Summary

H.F. 2541 (Beard); S.F. 2556 (Murphy): MSRS; Modifying MnDOT Pilots Special Retirement Coverage Provision, revises the maximum age from age 62 to age 65 for continuing employment as an MSRS-General covered pilot (due to a change in Minnesota Department of Transportation policy), and states that special early retirement rights which waive any reductions or penalties due to early retirement on or after age 62 remain in effect.

The bills appear to be misdrafted. An amendment (LCPR04-155) is provided in an effort to clarify the intended treatment.

Background on MSRS-General Pilot Provisions

Under MSRS-General law, MSRS-General members are entitled to unreduced benefits provided the individuals retire at or after reaching the normal retirement age for the plan. That age is specified in law (Minnesota Statutes, Section 352.01, Subdivision 25) as age 65 for members who first became public employees before July 1, 1989. For those hired later, normal retirement age is age 65 or "retirement age" age as defined in federal law for Social Security purposes (United States Code, Title 42, Section 416(1), as amended), but not to exceed age 66.

The General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General) includes a few exceptions regarding the treatment for individuals who retire before normal retirement age as specified in plan law, to address problems created for specific occupations where the mandatory retirement age for that occupation is below the MSRS normal retirement age. The two exceptions in current law are for military affairs personnel and Minnesota Department of Transportation pilots. There is also an exception for certain state fire marshal employees (Section 352.87), but it does not appear that that exception is caused by a retirement age conflict.

1. MSRS Military Affairs Personnel. Section 352.85 within the MSRS chapter of law specifies special treatment for certain employees of the Department of Military Affairs who are required by federal laws or military regulations to retire at an age below the normal retirement age specified in the MSRS-General plan. Section 352.85 permits these individuals to draw an MSRS-General annuity without any application of MSRS early retirement reductions due to retirement before the MSRS-General normal retirement age (age 65 to age 66). This special treatment is not automatic. To be covered, the individual must elect this coverage and the individual and employer must each make contributions of 1.6 percent of salary, in addition to the contribution requirements required to the MSRS-General plan in general.

2. MSRS Transportation Pilots. The current version of Section 352.86 of MSRS-General law provides certain exceptions for employees of the Department of Transportation who are employed as pilots or chief pilots who are required by Minnesota Department of Transportation rule or policy to terminate pilot service upon reaching age 62. Similar to the treatment above for Military Affairs personnel, the individuals can receive a retirement annuity computed under MSRS-General law without any reduction for early retirement. To receive the coverage, members must elect the coverage (Section 352.86, Subdivision 3), and an additional employee and employer contribution of 1.6 percent of salary is required (Section 352.86, Subdivision 2).

Discussion

H.F. 2541 (Beard); S.F. 2556 (Murphy): MSRS; Modifying MnDOT Pilots Special Retirement Coverage Provision, revises the maximum age from age 62 to age 65 for continuing employment as an MSRS-General covered pilot (due to a change in Minnesota Department of Transportation policy), and states that special early retirement rights which waive any reductions or penalties due to early retirement on or after age 62 remain in effect.

The bills appear to be misdrafted. An amendment (LCPR04-155) is provided in an effort to clarify the intended treatment.

1. Need for Consideration. This issue is whether there is sufficient need to consider these bills. MSRS staff indicates there are five pilots that may be covered by these bills.

2. MSRS Cost. The cost impact on MSRS is minimal because pilots are a minimal part of their membership.

3. The Issue of Proper Treatment. The issue is the appropriate treatment for this group. Although there are drafting problems, the language suggests an intention to continue allowing these pilots to access early retirement benefits without any reduction due to early retirement, although the maximum pilot termination age has been increased from age 62 to age 65.

If pilots may continue in service to age 65, then one could argue that the special early retirement reduction treatment is no longer appropriate. This special benefit was enacted because the maximum retirement age for these pilots was below the MSRS normal retirement age. When termination of service occurred before age 65, it was not because the pilot wanted to terminate, it was because he or she had to terminate due to the MnDOT policy which prohibited pilots to continue after age 62. Thus, there was a justification for waiving the early retirement penalties that would generally apply.

If the pilots can now continue to age 65, we note that this is the same normal retirement age applicable for all MSRS-General members who began public employment before July 1, 1989. Thus, if the decision to continue to age 65 is solely determined by the pilot, allowing a special treatment which waives the early retirement penalties for those who choose to leave before age 65 might not be justified. There would continue to be some justification for the treatment in law for the post-June 30, 1989, hirees who must terminate at age 65 but before the normal retirement age for this group.

In deciding on an appropriate treatment the Commission may wish to consider a few other factors. To be eligible for the treatment provided by Section 352.86, the pilot must make an election to be covered by this provision during and presumably at the start of his or her career, and the pilot and the employer must make additional matching contributions of 1.6 percent of pay. Clearly, the pilots who are covered by this provision wanted access to this treatment, they are relying on this treatment, and they made additional contributions to get this treatment. The second issue is that it is likely that the pilots are required to pass physical examinations to remain employed as a pilot. A pilot may be forced to retire before normal retirement age because of the results of the physical examination. There is some justification for continuing to waive early retirement reductions if the termination of pilot services is due to the results of a physical exam, rather than the free will of the individual.

4. Need for Amendment or Amendments. The Commission will need to consider at least one amendment and perhaps more. The bills are misdrafted. Given the new language in H.F. 2541 on page 1, lines 9 to 21, pilots to whom Section 352.86 applies and who retire at or after age 65 are entitled to an annuity without early retirement penalties, while the new paragraph (b) in H.F. 2541 (page 1, line 22, to page 2, line 5), says that that same policy will be followed provided the individual is at least age 62 at retirement. Our understanding based on discussion with MSRS staff is that the intention of the pilots is to retain the waiver of early retirement penalties on retirements after age 62 and before the MSRS normal retirement age.

Amendments

LCPR04-155 is a delete-all amendment that clarifies language, including clarification that early retirement penalties will continue to be waived on any retirement occurring on or after age 62 and prior to normal retirement age.

If the Commission wishes to pursue some policy other than that of the bills as amended by LCPR04-155, the Commission may wish to consider the following amendments drawn to LCPR04-155. The Commission may be interested in these amendments if the Commission concludes that the initial purpose for Section 352.86 has changed because there no longer is any difference between the maximum age for pilots under the MnDOT policy and the normal retirement age for MSRS, at least for pre-July 1, 1989, hirees.

LCPR04-156 voids the special early retirement penalty waiver if the decision to retire early is voluntary, rather than being due to a failure to pass medical examinations required for continued employment as a pilot. This revision would apply to new hirees after the effective date of the provision.

LCPR04-157 is alternative to LCPR04-156 and would have Section 356.86 apply only to individuals hired prior to the effective date of these bills.