H.F. 1586 (Nelson, P.); S.F. 1579 (Nienow)

H.F. 1586 (Nelson, P.); S.F. 1579 (Nienow) permits a member of the Teachers Retirement Association (TRA) to purchase up to 33 months of allowable service credit from the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) at its full actuarial value as calculated under Minnesota Statutes, Section 356.55 or 356.551, whichever applies.

Background Information on Service Credit Purchase Special Legislation

Prior service credit purchases are a phenomenon of defined benefit pension plans. Defined benefit plans specify the pension benefit amount, typically through the use of a formula based on the amount of compensation and on the length of service.

Prior service credit purchases are opportunities for pension plan members to obtain allowable service credit and, if applicable, covered salary credit in a defined benefit pension plan for a period that was not otherwise credited through normal pension plan membership. A process is followed in obtaining credit for a prior service credit purchase period, usually involving the payment of some amount to defray all or a portion of the actuarial cost attributable to the purchase and the provision of documentation relating to the service period.

Pension plan members seek prior service credit purchases for a variety of reasons, including a desire to gain defined benefit pension plan portability, a desire to obtain a larger pension benefit, or a desire to qualify for a special early retirement provision.

Principle II.C.10 of the Commission’s Principles of Pension Policy, last revised in 1996, covers purchases of service credit and has the following elements:

1. 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.

2. Public Employment. The period requested for purchase should be a period of public employment or service that is substantially akin to public employment. This is consistent with the notion that public pension plans should be providing coverage for public employees for periods of time when they were serving the public through public employment or through quasi-public employment. Coverage for a period when an individual provided private sector employment is not consistent with this statement.

3. Minnesota Connection. The employment period to be purchased should have a significant Minnesota connection. This is consistent with the notion that Minnesota taxpayers support these public pension plans and bear the investment risk in amassing plan assets. Given the support that taxpayers provide, it is appropriate that the service have a Minnesota connection, reflecting services provided to the people in the state.

4. 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. If there are unresolved issues of whether an individual should have service credit for a given period, those issues should be resolved before the individual terminates from public service, and certainly before the individual retires. The act of retiring undermines a claim that there is sufficient need for the Legislature to consider the coverage issue. If there were considerable hardship caused by the lack of service credit, presumably the individual would not have retired. Entering retirement suggests that the associated pension benefit is adequate without any further increase in the benefit level due to a purchase. Only on rare occasions has the Commission and the Legislature authorized service credit purchases by retirees.

5. 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. There is no process in law specifying a procedure for computing a "full actuarial value" purchase in a defined contribution plan, or even defining what that concept means in the context of a service purchase or service credit purchase in a defined contribution plan.

6. Full Actuarial Value Purchase. Within the context of a defined benefit plan, 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. The procedure used to compute this full actuarial value should be a methodology that accurately estimates the proper amounts. When clear evidence indicates that the employing unit committed an error that caused the individual to not receive pension plan coverage, the Commission has permitted the employee to make the employee contribution for the relevant time period, plus 8.5 percent interest, and the employer has been mandated to cover the remainder of the computed full actuarial value payment. If the employer does not directly make the payment following notification that the employee has made his or her portion of the full payment, the Commission has required that a sufficient amount to cover the remainder of the full actuarial value be deducted from any state aids that would otherwise be transmitted to the employer. The Commission has purposely departed from the full actuarial value requirement when there is evidence that the pension plan administration created the lack of service credit coverage due to pension plan administration error. In situations of pension plan error, the employee may be required to pay the contributions that would have been required for the relevant time period, plus 8.5 percent interest to adjust for the time value of money, leaving any difference between that payment and the full actuarial value to be absorbed by the pension fund.

7. 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 general, any issue or factor associated with a service credit purchase request which can be viewed as lacking fairness or being less than impartial can be a basis for rejecting a request. Requests by existing retirees to purchase additional service credit and have their annuities recomputed could be viewed as being a situation that violated equity considerations. New requests on behalf of individuals who were covered by purchase of service credit authorizations passed by earlier Legislatures but who are dissatisfied with the purchase of service credit terms that were provided can be considered as violating equity considerations. Individuals requesting service credit purchases for periods specifically excluded from plan coverage under the applicable law could be considered as violating equity considerations, among other policy concerns relating to those considerations. Requests to purchase service credit for periods covered by another pension plan may raise equity concerns. Generally, a service credit purchase is intended to fill a gap in coverage, not to create double coverage. Long delays in seeking remedial action can also be considered a violation of equity considerations. Individuals tend to wait until late in their career before seeking any remedial action for lost service credit. Prompt action, closer to the time period when the service credit problem occurred, would often result in a solution at a lower cost and would avoid efforts by the Commission to try to determine the factual situation many years, or even decades, after the event occurred.

The general purchase of service credit legislation enacted in 1999, 2000, and 2001 conflicted with the Commission policy as stated in the 1995-1996 Commission Statement of Pension Principles. Perhaps the 1999-2001 service credit purchase legislation should be viewed as reflecting evolution and permanent change in Commission policy. The 1999-2001 legislation also may be viewed as temporary provisions to address a short-term labor shortage situation, warranting a temporary waiver of the standard Commission purchase of service credit policy.

During the period 1957-2003, the Legislature has enacted 239 special laws authorizing one person or a small group of individuals to purchase prior service credit, distributed as follows:

A majority of special prior service credit purchase laws relate to the three major general employees retirement plans, with 33 special laws relating to the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), with 75 special laws relating to the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and with 43 special laws relating to the Teachers Retirement Association (TRA).

Discussion and Analysis

H.F. 1586 (Nelson, P.); S.F. 1579 (Nienow) allows Bonita J. Holt of Lindstrom, Minnesota, to purchase up to 33 months of service credit from the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) with a full actuarial value payment. Ms. Holt would be required to pay the full purchase payment amount unless her current employer, the Anoka-Hennepin School District, or one of her prior employers voluntarily decides to participate in the purchase payment as permitted by current statute.

Bonita Jill Holt of Lindstrom, Minnesota, is a special education teacher who has taught for 28 years, who is currently employed by Independent School District No. 11, Anoka-Hennepin, and who has periods of non-teaching school district employment during her college years by Independent School District No. 621, Mounds View, and by Independent School District No. 31, Bemidji, that were not covered by the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General). Ms. Holt desires to retire under the "Rule of 90" early normal retirement eligibility provision with retirement annuities from PERA-General and Teachers Retirement Association (TRA) under the Combined Service Annuity portability provision. To do so in 2004, Ms. Holt has determined that she needs 33 months of additional service credit. She has 35 months of non-teaching school district employment in Mounds View and in Bemidji that was not covered by PERA-General at the time and desires to purchase PERA-General allowable service credit for 33 months of that previously uncredited local government employment.

H.F. 1586 (Nelson, P.); S.F. 1579 (Nienow) raises several pension and related public policy issues for consideration and discussion by the Legislative Commission on Pensions and Retirement, as follows:

1. Adverse Equitable Considerations. The policy issue is the question of the presence or absence of equitable considera2tions that are adverse to Ms. Holt’s request. The principal potential adverse equitable considerations are the likelihood that Ms. Holt’s service for the Mounds View and Bemidji school districts was not eligible for coverage by PERA-General when rendered, a question handled in policy issue #3, and the length of time that has elapsed since that Mounds View and Bemidji public school district employment. Equitable principles argue for a timely pursuit of remedies or the correction of injustices. Having 30 or 35 years elapse since Ms. Holt’s Mounds View and Bemidji school district employment was rendered makes it very difficult to obtain or reconstruct the applicable records and, consequently, very difficult to determine plan coverage eligibility. Testimony should be sought from Ms. Holt about the reasonableness of this considerable delay.

2. Prior Service Credit Cost to and its Affordability for Ms. Holt. The policy issue is the cost to Ms. Holt to make the prior service credit purchase of 2.75 years of PERA-General service credit and its affordability for her. Because the purchase makes Ms. Holt eligible for the "Rule of 90" early normal retirement age provision, and because the period to be purchased is relatively long in duration, the prior service credit purchase payment amount is likely to be significant in amount. The Commission staff is not able to estimate the likely cost, but PERA should be able to calculate the service credit purchase payment to be required from Ms. Holt.

3. Nature of Ms. Holt’s 1968-1972 Uncovered Public Employment. The policy issue is the nature of the uncovered 1968-1972 public employment rendered by Ms. Holt. If the covered service was uncovered by PERA-General because it was excluded from PERA coverage at the time, either because of its duration (i.e., part-time or seasonal) or because of its pay level (i.e., under the minimum salary threshold, set at $75 per month at the time), the purchase may not be appropriate on that basis and because a purchase authorized for ineligible service will create a policy precedent for other potential purchasers of prior employment that was excluded from public pension coverage at the time that it was rendered. Testimony from PERA should be solicited about exclusions that existed from PERA-General coverage during the period 1968-1972, the number of current PERA-General members who may have uncredited periods of excluded employment, and the existence of prior special legislation that could be considered to be a precedent for this proposed special legislation.

4. Role of the Prior Employers if Service Should Have Been Covered. The policy issue is the potential role of the Mounds View and Bemidji school districts to be required if it is determined that Ms. Holt should have been covered by PERA-General when the service was rendered in 1968-1972. Where employers have erred in omitting their employees from pension coverage, the Commission frequently, in the past four years, has obligated the culpable employer to pay a substantial portion of the eventual service credit purchase payment amount. Testimony should be sought from PERA about what obligation the Mounds View and Bemidji school districts had for their public employees at that time.

5. Potential Subsidization of Prior Service Credit Purchases. The policy issue is the potential that Minnesota Statutes, Section 356.55, the current "full actuarial value prior service credit purchase payment determination procedure," does not adequately measure "full actuarial value" and thereby inappropriately subsidize a service credit purchase. Minnesota Statutes, Section 356.55, which is the full actuarial value service credit purchase payment amount determination provision in force until May 15, 2003, does not guarantee that no pension plan subsidy will be involved in the purchase. Commission longstanding policy has opposed any provision of a subsidy in a service credit purchase from the retirement plan. A continuing question with the Minnesota Statutes, Section 356.55, full actuarial value estimation procedure is whether that estimation technique produces more accurate full actuarial value estimates. As part of the 1998 full actuarial value estimation procedure legislation, during each annual actuarial valuation through 2002, the Commission-retained actuary compared the prior service credit purchase payment with the actuarial valuation liability change associated with the purchase. The following summarizes these comparisons for the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) for the three reported years:

PERA-General Service Credit Purchase Payment and Actuarial Liability Changes
	2000		2001		2002		Total
Active
Total	4		18		27		49
w/Gain	1	25%	8	44%	19	70%	28	57%
w/Loss	3	75%	10	56%	8	30%	21	43%
Avg. Payment	$18,418		$15,769		$23,909		$20,471
Avg. Liability Change	$20,879		$16,004		$21,673		$19,526
Avg. Gain (Loss)	($2,461)		($235)		$2,236		$945
Retired
Total	1		4		2		7
w/Gain	0	0%	2	50%	0	0%	2	29%
w/Loss	1	100%	2	50%	2	100%	5	71%
Avg. Payment	$4,918		$25,846		$8,538		$17,911
Avg. Liability Change	$20,962		$30,492		$10,304		$23,362
Avg. Gain (Loss)	($16,044)		($4,646)		($1,767)		($5,452)

Note: "Active" means the purchaser was an active member when the purchase was made and on the date of the next following actuarial valuation.
"Retired" means the purchaser retired after making the service credit purchase and was retired on the date of the next following actuarial valuation.

For the 56 prior service credit purchases under Minnesota Statutes, Section 356.55, during the period 2000-2002, 46 percent of all purchases involved a subsidy, with an average subsidy in those cases of $2,173. For the "retired" category of purchasers, which would likely include Ms. Holt if the special legislation were enacted, the subsidization occurs for 71 percent of those cases and the average subsidy in those cases is $5,452. The number of subsidies and the extent of that average subsidy may exceed permissible tolerances.