Summary of the Proposed Alternative Legislation

H.F. 2179 (Sertich); S.F. 2229 (Tomassoni) amends Minnesota Statutes, Section 353.30, the optional annuity provision of the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), by adding new Subdivision 3d, which allows all current PERA-General retirees a one-time second chance opportunity to elect an actuarial equivalent 50 percent joint and survivor optional annuity form.

H.F. 2180 (Sertich); S.F. 2228 (Tomassoni) would provide a certain retiree of the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) with a one-time second chance opportunity to elect an actuarial equivalent 50 percent joint and survivor optional annuity form.

Background Information on Social Security Coverage for Minnesota Public Employees

Social Security is a collection of federal programs.  Social Security is the Old Age, Survivors, Disability and Health Insurance (OASDHI) Programs. Coverage for public employees by the Old Age, Survivors, Disability and Health Insurance program (Social Security), under 42 U.S. Code Section 418 is generally provided through coverage agreements between the applicable state and the federal Department of Health and Human Services. When Social Security was established in 1935, it did not permit coverage for public employees, since it is funded by employee and employer payroll taxes (the Federal Insurance Contribution Act or FICA tax) and taxation of state governments by the federal government is unconstitutional. In 1954, Social Security coverage was extended to public employees by virtue of intergovernmental (state-federal) agreements. The applicable law is Minnesota Statutes, Chapter 355. In 1990, federal law extended Social Security coverage to any public employee who is not covered by a public employee pension plan.

In Minnesota, virtually all public employees are included in Social Security coverage based on a 42 U.S. Code, Section 418, state federal coverage agreement. The groups currently excluded from Minnesota’s agreement with the federal government extending Social Security coverage are:

1. Constitutional Officers first taking office before July 1, 1997;
2. Legislators first taking office before July 1, 1997;
3. Judges first taking office before July 1, 1973;
4. Members of the State Patrol Retirement Plan;
5. Members of the Public Employees Police and Fire Plan (PERA-P&F);
6. Members of the various local police or salaried fire relief associations or consolidation accounts administered by Public Employees Retirement Association (PERA);
7. Members of the PERA Basic Program (pre-1967 hirees);
8. Members of the Teachers Retirement Association (TRA) Basic Program (pre-1959 hirees);
9. Members of the Minneapolis Teachers Retirement Fund Association (MTRFA) Basic Program (pre-1978 hirees);
10. Members of the St. Paul Teachers Retirement Fund Association (SPTRFA) Basic Program (pre-1978 hirees);
11. Members of the Minneapolis Employees Retirement Fund (MERF, pre-1979 hirees);
12. State or local government employees excluded from the coverage by the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), PERA, TRA, MERF, or the first class city teacher retirement plans; and
13. Members of the various volunteer firefighter relief associations for their volunteer firefighter service.

Originally, in 1954, Social Security coverage was extended by a coverage agreement that required an "all or none" referendum of current public pension plan members. The State Employees Retirement Association (SERA), renamed the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), and the Duluth Teachers Retirement Fund Association (DTRFA) both coordinated with social Security on an "all or none" referendum basis, which is why those plans lack a Basic program. Later in the 1950s, the Social Security Act was amended to permit coverage extensions on a split basis referendum basis, where existing public pension plan members who did not desire Social Security coverage could retain their prior coverage. The Legislators Retirement Plan, the Judges Retirement Plan, the Elected State Officers Retirement Plan, the Public Employees Retirement Association (PERA), the Teachers Retirement Association (TRA), the Minneapolis Teachers Retirement Fund Association (MTRFA), the St. Paul Teachers Retirement Fund Association (SPTRFA), and the Minneapolis Employees Retirement Fund (MERF) all coordinated with Social Security on a split basis referendum basis.

PERA was the last major statewide retirement plan to coordinate with Social Security, occurring in 1965 for public hospital employees and in 1967 for all others, and the issue of Social Security coverage was controversial in local government. Demands by some governmental units and local government employees even resulted in a lawsuit attempting to compel the PERA Executive Secretary to implement coordination by PERA with Social Security (Slezak v Ousdigian, 260 Minn. 303, 110 N.W.2nd 1 (1961)).

When a Minnesota public pension plan coordinates with Social Security, the existing plan members who do not elect to coordinate retain their prior benefit plan coverage in the form of a "basic" program and plan members who elected to coordinate and future plan members have Social Security coverage plus supplemental retirement coverage by downsized benefit plan coverage in the form of a "coordinated" program.

Background Information on Optional Annuity Forms

Most statewide and major local Minnesota public pension plans provide a retirement annuity in the form of a single life annuity. This means that the retirement annuity is payable solely for the duration of the retired lifetime of the annuitant. To accommodate the needs and desires of annuitants, most major and statewide Minnesota public pension plans have established optional annuity forms.

An optional annuity form allows the annuitant to potentially extend the time period over which an annuity will be paid and to potentially include other recipients. The recipients must be natural persons, rather than legal persons (trusts or corporations), so that there is an actual lifetime over which the value can be predicted. The optional annuity form is typically provided on an actuarial equivalent basis, so the longer period of potential payment or the inclusion of additional recipients is accounted for by a reduced annuity amount. The most typical optional annuity forms are joint-and-survivor optional annuities, term-certain optional annuities, and accelerated annuities. A joint-and-survivor optional annuity pays a reduced annuity amount to the annuitant, but upon the death of the primary annuitant, all or a portion of the prior monthly benefit continues to be paid for the remaining life of the designated survivor. Joint-and-survivor annuities are often elected by married couples to ensure continued income for the surviving spouse. The amount of the reduction is a function of the actuarial life expectancy of the annuitant, the actuarial life expectancy of the potential survivor, and the extent of increased benefit payment duration caused by the differences in the ages. A term-certain optional annuity pays a reduced annuity amount to the annuitant, and if the annuitant dies before a designated period of time of receipt has elapsed, an equal annuity amount to the annuitant's survivors or estate for the remaining unelapsed period of time. The amount of the reduction is a function of the actuarial life expectancy of the annuitant and the length of the period of guaranteed annuity payments. An accelerated annuity (or Social Security leveling optional annuity) provides a benefit in a greater amount during the initial years of retirement, followed by a lower benefit amount for the remainder of the retired lifetime, typically intended to assist public employees who retire at ages earlier than when Social Security benefits are payable (earliest is age 62) or when full Social Security benefits are payable (age 65 if born earlier than 1938, increasing to age 67 if born later than 1959). For example, for an age 59 retiring member of the Teachers Retirement Association (TRA) with a final annual salary of about $60,000 and with 20 years of service, the person’s single life retirement annuity would be $1,000 per month, an accelerated annuity to age 62 would be $1,563.45 per month ($850.00 per month after age 62), and an accelerated annuity to age 65 would be $1,475.65 per month ($700.00 per month after age 65).

Optional annuity forms are likely elected by retirees or disabilitants for a number of potential motivations. The clearest motivation is a concern about the financial situation of a potential survivor (spouse, child, or other survivor) that underlies the selection of joint-and-survivor optional annuity forms. The motivation for the pre-age 62 accelerated optional annuity form is presumed to be an equalization of total benefit payouts to account for the delay in eligibility for Social Security benefits until age 62. The motivation for selecting term-certain optional annuity forms is unclear. Because of its time limitations, the term-certain optional annuity forms are not generally considered to be survivor benefits, although some term-certain optional annuity forms may be utilized for specialized survivor coverage concerns. The motivation for selecting accelerated annuity forms is the accommodation of retirement ages earlier than the earliest Social Security benefit age of age 62.

The "bounceback" in a joint-and-survivor annuity means that the annuity amount returns from the joint-and-survivor actuarially reduced amount back to the single life annuity amount if the intended survivor predeceases the annuitant. The bounceback is subsidized because no additional actuarial reduction in the retiree's retirement annuity amount is required for the feature beyond the joint-and-survivor optional annuity form actuarial equivalence reduction. The bounceback feature has not been included as part of term-certain or other optional annuity forms.

Under Minnesota Statutes, Section 356.371, enacted in 1981, there is a procedure that must be followed in electing an optional retirement annuity. Public pension plans are required to provide the retiree and the retiree's spouse before retirement with a summary of all optional retirement annuity forms with the retirement application, a calculation of the benefit reduction required to take each option, and the procedure to be used to gain more information on optional forms, and to provide the retiree and the retiree’s spouse with a post-election notification to the spouse of actual retirement election.

Public Pension Problem of Helen and Onni Oja

H.F. 2179 (Sertich); S.F. 2229 (Tomassoni) or H.F. 2180 (Sertich); S.F. 2228 (Tomassoni) are alternative potential remedies to assist Helen and Onni Oja of Hibbing, Minnesota.

Onni Oja of Hibbing, Minnesota, is a retired member of the Basic Program of the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General) who was employed by Independent School District No. 701 (Hibbing). When Mr. Oja retired in 1978, at age 60, he elected to receive a single life annuity (i.e. a pension payable for the length of his life only) rather than to take an optional retirement annuity form (such as a joint and survivor annuity, with a reduced benefit amount payable for both the life of Mr. Oja and the life of a designated beneficiary). Mr. Oja, at age 85, is currently in poor health and his wife, Helen Oja, is reportedly very concerned about her future financial situation, since Onni Oja took a single life annuity from PERA-General, without any survivor coverage elected, since Helen Oja has no independent retirement coverage of her own, and since neither Onni or Helen Oja has any significant amount of Social Security coverage.

Discussion

H.F. 2179 (Sertich); S.F. 2229 (Tomassoni) or H.F. 2180 (Sertich); S.F. 2228 (Tomassoni) would assist Helen Oja by providing Onni and Helen Oja with an opportunity to elect the survivor coverage that they do not currently have in the single life annuity that Onni Oja receives from the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General). Mr. Oja does not have any significant survivor coverage because he had nominal Social Security coverage as a Basic Program member of PERA-General, since he was employed as a public employee before PERA coordinated with Social Security, and did not elect Coordinated Program membership in 1967, and because he elected a single life annuity from PERA-General rather than an optional annuity from when he retired at an early age in 1978.

The proposed alternative legislation raises several pension and related public policy issues, as follows:

1. Appropriateness of Undoing a Prior Benefit Election. The policy issue is the appropriateness of the Legislature adjusting or modifying the prior benefit decision made by Onni Oja in 1978. Mr. Oja retired early in 1978, at age 60. It would appear that Mr. Oja was unwilling at that time to take both a reduction for early retirement (age 60 rather than age 65) and a reduction for spousal coverage (joint and survivor annuity form). Mr. Oja retired prior to the enactment of Minnesota Statutes, Section 356.46, in 1982, which requires the notification of a public pension plan member’s spouse of the availability of the potential optional annuity forms and of the annuitant’s annuity form selection. That provision addresses the same problem that federal law, the Employee Retirement Income Security Act of 1974 (ERISA), Section 205 (Internal Revenue Code, Section 401(a) (11)), addressed by requiring all defined benefit pension plans to provide benefits automatically in the form of joint and survivor annuities. The federal law provision does not apply to public pension plans and in private sector pension plans can be overridden (i.e., larger single life annuity selected) with the consent of the prospective spouse. Optimally, the decision in 1978 by Mr. Oja to take a single life annuity should have been made jointly by him and Helen Oja and should have been made cognizant of all of their resources (i.e., savings, insurance, and home ownership). The Commission should consider taking testimony about the 1978 decision of the Ojas to take a single life annuity and about their long-term financial planning for their life after retirement. Without some basis to believe that the public sector failed Mr. and Mrs. Oja in fulfilling its duty, there is strong argument that the 1978 decision by the Ojas to take a single life annuity should stand.

2. Lack of Conformity with Commission Pension Policy Principles. The policy issue is the appropriateness of any proposed legislation to assist Helen Oja in light of its nonconformity of the pension policy principles established by the Commission. Both bills are contrary to Commission Policy Principle II.C.13., which provides:

II.C.13. Reopening Optional Annuity Elections

Reopenings of optional annuity elections should not be permitted.

The bills do attempt to minimize the conflict with the Principles of Pension Policy by requiring that the second chance optional annuity election produce a resulting optional annuity that is actuarially equivalent to Mr. Oja’s current annuity, minimizing PERA-General’s potential actuarial cost. However, if Mr. Oja is currently in a poor medical condition, any optional annuity permitted at this time will likely result in an actuarial experience loss for PERA-General.

3. Cost to Onni and Helen Oja. The policy issue is the affordability of imposing a cost on the Ojas for the survivor coverage option. Both bills would require the optional annuity form to be the actuarial equivalent of Mr. Oja's current benefit. This means that the new annuity form, with its likely extension in the ultimate period of receipt by covering Mrs. Oja, must have the same actuarial present value (i.e., dollar value today by discounting all future annuity payments by 8.5 percent interest) as Mr. Oja’s current annuity. To produce a benefit that has the same present value and is payable for a longer period, the amount of the monthly annuity will need to be adjusted downward. It is unclear that the Ojas can afford a reduction in the amount of the current single life annuity, so the legislation could ultimately go unused if enacted.

4. Precedent. The policy issue is the past precedent for legislation of this type and the potential for the potential legislation to become a precedent for similar legislative requests. Past precedent does exist for both bills, in the form of 2000 legislation (Laws 2000, Chapter 461, Article 9, Section 4) that permitted a one-time special election of a 15 or 25 percent joint and survivor optional annuity by retirees of former local police and fire consolidation accounts that merged with the Public Employees Police and Fire Retirement Plan in 1999. The argument in 2000 for the special uncoded authority was the inadequacy of the prior relief association and consolidation account survivorship options. Enacting special legislation for Mrs. Oja in the form of H.F. 2179 (Sertich); S.F. 2229 (Tomassoni) will become a precedent for other current or future retirees who have risked or may wish to risk their long-term economic security for initial benefit maximization and who rethink their situation later in life, when their health begins to fail, and seek a second chance for spousal coverage.