Summary of H.F. 2844 (Kahn); S.F. ____ (       )

H.F. 2844 (Kahn); S.F. ____ (       ) amends Minnesota Statutes, Sections 356.216, a general police and paid fire relief association actuarial reporting law, and various portions of Minnesota Statutes, Chapter 423B, the Minneapolis Police Relief Association law, by making the following changes:

1. Changes the Minneapolis Police Relief Association Amortization Target Date From 2010 to 2020. The local police and paid firefighters relief association actuarial reporting law is amended to increase the amortization target date applicable to the Minneapolis Police Relief Association from 2010 to 2020 (Section 1);

2. "Thirteenth Check" Excess Investment Income Determination Period Reduced. The determination period for calculating excess investment income to ascertain whether a "thirteenth check" post-retirement adjustment is payable and the amount of any "thirteenth check" is reduced from five years to one year (Sections 2 and 6);

3. Below 90 Percent Funding Ratio Service Pension Level Eliminated. The service pension levels applicable when the relief association is below 90 percent funded (assets equal 90 percent of actuarial accrued liability) are eliminated, effective immediately (Section 3);

4. Service Pension Amount With 20 or More Years of Service Increased. The service pension amount payable to members with 20 or more years of service is increased by one unit (a unit is 1/80^th of base pay) or $932.88 per year (Section 3);

5. One Unit Service Pension Increase Extended to Joint-and-Survivor Optional Annuities. The one unit ($77.74 per month or $932.88 per year) increase is extended on an actuarial equivalent basis to optional joint-and-survivor annuities (Section 4);

6. One Unit Increase Extended to Survivor Benefits. The one unit increase is extended to surviving spouse benefits (Section 5);

7. Pensions Guaranteed in Amount. Properly paid pension benefits in accordance with the law are not permitted to be reduced (Section 6); and

8. Non-Reversible Effect; Local Approval. The proposed legislation is subject to local approval and is designated as non-severable (Section 7).

Background Information on the Minneapolis Police Relief Association

The Minneapolis Police Relief Association provides service pensions, survivor pensions, and disability benefits for its covered members. The plan was established in 1890 and was closed to new members in 1980. All new hirees after that date have pension coverage through the Public Employees Retirement Association Police and Fire (PERA-P&F) fund. The Minneapolis Police Relief Association, along with the Minneapolis Fire Relief Association, are among the four remaining local police and paid fire relief associations that have not consolidated with the Public Employees Retirement Association under consolidation procedures enacted in 1987.

The municipality is responsible for meeting the funding needs of its local police or paid fire relief associations, with the help of required member contributions and various State aids. Funding requirements and procedures for the relief association are specified in Section 69.77, the Police and Firefighters’ Relief Association Guidelines Act. The total required contributions are the sum of the contributions to cover normal cost and the contribution toward the unfunded liability. The normal cost reflects the increased liabilities created by operating the plan for another year under the current plan provisions, given the additional service credit that will be earned by members during the year. The contribution toward the unfunded actuarial accrued liability is the level dollar payment sufficient to retire the full unfunded actuarial accrued liability by December 31, 2010. The administrative expenses of the relief association are not funded annually, but are added to the unfunded actuarial accrued liability of the relief association.

Because the Minneapolis Police Relief Association has been closed to new members since 1980, the number of retirees, deferred retirees, and other benefit recipients now considerably outnumber active members.

Background on Minneapolis Police and Fire "Thirteenth Check" Post-Retirement Adjustments

The "thirteenth check" law for the Minneapolis Police Relief Association and the Minneapolis Fire Department Relief Association is a post-retirement adjustment mechanism that is in addition to the main post-retirement adjustment mechanism, which is known as the "benefit escalator." The escalator sets all service pensions and retirement benefits as a percentage of the current salary of a top grade patrol officer or a first class firefighter. Annually, if the investment income of the relief association permits, a portion of that "excess" investment income is disbursed as an additional payment. The law specifies the time-weighted total return of the fund for the recent five-year period must exceed the percentage increase in the salary of a first grade patrol officer or firefighter, whichever applies, by at least two percent.

Under the Minneapolis Police and Fire "thirteenth check," the State realizes savings. Whenever the local relief associations have met the criteria allowing them to pay the "thirteenth check," one-half percent of assets is used for the checks and one-half percent of assets is used to reduce the amortization and supplemental amortization aid that the municipality would otherwise receive.

Technical Amendment LCPR04-121

Amendment LCPR04-121, prepared by the Commission staff, attempts to remedy defects in the proposed legislation based on the Commission staff’s understanding of the intent of the proposal. The amendment makes the following changes:

1. Addition of the Amortization Date Change to Minnesota Statutes, Section 69.77. The proposed legislation changes the local police and paid firefighter relief association actuarial valuation reporting requirement for the Minneapolis Police Relief Association, implementing a 2020 amortization target date, but does not change the date in the law governing the calculation of municipal contributions to the relief association. The amendment adds the additional 2020 amortization target date change to Minnesota Statutes, Section 69.77, Subdivision 4, the relevant portion of the 1969 Local Police and Paid Firefighter Relief Association Financing Guidelines Act (Pages 1, 2, and 3, lines 1 to 15).

2. Incorrect Cross-Reference Corrected. A cross-reference intended to relate to a benefit increase is actually made to an actuarial provision. The amendment replaces the incorrect cross-reference with the correct cross-reference (Page 3, lines 16-18).

3. Updated Local Approval Provision. The proposed legislation includes a local approval effective date, but the provision does not reflect the current version of the required language. The amendment adds the substance of the current version of the local approval provisions.

Discussion

H.F. 2844 (Kahn); S.F. ____ (       ) relates to the Minneapolis Police Relief Association and extends the amortization date for eliminating the relief association unfunded actuarial accrued liability from 2010 to 2020, shortens the period for determining the trigger for and the amount of the "thirteenth check" post-retirement adjustment, eliminates a benefit reduction that should have occurred when the plan became less than 90 percent funded, increases the service pensions for members with 20 or more years of service by one unit, increases the service pension payable to joint-and-survivor annuitants by one unit, increases the surviving spouse benefits by one unit, guarantees the amount of benefits that have been properly paid, and is non-severable if approved by the City of Minneapolis.

The proposed legislation raises several pension and related public policy issues that may merit consideration and discussion by the Commission, as follows:

1. Actuarial Condition of the Minneapolis Police Relief Association. The policy issue is the current actuarial condition of the Minneapolis Police Relief Association and its change over time. The following sets forth the results of the last four actuarial valuations (as of 12/31/1999, 12/31/2000, 12/31/2001, and 12/31/2002) and the magnitude of the change between 2001 and 2002:

   	1999		2000		2001		2002		Change 2002-2001
   Membership
   Active Members		123		97		73		53		(20)
   Service Retirees		666		677		680		674		(6)
   Disabilitants		2		0		0		0		0
   Survivors		249		247		253		254		1
   Deferred Retirees		8		3		2		3		1
   Nonvested Former Members		0		0		0		0		0
   Total Membership		1,048		1,024		1,008		984		(24)
   Funded Status
   Accrued Liability		$447,595,629		$447,086,382		$464,648,670		$463,486,555		$(1,162,115)
   Current Assets		$427,122,128		$391,083,455		$349,170,447		$309,667,154		$(39,503,293)
   Unfunded Accrued Liability		$20,473,501		$56,002,927		$115,478,223		$153,819,401		$38,341,178
   Funding Ratio	95.43%		87.47%		75.15%		66.80%		(8.35)%
   Financing Requirements
   Covered Payroll		$7,503,174		$6,583,342		$5,238,480		$3,955,413		$(1,283,067)
   Benefits Payable		$26,213,944		$30,697,541		$30,503,691		$30,724,261		$(220,570)
   Normal Cost	30.41%	$2,281,715	24.03%	$1,581,906	23.10%	$1,210,336	21.56%	$852,946		$(357,390)
   Administrative Expenses	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0		$0
   Normal Cost & Expense	30.41%	$2,281,715	24.03%	$1,581,906	23.10%	$1,210,336	21.56%	$852,946		$(357,390)
   Normal Cost & Expense	30.41%	$2,281,715	24.03%	$1,581,906	23.10%	$1,210,336	21.56%	$852,946		$(357,390)
   Amortization	34.98%	$2,624,238	117.99%	$7,767,618	334.88%	$17,543,533	657.19%	$25,994,756		$8,451,223
   Total Requirements	65.39%	$4,905,953	142.01%	$9,349,524	357.98%	$18,753,869	678.75%	$26,847,702		$8,093,833
   Employee Contributions	8.00%	$600,254	8.00%	$526,667	8.00%	$419,078	8.00%	$316,433		$102,645
   Employer Contributions	46.53%	$3,491,019	89.64%	$5,901,141	350.01%	$18,334,791	670.75%	$26,531,269		$8,196,478
   Employer Add'l Cont.	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0		$0
   Direct State Funding	10.86%	$814,680	52.38%	$3,448,383	0.00%	$0	0.00%	$0		$0
   Other Govt. Funding	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0		$0
   Administrative Assessment	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0		$0
   Total Contributions	65.39%	$4,905,953	142.01%	$9,349,524	357.98%	$18,753,869	678.75%	$26,847,702		$8,093,833
   Total Requirements	65.39%	$4,905,953	142.01%	$9,349,524	357.98%	$18,753,869	678.75%	$26,847,702		$8,093,833
   Total Contributions	65.39%	$4,905,953	142.01%	$9,349,524	357.98%	$18,753,869	678.75%	$26,847,702		$8,093,833
   Deficiency (Surplus)	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0		$0
   Amortization Target Date	2010		2015		2016
   Actuary	Van Iwaarden		Van Iwaarden		Van Iwaarden		Van Iwaarden

2. Actuarial Impact of the Amortization Target Date Change. The policy issue is the actuarial impact of the proposed extension in the amortization target date from 2010 to 2020 and of the one-unit increases in 20+ years-of-service service pensions, joint-and-survivor optional annuities, and surviving spouse benefits. The actuarial impact estimate associated with the proposed legislation is as follows:

	Actuarial Results Draft 2003		Impact of  Change		Resulting Actuarial  Condition
Funded Status
Accrued Liability		$465,275,886				$477,945,879
Current Assets		$300,154,422				$300,134,422
Unfunded Accrued Liability		$165,121,464				$177,791,457
Funding Ratio	64.51%				62.80%
Financing Requirements
Covered Payroll		$1,860,356				$1,860,356
Benefits Payable		$30,724,261				$30,724,261
Normal Cost	19.78%	$367,974	0.80%	$14,975	20.58%	$382,949
Administrative Expenses	0.00%	$0	0.00%	$0	0.00%	$0
Normal Cost & Expense	19.78%	$367,974	0.80%	$14,975	20.58%	$382,949
Normal Cost & Expense	19.78%	$367,974	0.80%	$14,975	20.58%	$382,949
Amortization	1,702.84%	$31,678,807	(810.69%)	($15,081,783)	892.14%	$16,597,024
Total Requirements	1,722.62%	$32,046,781	(809.89%)	($15,066,808)	912.72%	$16,979,973

3. Appropriateness of Extending the Amortization Target Date to 2020. The policy issue is the appropriateness of an extension in the amortization target date from 2010 to 2020. The change in the amortization target date likely reduces the municipal obligation with respect to the relief association, which is the obvious interest of the City of Minneapolis in the proposed legislation. The current amortization target date, 2010 is 40 years from the date when the Minneapolis Police Relief Association was required to begin funding the relief association on an actuarial basis under the 1969 Police and Paid Firefighters’ Relief Association Financing Guidelines Act, and was set 30 years ago, when the relief association was placed on a phase-out basis. The 1980 phase-out legislation included the amortization aid program, which provided Minneapolis with additional State aid based on the financial requirements in 1980 to amortize the plan. An extension to 2020 would put the full funding target date well beyond the date when the last active member of the relief association retires. The average Minneapolis Police Relief Association active member, as of December 31, 2002, is age 53.7 years, with 29.4 years of service credit, and an active salary of $74,630, meaning that the average relief association member could retire at any time.

4. Appropriateness of the Reduction in the "Thirteenth Check" Excess Investment Performance Determination Period. The policy issue is the appropriateness of reducing from five years to one year the determination period used to ascertain whether or not a "thirteenth check" benefit is payable and its amount. This is at least the second time since the 1989 enactment of the provision that the determination period has been adjusted and each time the change has been proposed to allow a "thirteenth check" post-retirement adjustment to be paid when an adjustment would not otherwise be payable. Initially, in 1989, the "thirteenth check" adjustment mechanism required a particular level of excess investment performance on both a five-year averaging period basis and on a one-year basis. The single five-year basis was substituted for the double basis and is now being revised again. The "thirteenth check" post-retirement adjustment is not the sole retirement adjustment mechanism available to Minneapolis Police Relief Association retired members and benefit recipients. The "thirteenth check" is in addition to an escalator mechanism, under which retiree benefits are increased by the same percentage as the maximum monthly salary of a first grade patrol officer. The most recent escalator increase was four percent. If the "thirteenth check" determination period change is being proposed for policy reasons or theoretical rationales rather than an attempt to prematurely pay an extra increase, this change could be deferred for two or three years. Amendment LCPR04-133 would make the "thirteenth check" changes effective two years from now.

5. Appropriateness of Eliminating the Under 90 Percent Funded Ratio Service Pension Levels. The policy issue is the appropriateness of the elimination of the benefit levels that are specified for when the relief association is under 90 percent funded. Several years ago, the Minneapolis Police Relief Association convinced the Legislature of the appropriateness of gaining a benefit improvement when it reached the 90 percent funding ratio. Now that the Minneapolis Police Relief Association has fallen below the 90 percent funding ratio, it apparently has not reduced benefits back to the under 90 percent funded level, as required by law, and seeks to ratify that action by eliminating the legal requirement. The failure to reduce benefits, and the proposal to ratify that inaction, amounts to reneging on that prior arrangement with the Commission and the Legislature.

6. Appropriateness of the Additional One Unit Benefit Increases. The policy issue is the appropriateness of granting an additional benefit increase to the Minneapolis Police Relief Association. The plan is closed to new members and there are very few active members remaining in the relief association, so recruitment and retention of active members are not the rationale for the proposed increase. It is unclear how the additional benefit increase furthers the traditional goal of a systematic and predictable outtransitioning of active members at the end of the normal working career, unless the increase is intended to encourage the immediate retirement of the remaining 53 active members. The Commission should request testimony from the Minneapolis Police Relief Association and from the City of Minneapolis about the policy basis for the benefit increase.

7. Appropriateness of Benefit Increases Without Any Showing of Any Lack of Benefit Adequacy for Minneapolis Police Relief Association Members. The policy issue is the appropriateness of granting benefit increases when there is no apparent inadequacy of Minneapolis Police Relief Association benefit coverage. In the view of many, the Minneapolis Police Relief Association provides the best retirement benefits of any retirement plan in the State. If the Minneapolis Police Relief Association benefits are not inadequate, there may be no need for the additional benefits. The following compares the average benefits of the Minneapolis Police Relief Association and the other major retirement plans that are not covered by Social Security:

Plan	Average Benefit of Recent Retirees	Average Benefit of All Retirees
Minneapolis Police Relief Association	$38,687	$38,687
Minneapolis Firefighter Relief Association	$37,358	$37,358
PERA-P&F	$38,123	$40,555
State Patrol Retirement Plan	$42,295	$49,409
PERA-General Basic Program	$31,970	$28,085
MERF	$34,062	$28,879

8. Question About the Intended Retroactivity of Benefit Increases. The policy issue is whether or not the benefit increases are intended to be retroactive and apply to current Minneapolis Police Relief Association retired members. The proposed legislation lacks any provision that clearly makes the benefit increases retroactive. Minnesota Statutes, Section 645.21 indicates that there is a presumption against retroactively in any legislative enactment. If the benefit increases are intended to be retroactive and not just apply to the current 53 active members, some clear indication of retroactivity is needed. Amendment LCPR04-134 clarifies that the benefit increases are retroactive.

9. Appropriateness of Benefit Increases With Minneapolis Funding Problems. The policy issue is the appropriateness of granting benefit increases to Minneapolis Police Relief Association members when the City of Minneapolis has considerable financial difficulties and the appropriateness of a lack in reductions in State pension aids to the Minneapolis Police Relief Association if the relief association can afford benefit increases. The City of Minneapolis apparently has sizeable budget problems. It also receives considerable pension-related aids with respect to its police pension plan. In the light of budget problems, granting a benefit increase and increasing city pension liabilities seems potentially foolhardy. The amortization change apparently provides a financial margin to the city, but combining together an actuarial change with a benefit increase that only becomes affordable on that basis is a dubious policy. If a benefit increase is affordable for the City of Minneapolis, perhaps some of the Minneapolis Police Relief Association-oriented State aid should be redirected to other problematic pension plans, such as the Minneapolis Teachers Retirement Fund Association (MTRFA).

10. Appropriateness of Proposed Pension Guarantees. The policy issue is the appropriateness of the proposed pension guarantee. The provision is unclear in its meaning and deserves to be clarified. It is unclear whether the reference to "this act" refers to the proposed legislation or the entirety of Minnesota Statutes, Chapter 423B. It is also unclear why a pension guarantee is needed. If the provision is extraneous, it should be jettisoned as unnecessary. If it is needed, Minneapolis Police Relief Association representatives should be questioned on what feared future events give rise to this concern.

11. Appropriateness of Non-Severability Provision. The policy issue is the appropriateness of the reference in the local effective date provision to the legislation being "not severable." If enacted, to the best understanding of the Commission staff, this would be one of the few times in the past 30 years that such a provision was included in a pension bill. The provision appears to indicate some fear about future legislative or judicial developments that may jeopardize the proposed legislation. Some clarification from Minneapolis Police Relief Association representatives would be helpful.

12. Extent of Minneapolis City Support. The policy issue is the extent of support by the City of Minneapolis for the benefit and actuarial changes contained in the proposed legislation. If the City of Minneapolis is not supportive of the proposed legislation and it will not ultimately become effective, there is little advantage for the Commission wasting valuable legislative time considering it.