Introduction

On February 23, 2004, the Executive Committee met to consider the options of the Legislative Commission on Pensions and Retirement for the provision of actuarial valuation and related services for the statewide and major local retirement plans. After reviewing the issues that gave rise to the shortened contract with Milliman USA and the various options open to it in attempting to resolve the issue of future actuarial services provision, the Executive Committee recommended the substitution of a consulting actuarial firm retained jointly by the Minnesota State Retirement System (MSRS), the Public Employees Retirement Association (PERA), and by the Teachers Retirement Association (TRA) for a consulting actuarial firm retained by the Commission.

The Commission staff was requested by the Executive Committee to refine and augment the recommended option beyond the applicable draft proposed legislation (LCPR04-006) attached to the January 8, 2004, Commission staff memorandum.

The Commission staff circulated an earlier working document on the actuarial services option, Document LCPR04-081, for comments on February 25, 2004. The attached document LCPR04-105 incorporates the comments on Document LCPR04-081 received since February 25, 2004.

Summary of the Current Contractual Situation with Milliman USA

The 2002 actuarial services contract between the Commission and Milliman USA was for two years, with an option for the Commission to extend the contract for two additional years, through June 30, 2006, if Milliman USA and the Commission can resolve, in a mutually agreeable manner, three remaining issues. The issues remaining for resolution are:

1. Liability Limitation. Milliman USA is seeking a limit on its liability for errors and omissions. In any fiscal year, Milliman USA would be limited in liability in tort, contract, or otherwise, except for intentional fraud or willful misconduct by Milliman USA, to a specific dollar amount.

2. Mandatory Dispute Arbitration Rather than Litigation. Milliman USA is seeking the use of mandatory dispute arbitration rather than litigation in resolving disputes with the Commission. All actuarial services contract disputes would be resolved by final and binding confidential arbitration without any authority for the arbitrator or arbitrators to award punitive damages.

3. No Third-Party Reliance. Milliman USA is seeking a restriction on the reliance on actuarial results by third parties.

If an agreement is not reached before June 1, 2004, which is the deadline for the Commission to notify Milliman USA in writing of its exercise of the extension option, the actuarial services contract with Milliman USA would conclude on June 30, 2004, rather than June 30, 2006.

Commission Options to Obtain Actuarial Services After June 30, 2004

The seven readily identifiable alternatives considered by the Executive Committee for obtaining actuarial services beyond June 30, 2004, were:

1. Accede to the Milliman USA Liability Limitations and Mandatory Arbitration Proposal. The Commission could accept the Milliman USA proposal assembled by Thomas K. Custis in August 2003, and then act to extend the Milliman USA actuarial services contract until June 30, 2006.

2. Negotiate with Milliman USA about its Liability Limitation and Mandatory Arbitration Proposal. The Commission could negotiate with Milliman USA about its concerns with the liability limitation and mandatory arbitration proposal and extend the current Milliman USA contract for an additional two years based on those negotiations.

3. Negotiate an Actuarial Services Contract with Edward Friend, Inc. The Commission could elect to offer to enter into an actuarial services contract for the remainder of the four-year period with the unsuccessful 2002 bidder, Edward Friend, Incorporated (EFI).

4. Rebid the 2004-2006 Actuarial Services Contract. The Commission could issue a Request for Proposal to begin the rebidding process for an actuarial services contract with another consulting actuarial firm.

5. Hire a Pension Actuary on the Commission Staff. With the hiring by the Commission of a pension actuary and with the upgrading of the Commission staff computer capabilities, the actuarial services function could be shifted from a consulting actuarial firm to a professional staff position.

6. Make the Commission Actuary the Reviewing Actuary and Reinstate the Retirement Fund Actuaries as the Production Actuaries. The actuary retained by the Commission could be made the reviewing actuary for future actuarial work, and the various retirement plan actuaries could be redesignated as the primary production actuaries for actuarial valuations, experience studies, and benefit costing.

7. Replace the Commission Actuary with a Consulting Actuary Jointly Retained by MSRS, PERA, and TRA. The Commission could replace the current Commission actuary with a single consulting actuary who would be selected jointly by the three largest retirement systems, to function essentially in the same manner as the current arrangement with the actuary retained by the Commission, except that the selection of the consulting actuary, the negotiation of the actuarial services contract, and the establishment of a budget for actuarial services would become the responsibility of the three major retirement plan administrations.

Summary of Potential Proposed Legislation LCPR04-105

Potential proposed legislation LCPR04-105, incorporating suggestions received about the earlier draft, potential proposed legislation LCPR04-081, amends the portions of Minnesota Statutes, Chapters 352, 352B, 353, 354, 354A, 356, and 422A relating to the preparation of annual actuarial valuations by substituting a consulting actuary retained jointly by the three major statewide retirement systems for the current consulting actuary retained by the Legislative Commission on Pensions and Retirement and by specifying the parameters within which the jointly retained actuary would function, including:

1. Official Production Actuary to be Retained Jointly by the Seven Retirement System Chief Administrators. The consulting actuary for the production of the official actuarial valuations of the various statewide and major local Minnesota public pension plans is required to be retained jointly by the chief administrative officers of the seven major retirement systems, the Minnesota State Retirement System (MSRS), the Public Employees Retirement Association (PERA), and the Teachers Retirement Association (TRA), the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), the Minneapolis Employees Retirement Fund (MERF), and the St. Paul Teachers Retirement Fund Association (SPTRFA), with the consulting actuary selection subject to ratification by the Legislative Commission on Pensions and Retirement (Section 6, Subdivision 1, Paragraph (a));

2. Jointly Retained Actuary Must be an Approved Actuary. The actuary retained jointly must be a Fellow in the Society of Actuaries (FSA), a private credentialing organization, or must have at least 15 years of experience with major public pension plans (Section 6, Subdivision 1, Paragraph (a));

3. Actuarial Valuations Must Comply with Actuarial Standards. The 14 annual actuarial valuations prepared by the jointly retained actuary must comply with Minnesota Statutes, Section 356.215, the actuarial reporting law, and with the Standards for Actuarial Work adopted and revised periodically by the Legislative Commission on Pensions and Retirement (Section 6, Subdivision 1, Paragraph (c));

4. Annual Actuarial Valuations and Major Plan Quadrennial Experience Studies. Actuarial valuations must be prepared for the 14 current plans annually by the jointly retained actuary and experience studies for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA) must be prepared every four years by the jointly retained actuary (Section 6, Subdivision 1, Paragraph (b));

5. Commission Chair Could Request Additional Experience Studies. Experience studies for any of the smaller 11 statewide or major local pension plans would be performed by the jointly retained actuary when requested by the Commission chair (Section 6, Subdivision 1, Paragraph (e));

6. Five-Year Maximum Actuarial Services Contract. The contract jointly retaining the consulting actuary has a maximum duration of five years (Section 6, Subdivision 1, Paragraph (f));

7. Actuarial Services Contract Subject to Competitive Bidding and Open Meeting Consideration. Competitive bidding procedures are required to be used in selecting the jointly retained actuary and the consideration of actuarial services bids and the consulting actuary selection must be conducted in open meetings (Section 6, Subdivision 1, Paragraph (g));

8. Contracting Procedures and Contract Substance Under Joint Rules. The joint retirement system chief administrative officers are required to specify requirements for the procedure under which the actuarial services contract will be bid and the requirements for the substantive provisions of the actuarial services contract, with those rules subject to Commission notification and an opportunity for Commission comment (Section 6, Subdivision 1, Paragraph (f));

9. No Reliance Limitation Applicable to the Legislature or the Commission. If the actuarial services contract includes a limit on the parties who can rely on actuarial results under the contract, the limit cannot be extended to the Legislature or the Commission (Section 6, Subdivision 1, Paragraph (g));

10. Actuarial Services Contract Cost to be Allocated. The cost of annual actuarial valuations and quadrennial experience studies must be allocated among the various pension plans on the basis of the plan’s proportional share of the total work effort. The cost of actuarial cost estimates prepared at the request of a pension plan or interested party must be billed to the plan or interested party and may be pre-billed to interested parties. The cost of actuarial cost estimates prepared at the request of the Legislative Commission on Pensions and Retirement are payable by the Commission (Section 6, Subdivision 2); and

11. Cost Estimates of Legislation to be Reported to the Commission. Any cost estimates for pending legislation prepared by the jointly retained actuary under the contract are required to be reported to the Legislative Commission on Pensions and Retirement at the same time as they are transmitted to the requester (Section 6, Subdivision 3).

Conclusion

Potential proposed legislation LCPR04-105 attempts to implement the recommendation of the Executive Committee of the Legislative Commission on Pensions and Retirement on February 23, 2004, to resolve the questions raised by the pension plan representatives who attended the Executive Committee meeting on February 23, 2004, and to incorporate suggestions on a prior draft received since February 25, 2004.

Document LCPR04-105 requires the chief administrative officers of the seven major Minnesota retirement systems to jointly retain a consulting actuarial firm which would be the official production actuary for regular actuarial valuation purposes, with the various retirement plans permitted, but not required, to retain a supplementary consulting actuary. The bidding for the contract must be competitive and must be done in open meetings. A limitation on third party reliance would not be permitted to be extended to the Legislature or the Commission. Authority would exist for various parties to obtain actuarial cost estimates, with the requesting entity responsible for the cost of the work, including the Commission.

cc:    David Bergstrom, Minnesota State Retirement System
        Mary Vanek, Public Employees Retirement Association
        Gary Austin, Teachers Retirement Association
        J. Michael Stoffel, Duluth Teachers Retirement Fund Association
        Phillip Kapler, St. Paul Teachers Retirement Fund Association
        Karen Kilberg, Minneapolis Teachers Retirement Fund Association
        Judith Johnson, Minneapolis Employees Retirement Fund
        Mark Shepard, House Research
        Tom Bottern, Senate Counsel
        Helen Roberts, House Fiscal Analyst
        Kevin Lundeen, Senate Fiscal Analyst
        David Johnson, Rice, Michels & Johnson, LLP