |
3 |
8% |
5 |
10% |
9 |
8% |
1 |
11% |
0 |
0% |
2 |
11% |
3 |
7% |
Loss $5,000-$9,999 |
0 |
0% |
8 |
20% |
7 |
14% |
15 |
14% |
0 |
0% |
2 |
14% |
2 |
11% |
4 |
10% |
Loss $1,000-$4,999 |
15 |
79% |
24 |
60% |
27 |
54% |
66 |
61% |
6 |
67% |
11 |
79% |
12 |
63% |
29 |
69% |
Loss $1-$999 |
3 |
16% |
5 |
13% |
9 |
18% |
17 |
16% |
2 |
22% |
1 |
7% |
3 |
16% |
6 |
14% |
Retired |
||||||||||||||||
Total # of Purchases |
41 |
34 |
28 |
103 |
4 |
5 |
6 |
15 |
||||||||
w/Loss |
25 |
61% |
20 |
59% |
19 |
68% |
64 |
62% |
2 |
50% |
2 |
40% |
4 |
67% |
8 |
53% |
Average Loss |
($32,934) |
($30,686) |
($28,064) |
($30,786) |
($28,025) |
($17,477) |
($22,347) |
|||||||||
Loss $40,000 or more |
9 |
36% |
5 |
25% |
3 |
16% |
17 |
27% |
1 |
50% |
0 |
0% |
0 |
0% |
1 |
13% |
Loss $20,000-$39,999 |
11 |
44% |
10 |
50% |
10 |
53% |
31 |
48% |
0 |
0% |
1 |
50% |
2 |
50% |
3 |
38% |
Loss $10,000-$19,999 |
2 |
8% |
2 |
10% |
4 |
21% |
8 |
13% |
0 |
0% |
0 |
0% |
2 |
50% |
2 |
25% |
Loss $5,000-$9,999 |
2 |
8% |
3 |
15% |
1 |
5% |
6 |
9% |
1 |
50% |
1 |
50% |
0 |
0% |
2 |
25% |
Loss $1,000-$4,999 |
0 |
0% |
0 |
0% |
1 |
5% |
1 |
2% |
0 |
0% |
0 |
0% |
0 |
0% |
0 |
0% |
Loss $1-$999 |
1 |
4% |
0 |
0% |
0 |
0% |
1 |
2% |
0 |
0% |
0 |
0% |
0 |
0% |
0 |
0% |
Observations
The material covered in this memo suggests observations in a number of areas:
No cases were found where there was exact agreement. Differences tended to be large rather than small. For all funds, active purchases tended to produce a gain and retired purchases tend to produce a loss. For TRA, which had three times more service credit purchases than the rest of the funds combined, Table 1 indicated that active purchases, on average, produced a gain of $4,277 per purchase while retired purchases produced a loss of $7,800 per purchase. Separate examination of the cases with gain and the cases with loss indicated wide dispersion. Viewing only cases where gains occurred, Table 2 indicated the average gain was $6,169 for active members. For retired purchases where gains occurred, the average gain was $29,920. Viewing only cases where losses occurred, Table 3 indicated an average loss for active members of $4,450. For retired purchases where losses occurred, the average loss was $30,786.
The actuary, in discussing the service credit purchase tables in the Summary of Valuations, has not directly addressed the issue of accuracy. Rather, the actuary has commented indirectly on this issue by focusing on the impact purchases had on the funding status of the plans as indicated in the actuarial valuations. The 2000 Summary of Valuations included a statement that service credit purchases reviewed in the 2000 actuarial valuations harmed the funding status of the plans because service credit purchases in total were less than the resulting liability recorded in the actuarial valuations for the plans. In the last two years the situation reversed, and the total amounts received through service credit purchases were greater than the added liability recognized in the actuarial valuations. Thus, in the last two years, these purchases moved the plans marginally ahead in their reported funding condition, given the methodology used in actuarial valuations.While these funding ratio effects may be occurring, it was never the intention of the Legislature to influence plan funding ratios through service credit purchases. The intention was to charge each individual purchasing service credit the amount necessary to hold harmless the employers who contribute to the plan and all of the other plan members. The data raise a concern that any given individual is not being charged the necessary amount (windfalls to some purchasers and excessive payments by others may be occurring), and even on average the payments may not be correct, as suggested by the tendency to have reported gains on active member purchases but reported losses on purchases just prior to retirement. In any given year, depending upon the mix of active and retired purchases and many other factors not as evident, the employers and broad membership may be providing subsidies or may be receiving a windfall.
Discussion
H.F. 2422 (Smith); S.F. 2507 (Pogemiller) would extend from 2004 until 2009 the revised full actuarial value determination procedure enacted in 1998, and nearly all general law full actuarial value service credit purchase procedures enacted in 1999 and later.
Pension policy issues are:
Conflict with Commission’s Policy Statement. The policy statement indicates that the period being purchased should have a Minnesota connection, and should be a period of public employment or quasi-public employment. The Commission may wish to consider that in nearly all cases covered under the TRA and first class city teacher plan service credit purchase provisions, the service being purchased is for a period of time in which the individual was not providing service to a Minnesota public employer. The provisions cover breaks in service, or service provided to other states, to the national government, or to private employers. Given the current review and the discussion of risks, the Commission may wish to consider whether Minnesota public employers and other public employees should be burdened with the short-term and long-term risks related to these service credit purchase periods.
Concern About Accuracy of the Full Actuarial Value Procedure. The study raised concerns that the full actuarial value estimation procedure is not sufficiently accurate. The results are windfall in some cases to the individuals and harm to the fund, while in other cases the fund may receive a windfall while the purchaser is harmed. It is unlikely that a fully accurate methodology will ever be developed. Given reservations about the procedure used, the Commission may choose to limit use of the procedure by permitting the various full actuarial value service credit purchase procedures to expire, and by permitting the existing methodology to expire, which would have the effect of causing the prior full actuarial value method, now coded as Section 356.51, to be come effective.
Concern About Impact on Plan Funding. Given that all of our public pension funds have had serious decreases in funding ratios due to three years of bad investment market (2000 through 2003), particularly when market value is used rather than actuarial value, the Commission may choose to consider the risk that extending these provisions places on the plans. One of the teacher plans, the Minneapolis Teachers Retirement Fund Association (MTRFA) may have totally depleted its assets in approximately another decade. The actuarial condition of the various teacher plans is shown below. Comparable information for other plans is included in your packet, based on the most recently available data.
Benefit for a Minority of Membership. A very small percentage of plan members purchase service credit, while the employers and the other members bear the risks. In TRA, which had by far the most service credit purchases, an average of 200 purchases occurred per year from 2000 through 2002. TRA has 71,700 active members. Thus, in any given year, considerably less than one percent of the active membership (0.27 percent of active members) purchased service credit. Those that did purchase service credit had the financial resources, often many tens of thousands of dollars, to make those purchases. Given the considerable amount of Commission time spent on full actuarial value issues and the harm that may be occurring to various groups, the Commission may wish to consider discouraging full actuarial value purchases. One reason is the minute fraction of plan members who utilize these provisions and the harm or windfall that may be occurring to those purchasers under existing methods. Another is the risk to the employers and other employees covered by the plan, employees who do not have the resources to consider a purchase of service credit. Allowing Section 356.55 to expire would discourage purchases. The Commission may also wish to permit the numerous full actuarial value purchase provisions added to general law in the last few years to also expire.
Early Retirement Issues. Service credit purchases are being used by those nearing retirement to retire earlier than they otherwise would. The purchase permits the individual to qualify under the "Rule of 90" or other early retirement provision. Therefore, these service credit purchase provisions are an early retirement tool, but without any specific targeting to the employer’s workforce needs. The Commission may also wish to be concerned that when service credit is purchased just before retiring, a loss to the fund (a gain to the individual) is likely to occur. The best information available to the Commission indicates that the pension fund is harmed in those situations.
Implications of Purchases by Younger Employees. Presumably, at least some of the individuals purchasing service credit under the various provisions enacted in TRA and first class city teacher law are relatively young and are not close to retirement. Despite some data in this report that suggests possible gains on those purchases, the Commission may choose to be concerned about eventual fund losses stemming from those purchases. The longer before retirement that a purchase of service credit occurs, the more error is likely to be involved in estimating the purchase price. The reason is that any estimate must be based on assumptions about salary increases and investment returns that will prove incorrect over time. The longer those must be projected, the more likely an error, possibly of substantial proportions, will occur.
Benefit Windfall Problem. If the Commission and the Legislature continue to support the use of service credit purchases, they may wish to consider a requirement that the individual who purchased service credit must make an additional payment to cover at least the obvious sources of a windfall, like a benefit improvement that occurs after the initial purchase and prior to retirement.
Amendments
Several amendments are provided for Commission consideration. All but the first amendment, LCPR04-135, are delete-all amendments.
LCPR04-135 would extend the repeal date on the University of Minnesota teacher service provisions. This does not appear in the bills. The Commission may wish to decide if that omission was intentional or reflects a drafting error. If the Commission wishes to extend the expiration date on those two provisions to 2009, the same as the other provisions covered by the bills, the Commission would want to adopt LCPR04-135.
LCPR04-136 is a delete-all amendment that would extend the expiration date on all provisions included in the bills, plus the University of Minnesota teaching provisions, for one year rather than until 2009, and adds an effective date provision.
LCPR04-137 is a delete-all amendment that would extend the expiration date on all provisions included in the bills, plus the University of Minnesota teaching provisions, for until a date to be set by the Commission, and adds an effective date provision.
LCPR04-138 is a delete-all amendment that would extend the expiration date on all service credit purchase provisions included in the bills, plus the University of Minnesota teaching provisions, for one year, and adds an effective date provision. The revised full-actuarial value procedure, however, is permitted to expire.
LCPR04-139 is a delete-all amendment that would extend the expiration date on all service credit purchase provisions included in the bills, plus the University of Minnesota teaching provisions, until a date to be set by the Commission, and adds an effective date provision. The revised full-actuarial value procedure, however, is permitted to expire.
LCPR04-140 is a delete-all amendment that could be used if the Commission wishes to extend the military service credit purchase provisions, but not others, for another year, adds an effective date provision, and extends the revised full-actuarial value procedure.
LCPR04-141 is a delete-all amendment that could be used if the Commission wishes to extend the military service credit purchase provisions, but not others, for another year, and adds an effective date provision. The revised full-actuarial value procedure, however, is permitted to expire.
APPENDIX
Summary of 1999 and Later General Law
Service Credit Purchase Provisions
1999 Session Provisions: General Law Teacher Plan Service Credit Purchase Provisions
Full Actuarial Value Military Service Credit Purchase. A vested TRA or first class city teacher plan member who performed service in the armed forces before becoming a Minnesota teacher plan member, or who did not make contributions to obtain service credit while on a teacher plan military leave of absence, is entitled to purchase service credit for the initial period of enlistment, induction, or call to active duty not including any voluntary extension. To receive the service credit, the member must pay the full actuarial value. The purchase is not permitted if the individual is eligible for a military pension or if the individual has service credit in another plan due to this military service. (Laws 1999, Chapter 222, Article 16, Sections 1 and 7. Coded as Minnesota Statutes, Section 354.533 for TRA and Section 354A.097 in first class city teacher plan statutes.)
Conflicts with Policy Statement: May lack any Minnesota connection. Raises several equity concerns, including failure by some to take advantage of a more generous treatment under military leave of absence provision, and lack of any requirement that the individual must honorably serve to be eligible. Other issue: The teacher plans have contended that the prohibition against purchases if the individual is entitled to a military pension may conflict with federal law.
Out-of-State Teaching Service Credit Purchase. A vested member may purchase up to ten years of service credit in the applicable teacher plan for out-of-state teaching in an educational institution established and operated by another state, a governmental subdivision of another state, or the federal government, providing the individual is not eligible for service credit in another plan. To receive the service credit, the member must pay the full actuarial value. (Laws 1999, Chapter 222, Article 16, Sections 2 and 8. Coded for TRA as Minnesota Statutes, Section 354.534, and for the first class city teacher plans as Section 354.A.098.)
Conflicts with Policy Statement: Lacks any Minnesota connection; this provision provides service credit in Minnesota plan for service provided to residents of other states.
Maternity Leave of Absence or Maternity Break-In-Service Purchase of Service Credit. A vested member may purchase up to five years of service credit in the applicable teacher plan for maternity leaves for which service credit was not received, or for a maternity break in teaching service, providing the individual is not eligible for service credit in another plan. To receive the service credit, the member must pay the full actuarial value. (Laws 1999, Chapter 222, Article 16, Sections 3 and 9. Coded for TRA as Minnesota Statutes, Section 354.535, and for the first class city teacher plans as Section 354A.099.)
Conflicts with Policy Statement: Provides service credit for period to time during which the individual was not providing service to a Minnesota employer.
Parochial or Private School Teaching, Purchase of Service Credit. A vested member may purchase up to ten years of service credit in the applicable teacher plan for private or parochial school teaching service, providing the individual is not eligible for service credit in another plan. To receive the service credit, the member must pay the full actuarial value. (Laws 1999, Chapter 222, Article 16, Sections 4 and 10. Coded for TRA as Minnesota Statutes, Section 354.536, and for the first class city teacher plans as Section 354A.101.)
Conflicts with Policy Statement: May lack any Minnesota connection. Provides Minnesota public plan coverage for private sector or church-related employment. May offer coverage for periods where the individual willfully took employment lacking any retirement coverage.
Peace Corps or VISTA (Volunteers in Service to America) Service Credit Purchase. A vested member may purchase up to ten years of service credit in the applicable teacher plan for Peace Corps or VISTA service providing the individual is not eligible for service credit in another plan. To receive the service credit, the member must pay the full actuarial value. (Laws 1999, Chapter 222, Article 16, Sections 5 and 11. Coded for TRA as Minnesota Statutes, Section 354.537, and for the first class city teacher plans as Section 354A.102.)
Conflicts with Policy Statement: May lack any Minnesota connection. Presumably offers coverage for periods where the individual willfully took employment lacking any retirement coverage.
Charter School Teaching, Purchase of Service Credit. A vested member may purchase up to ten years of service credit in the applicable teacher plan for charter school teaching service providing the individual is not eligible for service credit in another plan. To receive the service credit, the member must pay the full actuarial value. (Laws 1999, Chapter 222, Article 16, Sections 6 and 12. Coded for TRA as Minnesota Statutes, Section 354.538, and for the first class city teacher plans as Section 354A.103.)
Conflicts with Policy Statement: May lack any Minnesota connection. May raise public/ private concerns in some circumstances. May offer coverage for periods where the individual willfully took employment lacking any retirement coverage.
Previously Uncredited Part-Time Teacher Service, Purchase of Service Credit. This provision applied only to first class city teacher plans. A vested member with previously uncredited part-time teaching service may purchase service credit in the applicable first class city teacher plan for that teaching service providing the individual was not previously eligible for credit for that service. To receive the service credit, the member must pay the full actuarial value. (Laws 1999, Chapter 222, Article 16, Section 13. Coded as Minnesota Statutes, Section 354A.104.)
Conflicts with Policy Statement: May raise equity issue if the service was properly excluded from law at the time service was rendered.
2000 Session Provisions
Military Service Credit Purchase. A vested member of MSRS-General, MSRS-Correctional, the State Patrol Plan, PERA, or PERA-P&F who performed service in the armed forces before becoming a member of the applicable plan or who failed to make contributions to obtain service credit while on a military leave of absence is entitled to purchase service credit for the initial period of enlistment, induction, or call to active duty not including any voluntary extension. To receive the service credit, the member must pay the full actuarial value. The purchase is not permitted if the individual is eligible for a military pension or if the individual has service credit in another plan due to this military service. (Laws 2000, Chapter 461, Article 4, Sections 1 to 4. Coded as Minnesota Statutes, Section 352.275 for MSRS-General and MSRS-Correctional, Section 352B.01, Subdivision 3a, for the State Patrol Plan, and Section 353.01, Subdivision 16a, for PERA and PERA-P&F.)
Conflicts with Policy Statement: May lack any Minnesota connection. Raises several equity concerns, including failure by some to take advantage of a more generous treatment under military leave of absence provision, and lack of any requirement that the individual service honorably to be eligible.
TRA Service Credit Purchase for Nonprofit Community-Based Corporation Service. The TRA and first class city teacher plan provisions authorizing service credit purchases at full actuarial value for private or parochial school teaching service are revised to also authorize purchases of nonprofit community-based corporation teaching service. (Laws 2000, Chapter 461, Article 11, Sections 3 and 5.)
Conflicts with Policy Statement: May lack any Minnesota connection. The full section as revised provides Minnesota public plan coverage for private sector or church-related employment, and raises the issue of whether nonprofit community-based corporation is sufficiently akin to public employment. May offer coverage for periods where the individual willfully took employment lacking any retirement coverage.
2001 Session Provisions
Out-of-Country Teaching Service and Tribal Teaching Service Credit Purchase. The TRA and first class city teacher plan out-of-state teaching service credit purchase provisions were expanded to include teaching service provided in another country or teaching service where the employing unit is a federally recognized American Indian tribe. (Laws 2001, First Special Session, Chapter 10, Article 6, Sections 5 and 11.)
Conflicts with Policy Statement: Can lack any Minnesota connection. May offer coverage for periods where the individual willfully took employment lacking any retirement coverage.
Developmental Achievement Center Service Credit Purchase. The TRA and first class city teacher plan service credit purchase provisions permitting service credit purchase for teaching in a nonprofit community-based corporation, private school, or parochial school, were expanded to include teaching at a developmental achievement center. (Laws 2001, First Special Session, Chapter 10, Article 6, Sections 6 and 12.)
Conflicts with Policy Statement: May lack any Minnesota connection. Raises issue of whether this is proper coverage to add to a public plan. May offer coverage for periods where the individual willfully took employment lacking any retirement coverage.
Purchase of Service Credit for Uncovered Prior Teaching at the University of Minnesota. TRA or first class city teacher plan members who are vested and who provided University of Minnesota teaching service but who are not entitled to a current or deferred age and service retirement annuity or disability benefit related to that service may purchase service credit in TRA or a first class city teacher plan, as applicable, at full actuarial value reflecting that university service, not to exceed ten years. (Laws 2001, First Special Session, Chapter 10, Article 6, Sections 8 and 14. The TRA provision is coded as Minnesota Statutes, Section 354.541, and the first class city teacher plan provision is coded as 354A.109.)
Conflicts with Policy Statement: May offer coverage for periods where the individual willfully took employment lacking any retirement coverage.
Parental/Family Leave or Break-in-Service Service Credit Purchase Provision. A member of MSRS-General MSRS-Correctional, PERA-General, PERA-P&F, TRA, the first class city teacher plans, MERF, Minneapolis Firefighters Relief Association (MFRA) and Minneapolis Police Relief Association (MPRA), who had or has a family leave of absence, a parental leave, or a break-in-service from the same employer due to parental or family-related matters (due to birth of a child, adoption, or care of a near relative or in-laws), may purchase service credit for the period of the leave or break-in-service, not to exceed five years, by paying the full actuarial value of the service credit purchase. (Laws 2001, First Special Session, Chapter 10, Article 6, Sections 1 to 4, 10, 12, 16 to 20. The provision is coded as Minnesota Statutes, Section 356.555.)
Conflicts with Policy Statement: Provides coverage for a break-in-service, rather than for some period of uncovered service provided to a Minnesota public employer.