Summary of H.F. 1795 (Swenson); S.F. _____ (    )

H.F. 1795 (Swenson); S.F. _____ (    ) authorizes a retired member of the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) to change the second covered life on the person’s current joint-and-survivor optional retirement annuity form from the former spouse to the current spouse, with the amount of the subsequent joint-and-survivor annuities adjusted to equal the remaining actuarial present value of the current joint-and-survivor optional retirement annuity based on the retiree’s age and that of the current spouse.

Background Information on the Joint-and-Survivor Optional Retirement Annuity Form

1. Joint-and-Survivor Annuities in General. For most Minnesota public employee retirement plans, the total economic value of the retirement benefit is a function of the individual’s salary near retirement and total years of service. Most Minnesota public pension plans provide a single life annuity as the basic form of the retirement annuity and also have established various optional retirement annuity forms and an individual retiree may choose from that variety of forms. A single (or straight) life annuity covers only the retiree’s life. A joint-and-survivor annuity is an annuity form that provides coverage to another individual in addition to the retired or disabled employee. The second covered life is often a spouse, but it could also be another adult or a child unless specifically restricted under the laws or bylaws governing a particular plan. With a joint-and-survivor annuity, the intent is to provide continuing income to the other individual for life, following the death of the primary annuitant. With a few exceptions, all of these annuities must have the same actuarial present value whether it covers only the retired member, or the retired member and spouse, or some other individual or individuals. One of these exceptions is a subsidized bounce-back feature on joint-and-survivor annuities, which is discussed below.

To achieve this benefit equivalence requirement, when a joint-and survivor optional annuity form is selected, the monthly benefit received by the primary annuitant must be reduced in order to finance the extension of coverage to the potential survivor. If done otherwise, the total value received by the recipients would be higher than the value received by a comparable single individual, or a comparable married individual who decides not to take a joint-and-survivor annuity. The amount of the actuarial reduction is a function of the ages of the annuitant and designated beneficiary and their expected lifetimes. If the joint-and-survivor optional annuity selected by the retiree provides coverage to a spouse who is much younger than the primary annuitant, the amount of the monthly reduction can be quite large, due to the actuarial likelihood that the younger potential survivor will outlive the primary recipient by many years.

The amount of the reduction also depends upon the extent of the continuing coverage. Plans typically permit several different joint-and-survivor annuity continuation amounts. Under a 100 percent joint-and-survivor option, the designated beneficiary receives the same monthly benefit as before the death of the primary annuitant occurred. Because of the level of this continuing coverage, a 100 percent joint-and-survivor optional annuity requires a larger monthly reduction than options offering a lesser amount of continuing coverage. With a 50 percent joint-and-survivor option, the designated beneficiary would receive a monthly benefit which is half of the annuity amount that was previously received by the primary annuitant. Fifty percent, 75 percent, and 100 percent joint-and-survivor annuities are the most common joint-and-survivor optional annuity offerings, but others also exist.

2. Plans with Subsidized Bounce-Back Feature on Joint-and-Survivor Annuities. There is a provision in many of the larger Minnesota state retirement plans (i.e., the plans administered by the Public Employees Retirement Association (PERA), TRA, the first class city teacher retirement plans, and most plans administered by the Minnesota State Retirement System (MSRS)) which slightly modifies the general actuarial equivalence requirement. In 1989, subsidized bounce-back provisions were added to the joint-and-survivor optional annuity laws in these plans. Under this modification, if the individual to receive the second half of the joint-and-survivor annuity predeceases the primary annuitant, the monthly benefit is restored (i.e. bounces back) to the monthly benefit amount that would have been received if the individual had selected a single life annuity. In the plans with a subsidized feature, this bounce-back is provided without any further reduction in the monthly benefits to cover the cost of the bounce-back. The bounce-back cost is thus shifted from the individual retiree to all employers and employees who fund the plan through their contributions.

3. Plans with Unsubsidized Bounce-Back. In 1991, a bounce-back feature on joint-and-survivor optional annuities was added to the MERF plan, but the bounce-back was not subsidized and an additional reduction is taken in the monthly annuity when the annuity commences to cover the cost of the bounce-back. In 1997, laws were enacted which extended joint-and-survivor optional annuity forms, both those with a bounce-back and those without, to the Minneapolis Police Relief Association plan and to the Minneapolis Firefighters Relief Association plan. If the retiring or disabled member selects a bounce-back annuity, it is not subsidized.

Background Information on Joint-and-Survivor Options and Marital Dissolution Decrees

When a marriage dissolution occurs, the legal system must address the division of marital property. Minnesota Statutes, Section 518.18, deals with the division of marital property and Minnesota Statutes, Section 518.581, deals with certain surviving spouse benefits, including those provided by local police or paid fire benefit plans. Pensions earned by either spouse are treated in Minnesota law as marital property for division in the event of a marriage dissolution. Both statutory provisions reflect work by the 1987 and 1988 Legislatures to clarify the treatment of pension plan benefits under a marriage dissolution settlement. Minnesota Statutes, Section 518.58, Subdivision 3, added in 1987, instructs the district courts to avoid dividing pension benefits directly, if possible, requiring adjusting the division of other liquid assets, as necessary, to compensate instead. Minnesota Statutes, Section 518.58, Subdivision 4, governs how the pension benefits might be valued, or how pension benefits can be allocated if it is necessary to allocate those benefits between the parties, if there are no other assets available for allocation. Thus, the provisions provide for the allocation of a pension benefit or benefits between the divorcing couple, so long as all pension plan laws regarding the timing, periodic distribution requirements, and total amounts of the benefit are followed. There is no statutory provision empowering the district courts to void a pension benefit or a portion of a pension benefit or to change a joint-and-survivor optional annuity form designated survivor. When a retired or disabled public employee selects a joint-and-survivor optional annuity form, a pension right is created for that annuitant and for the person or persons named to the second half of the joint-and-survivor annuity. In the event of the primary annuitant’s death, the individual or individuals named as the second lives covered under the option have a right to continued monthly benefits for their remaining lifetimes and that right is intended to continue even if a divorce occurs.

In a marriage dissolution action, the parties to the action directly, or their legal counsels indirectly on their behalf, are expected to divide the marital property of the couple in an equitable fashion. On occasion, there are dissolution settlements that specify that the second half of a joint-and-survivor annuity is not to be paid as originally elected. These instances suggest that there was poor legal work on the part of the lawyers involved in the dissolution settlement.

Public Pension Problem of Ken Oslund of Mankato, Minnesota

Kenneth Oslund of Mankato, Minnesota, is a retired member of the Basic Program (i.e., not covered by Social Security) of the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) who elected a joint-and-survivor optional annuity form covering his then wife as a second recipient of a retirement annuity from PERA-General. Mr. Oslund was the Finance Director of the City of Mankato before his retirement. Mr. Oslund subsequently was divorced from his spouse after his retirement in 1985 and now wishes to change the second covered life on his PERA-General joint-and-survivor optional retirement annuity from his former spouse to his current spouse. The current State laws governing the various Minnesota public pension plans do not permit a change in joint-and-survivor optional annuity elections.

Discussion

H.F. 1795 (Swenson); S.F. _____ (    ) permits Ken Oslund of Mankato, Minnesota, to change his joint-and-survivor optional annuity designation. Ken Oslund, a former Finance Director of the City of Mankato who retired in 1985, is divorced from his wife at the time of his retirement, whom he named as the second covered life on a joint-and-survivor optional annuity form, has remarried, and now seeks to change the second covered life designation on his joint-and-survivor optional annuity form to his current spouse. The proposed legislation would permit Mr. Oslund to make the desired change in his optional annuity form second covered life designation, with the re-designated joint-and-survivor optional annuity amount adjusted to account for any age differential between the current second covered life and the intended second covered life.

The proposed special legislation raises a number of pension and related public policy issues for Commission consideration, as follows:

1. Proposed Legislation as a Potential Unconstitutional Taking. The policy issue is the potential that the proposed legislation constitutes potentially unconstitutional taking of a property interest created in the former spouse with a remainder interest in the retirement annuity. The Fifth Amendment to the U.S. Constitution and Article I, Section 13, of the Minnesota Constitution both prohibit the taking of private property by government action without the payment of just compensation. When a joint-and-survivor annuity is elected and comes into force by the commencement of the receipt of the optional annuity, a property interest arguably is created in the potential survivor. If the joint-and-survivor coverage was valued for and included in the marriage dissolution property settlement and court award, the property interest was clearly established in the current joint-and-survivor optional annuity beneficiary. Although not involving a public pension survivor benefit, changing the disposition of assets to survivors by law has been found to violate the Fifth Amendment of the U.S. Constitution in Hodel v. Irving, 481 U.S. 704 (1987). Without the consent of the former spouse with the right to a joint-and-survivor option remainder benefit, without even providing notice to the former spouse of the change, and actually or potentially revising the original marriage dissolution property settlement, the proposed legislation would empower the primary recipient to revoke his first joint-and-survivor election and elect to cover a different person as a survivor. If the former spouse affected by a joint-and-survivor revocation was disgruntled by the change and was to litigate the issue, there is some considerable chance that the proposed legislation would be overturned under the U.S. Constitution and that a similar result could be expected under the Minnesota Constitution.

2. Consistency With Commission Policy. The policy issue is the consistency of the proposed legislation with the policy of the Legislative Commission on Pensions and Retirement on the reopening the optional annuity forms. Principle II.C.13 of the Commission’s Principles of Pension Policy, last revised in 1995-1996, provides that optional annuity forms should not be reopened. The proposed legislation provides for a reopening of an optional annuity form and is inconsistent with the Commission’s Principles of Pension Policy. If the Commission wishes to recommend the special legislation for Mr. Oslund, the Commission should consider revising its Pension Principles.

3. Appropriateness of a Legislative Intervention in Prior Marriage Dissolution Property Settlement. The policy issue is the appropriateness of the Legislature involving itself to the benefit of one party to overturn or modify the property settlement of a prior marriage dissolution. Although the Commission staff has no specific information about the marriage dissolution of Mr. Oslund and his first wife or about the property settlement between the spouses, the proposed special pension legislation will change that property settlement. Pension coverage is marital property under Minnesota Statutes, Chapter 518, and has been held to be such by Minnesota courts for decades. When a marriage is dissolved, the marital property is to be allocated between the spouses. The joint-and-survivor optional annuity second life survivor coverage accorded to Mr. Oslund’s first spouse is of value to the ex-spouse, and whether the value of that coverage was adequately accounted for in the marriage dissolution proceedings or not, the Legislature is a problematic forum for weighing the values of various marital property items and the equities of the spouses at this later date. The lawyers for Mr. Oslund and his first wife or the district court either included the value of the second covered life survivorship benefit in reaching a property settlement or should have done so. To remove the coverage from the former spouse without providing some other item of comparable value lacks fundamental fairness.

4. Appropriateness of the Proposed Legislation in Light of Alternative Resolution Options. The policy issue is the appropriateness of the proposed legislation when there are alternative options for a resolution of any problem that actually exists with respect to the pension coverage in the marital property settlement in Mr. Oslund’s marriage dissolution. Since Mr. Oslund elected a joint-and-survivor optional annuity form covering his former wife creating a contingent (i.e., dependent on the former wife surviving Mr. Oslund) property interest for her, then retired, and began receipt of that optional annuity form, that election is irreversible, but the value of that survivorship benefit can be considered (and should have been considered) in a division of marital property in the marriage dissolution. If that was not done previously, the parties, on their own or by petitioning the district court, can revisit the property division and accomplish the readjustment in values. If the prior property settlement already accommodated the marital property division appropriately, including the value of the second covered life portion of the joint-and-survivor optional annuity form, then no additional action is needed or appropriate unless one party wishes to make a gift with a monetary value to the other.

5. Actuarial Cost. The policy issue is the amount of any actuarial cost associated with the proposed legislation. Any actuarial cost to PERA from the special legislation for Mr. Oslund will need to be assessed by PERA and by the consulting actuary retained by the Commission, the firm of Milliman USA. Budget cuts from 2003 have eliminated the Commission’s special actuarial projects budget, so the cost of any actuarial work not performed by or on behalf of PERA will need to be paid from other sources. The proposed special legislation, however, is drafted to minimize any adverse actuarial impact on PERA.

6. Administrative Burden. The policy issue is the burden that reopening optional annuity elections may place on the affected retirement plan, PERA. The reelection process will involve additional benefit estimates, additional contacts with Mr. Oslund, additional actuarial work or calculations, and additional benefit counseling. While the burden on PERA is not likely to be excessive for one retiree, for potentially all PERA retirees, it becomes more burdensome. While administrative burden claims should not be the sole basis for declining to recommend proposed legislation, combined with other policy issues, administrative burdens should be considered.

7. Precedent. The policy issue is the extent of past precedents for the proposed legislation and the potential for the proposed legislation to become a precedent for additional similar legislative demands. There are two past instances where special legislation has permitted a retiree to reverse a joint-and-survivor election, once without Commission recommendation and once with Commission recommendation. Laws 1987, chapter 157, Section 20, derived from a Senate floor amendment and not recommended by the Commission, permitted a PERA-General retiree from Edina, Minnesota, who divorced after retiring, to convert a joint-and-survivor back to a single life annuity. Laws 1994, Chapter 526, recommended by the Commission, permitted a PERA-General retiree who was a St. Paul Water Utility employee to rescind an optional annuity form election. Both past optional annuity election reversals predated the 1995-1996 addition to the Principles of Pension Policy rejecting the reopening of optional annuity form elections, so their precedent value is limited by that fact. Both past reversals involved a change to a single life annuity rather than a change in the second covered life. If a reopening of an optional annuity form is permitted by special or general legislation for PERA-General, similar demands could be expected relating to the 14 other retirement plans currently providing optional annuity forms.