Legislative Commission on Pensions and Retirement

Status Update on Bills relating to the Fairview Employees

TO: Members of the Legislative Commission on Pensions and Retirement

FROM: Susan Lenczewski, Executive Director

RE: Update on Bills regarding Fairview Employees: Reduction in the Enhanced Augmentation Rate and Changes to the Exception to Enhanced Augmentation for Return to Public Service

DATE: April 5, 2016

Status Update on Bills relating to the Fairview Employees

H.F. 3716 (O'Driscoll)/S.F. XXXX (formerly LCPR16-016). This bill both reduces the rate of future augmentation and revises the exception from enhanced augmentation for return to public service. This bill was heard by the Pension Commission at its meeting on February 24, 2016. At the meeting, the Commission heard from David Bergstrom, Executive Director of the Minnesota State Retirement System (MSRS), Representative Phyllis Kahn, and several testifiers, including Fairview employees or their spouses, and representatives from AFSCME Council 5. No action was taken. The focus of the testimony and discussion was on the proposed reduction in the future rate of augmentation from 5.5% to 2%. (For Fairview employees who are at least age 55, the reduction in the future rate of augmentation would be from 7.5% to 2%.)

H.F. xxxx (Hornstein/Thissen); S.F. xxxx (Dibble); Revisor #16-6647. This bill only revises the exception from enhanced augmentation for return to public service and mirrors the exception language in H.F. 3716, as to substance. (This bill reflects changes made by the Revisor's Office to clarify the retroactive application of the changes, but these changes are not intended to change the substance of the bill.) This bill was heard by the Pension Commission at its meeting on March 22, 2016. The authors presented the bill and Mr. Bergstrom provided testimony. Amendment #16-6647-1A, which would apply the change to all current and future retirees was distributed. No action was taken on the bill or the amendment.

Commission Meeting on April 5, 2016. The Commission will hear an update from Mr. Bergstrom at the meeting on April 5. The Chair will determine the extent to which the Commission will hear additional testimony from members of the public.

Additional Information for Consideration by the Commission

Communications to Fairview Employees in 1997.

In connection with the U of M Hospital/Fairview spin-off transaction at the end of 1996, MSRS provided information to all Fairview employees regarding the supplemental pension benefit package through a mailing and a series of informational meetings. Copies attached for your consideration:

• The mailing starts on page 3 of the packet; and
• The slide presentation used at the informational meetings starts on page 5 of the packet. Page 10, in the slide presentation, explains enhanced augmentation and the exceptions.

Communications to Fairview Employees since 1997.

MSRS reports that an informational page was included with benefit estimates prepared as requested by Fairview employees for a period, up to approximately 2013. A copy of that information sheet is at page 13 of the packet.

Beginning in July 2014, benefit estimates for the Fairview employees included an explanation of augmentation and the exception for return to public service. A copy of a benefit estimate begins on page 15 of the packet. See page 17 of the packet for the paragraph on the Fairview benefits.

We understand that annual statements are not customized for this particular group of former employees, for cost reasons because the size of the group is small compared to the total MSRS member population. Therefore, annual statements typically have not specifically addressed enhanced augmentation or the exceptions to receiving it.

Summary of the Fairview Facts and Proposed Changes

• The reduction in the rate of augmentation will result in actuarial savings to MSRS of nearly $60 million, an immediate improvement to MSRS' funding status.
   
  
• Deductions from the paychecks of 50,000 current active State employees continue to pay for enhanced benefits to a small group of employees who haven't contributed to MSRS in 20 years.
   
  
• Augmentation is a COLA credited every year on a former employee's pension benefit and the increases are cumulative. It is not found at all in private sector pensions and, in the public sector, is unique to the pension plans of Minnesota and South Dakota. While a good case can be made to eliminate it entirely, an even better case can be made to eliminate it in this case, involving substantially higher rates of augmentation to one select group of former employees.
   
  
• The proposal reduces the rate of increase only on a prospective basis-the enhanced increases already credited to these members' pensions over the last 20 years are locked in and are not reduced by the proposal. The potential for litigation arises when change is retroactive, which this is not.
   
  
• This is true pension plan reform. It is commendable that MSRS is seeking to reform this excess from the past and has moved forward with this initiative, notwithstanding the controversy and additional work it has brought to the executive director and his staff. Were it not firmly grounded in common sense and fairness, MSRS would not have initiated the proposal.
   
  
• The changes to one of the two exceptions to receiving enhanced augmentation alleviate the adverse impact of the exception that has become a disincentive to Fairview employees wishing to return to public employment. Coincidentally, two constituents have also asked their respective legislators for this relief.