H.F. 1856 (Gerlach); S.F. 1819 (Knutson) permits Laura Myers, described as a member of a class presumably limited to her only, to purchase four years of allowable service credit in the Minneapolis Teachers Retirement Fund Association (MTRFA), for which credit was lost due to an alleged reporting error by Special School District No. 1, representing the period of her extended leave of absence between June 1999 and September 2003 by paying the equivalent member contributions that she would have paid if the extended leave of absence had been reported by the school district correctly, plus compound interest on the amount at 8.5 percent per annum from the midpoint of the leave, and if she makes the payment, Special School District No. 1, Minneapolis, would be required to pay the balance of the full actuarial value purchase payment amount to MTRFA or have the amount deducted from any State aid payable to the district.

Background information on the topic of special legislation authorizing public pension service credit purchases is attached.

Laura Myers is a resident of Apple Valley who is a teacher in the Minneapolis Public School System at Edison High School. In June 1999, Ms. Myers took an extended leave of absence under Minnesota Statutes, Section 354A.091, a remnant of 1977 teacher mobility legislation, but the school district allegedly erroneously reported her to the Minneapolis Teachers Retirement Fund Association (MTRFA) and to the teacher’s union as having terminated employment with the Minneapolis public school system. Upon the conclusion of a four-year leave of absence and upon her return to teaching this fall, Ms. Myers became aware of the apparent 1999 school district error and is attempting to correct the loss of four years of MTRFA allowable service credit for the leave period. A deadline of May 16, 2004, applies to a current law provision allowing her to utilize savings in her deferred compensation program to make the purchase.

H.F. 1856 (Gerlach); S.F. 1819 (Knutson) permits Laura Myers, a Minneapolis teacher with a four-year extended leave of absence period that is uncredited because of an alleged 1999 school district paperwork processing or reporting error, to purchase four years of Minneapolis Teachers Retirement Fund Association (MTRFA) allowable service credit. Ms. Myers would be obligated to pay the equivalent member contributions for the four-year period, plus interest, and the Minneapolis School District would be obligated to pay the balance of the full actuarial value.

H.F. 1856 (Gerlach); S.F. 1819 (Knutson) raises the following pension and related public policy issues:

1. Equitable Considerations Regarding Ms. Myers. The policy issue is the extent of any adverse equitable considerations with respect to the prospective purchaser, Laura Myers. The applicable Commission Principle of Pension Policy, Principle II.B.10, relating to service credit purchases, adapted for 1998-2002 legislative developments, provides that a potential service credit purchase must not violate equitable notions. The provision means that the purchase must not have been eligible for a prior purchase that was ignored or must not have been wholly or primarily responsible for the loss of service credit. The sole potential adverse equitable consideration that appears to relate to Ms. Myers is her apparent lack of diligence in ascertaining the terms of the extended leave of absence (i.e. the requirement that the payment for service credit must be made annually at the end of each school year) before the leave began and in monitoring the leave payments during the leave. If Ms. Myers had paid greater attention to the terms of Minnesota Statutes, Section 354A.091, the extended leave of absence provision governing the first class city teachers retirement fund associations, she would have caught the school district error in June 2000, on the eve of her first mandatory leave payment, rather than in the Spring of 2003, when correcting the error would have been possible administratively instead of legislatively and would have been less expensive. Testimony from Ms. Myers about her understanding of the extended leave of absence provisions in 1999 and her monitoring of the leave during its four-year duration should be sought by the Commission.

2. Degree of School District Fault. The policy issue is whether or not Special School District No. 1, Minneapolis, made an error with respect to Ms. Myers and to what degree that error caused Ms. Myers’ current pension problem. Ms. Myers’ rendition of the situation would clearly indicate that the school district made an error and that the school district error was the proximate cause of Ms. Myers’ loss of Minneapolis Teachers Retirement Fund Association (MTRFA) service credit. The school district should be provided an opportunity to dispute any of the factual assertions made by Ms. Myers and to present any contrary information or considerations that may be relevant. Since 1998 or 1999, the Commission has been holding employing units who caused a loss of service credit or contributed significantly to a service credit loss responsible for all or most of the actuarial cost of any service credit purchase.

3. Adequacy of Purchase Payment Determination Procedure. The policy issue is the adequacy of the service credit purchase payment determination procedure under Minnesota Statutes, Section 356.55. Comparisons of past purchase payment amounts under Minnesota Statutes, Section 356.55, and the associated pension plan’s liability for a purchase for the period 1999-2001 indicate that the payment determinations do not match well with associated pension liabilities, with earlier career (i.e. not year of retirement) purchases tending to produce an actuarial gain for the pension plan and with later (i.e. year of retirement) purchases tending to result in a subsidy by the pension plan for the purchase. The Commission’s applicable Principle of Pension Policy, Principle II.B.10, requires the payment of the full actuarial value of the service credit purchase to avoid providing a pension plan subsidy. The default (post-May 2004) service credit purchase payment determination procedure, Minnesota Statutes, Section 356.551, typically requires a larger service credit purchase payment than the Minnesota Statutes, Section 356.55, procedure and is less likely to provide a service credit subsidy. The Commission should consider the adequacy of the service credit purchase payment procedure before potentially adding to the MTRFA unfunded actuarial accrued liability by authorizing what may be a subsidized service credit purchase.

4. Appropriate Allocation of the Purchase Payment. The policy issue is the appropriateness of the proposed allocation of the service credit purchase payment amount between Ms. Myers and Special School District No. 1, Minneapolis. The proposed legislation would require Ms. Myers to pay her four-year equivalent member contribution payment that she would have made 1999-2003, plus 8.5 percent interest, and would require the Minneapolis public schools to pay the balance of the full actuarial purchase payment requirement. It is unclear what the allocation of the extended leave of absence employer contributions was under Ms. Myers’ 1999 leave agreement but, potentially, Ms. Myers may have been responsible for the full equivalent employer contribution amount. The shift of the burden in the proposed legislation undoubtedly is based on allegations of school district fault in this instance and would be consistent with recent Commission practice if there was evidence of school district fault.

5. Affordability of Service Credit Purchase for Special School District No. 1. The policy issue is the affordability of any required service credit purchase payment amount for Special School District No. 1, Minneapolis. In other leave of absence reporting errors that resulted in service credit purchase legislation (see First Special Session Laws 2001, Chapter 10, Article 17, Sections 1 and 3), the employer cost was between $60,000-$70,000 and the cost of this purchase could potentially approach that amount. The school district has numerous financial pressures and will likely argue that it can ill afford the imposition of this additional pension cost. A more refined estimate of the purchase payment amount should be available from MTRFA.

6. Appropriateness of Continuing the 1977 Teacher Mobility Programs. The policy issue is the continued appropriateness of the 1977 teacher mobility programs and the appropriateness of sunsetting those programs. In 1977 (Laws 1977, Chapter 447, Article 9), largely based on the interest of House Speaker Martin O. Sabo, the Legislature attempted to assist school districts in recruiting and retaining new teachers by encouraging the retirement or turnover of experienced teachers. The programs included early retirement incentive payments, extended leaves of absence programs, and the full-time teacher retirement service credit for the part-time teaching service phase-out program. State financial participation in these mobility programs has been phased out or terminated, but the underlying programs continue. The Commission has not reevaluated the need for these programs in recent years and the programs may benefit from the addition of a sunset provision to encourage that legislative reevaluation. Errors and omissions in connection with the extended leave of absence program has given rise to a number of recent service credit purchases (see Laws 2001, 1st Special Session, Chapter 10, Article 17, Section 2; Laws 1999, Chapter 222, Article 8, Section 10; Laws 1998, Chapter 390, Article 4, Section 3, Subdivisions 5, 6, and 9; and Laws 1995, Chapter 141, Article 2, Section 3).

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).