Legislative Commission on Pensions and Retirement
Summary of HF1908/SF1774
TO: Members of the Legislative Commission on Pensions and Retirement
FROM: Susan Lenczewski, Executive Director
RE: HF1908 (Atkins); SF1774 (Hayden); Benefit Increase for Certain Former Local Police and Paid Fire Relief Association Recipients Covered by PERA-P&F
DATE: February 23, 2016
Summary of HF1908 (Atkins); SF1774 (Hayden) and Delete-All Amendments H1908-2A and H1908-3A
HF1908 (Atkins); SF1774 (Hayden) was introduced on March 16, 2015, but was not considered by the Legislative Commission on Pensions and Retirement during the 2015 legislative session. The bill amends Minnesota Statutes § 353.65, by adding a new subdivision to this section, which deals with contributions to the public employees police and fire fund to fund Public Employees Police and Fire Retirement Plan (PERA-P&F) benefits.
Both amendments are "delete-all" amendments that replace all of the substantive provisions of the bill. The amendments add a new subdivision to Minnesota Statutes § 353.651, which deals with retirement annuities upon leaving public service. Since the new subdivision increases the retirement annuity currently being paid to retirees and their surviving spouses, it is more appropriately added to this section rather than the section amended by the bill.
As noted, the amendments add a new subdivision 6 to section 353.651. Subdivision 6, as set forth in Amendment H1908-2A, provides for the following:
- A pension increase for any person who (a) was a former member of a local salaried police or firefighters relief association that consolidated with PERA P&F, (b) elected to have his or her pension calculated under the former local plan, and (c) had at least 20 years of service or was receiving a disability pension.
- The retiree's annual pension benefit is to be increased, effective July 1, 2016, to $38,000 or by 20%, whichever results in the lower annual amount.
- In the case of the surviving spouse of a person described in paragraph 1, above, the spouse's annual benefit is to be increased, effective July 1, 2016, to $30,000 or by 20%, whichever results in the lower annual amount.
- Post-retirement adjustments are to be paid on the pension equal to the rate applicable to PERA-P&F under Minn. Stat. § 356.415, subdivision 1, paragraph (c), which is currently 1%.
- To pay for the benefit increases, the portion of the annual supplemental state aid of $15.5 million under Minn. Stat. § 423A.022 that is paid to the PERA-P&F Plan and the State Patrol Plan administered by the Minnesota State Retirement System (MSRS) is to be extended beyond the termination date that would otherwise apply to the state aid. The state aid to the PERA-P&F Plan and the State Patrol Plan will terminate when the funding ratio of market value assets to actuarial accrued liabilities of both plans reaches 90%. Since the Plans' portion of the state aid is approximately $10 million, and the cost of the increased benefits was calculated by PERA to be approximately $8.5 million ($2.4 million for retirees and $6.1 million for surviving spouses), as of January 16, 2015, one additional year of state aid should cover the cost of the benefit increases. The cost estimate by PERA, however, is now out of date and o would expect the cost of the increased benefits to be higher, due to mortality and other changes.
Amendment 1908-3A is identical to Amendment 1908-2A, except that it does not include the benefit increases for surviving spouses (item 3, on page 1 of this memo).
Please see the attached is a summary of a report prepared by PERA's executive director dated January 16, 2015, for background on the local salaried police or firefighters relief associations, consolidations into PERA-P&F and choices given to members in connection with the consolidations. More detail is provided in the PERA report, which is also attached.
The following considerations summarize and update points raised in memos prepared by former Commission staff members in response to similar legislation proposed in 2014 and HF1908/SF1774.
- Payments into the Fund Will Substantially Lag Payments Out of the Fund and May Never Occur. As noted, to pay for the benefit increases, the portion of the annual supplemental state aid of $15.5 million under Minn. Stat. § 423A.022 that is paid to the PERA-P&F Plan and the State Patrol Plan is to be extended beyond the termination date that would otherwise apply. The state aid to the PERA-P&F Plan and the State Patrol Plan will terminate when the funding ratio of market value assets to actuarial accrued liabilities of both plans reaches 90%. PERA-P&F is projected to reach 90% funding in 2033 and the State Patrol Plan is projected to reach 90% funding in 2049, so the later of the two is 2049. These projections do not include potential changes from the pending experience studies underway for both plans. We can expect that these experience studies will impact these projections. By way of comparison, the impact of the recently completed experience study on the PERA General Employee Retirement Plan (PERA-General) moved its 90% funding date from 2033 to 2039.
The increased pension benefits for these members will begin to be paid shortly after enactment. However, the funding of the liability will not occur until at least 2049, when the State Patrol Plan is projected to reach the 90% funding target. The Commission may wish to consider whether it is appropriate and good precedent to pay out increased benefits many years before the funding of the related liability will occur. We can also expect that if the liability will not begin to be addressed for many years, the cost of advancing benefit payments without corresponding funding will increase the overall cost of these benefit increases.
- Projected Funding Impact Information is Out of Date. The information on which PERA's cost estimates is based dates back to July 1, 2014, and does not reflect the impact of the updated actuarial assumptions, including increased mortality. Also, Commission staff understands that there have been changes in the retirees and survivors impacted by the legislation, such as deaths and changes in marital status. The passage of time and these developments can be expected to have an impact on the cost of providing increased benefits. Since one of the Commission's duties, under Minnesota Statutes § 3.85 is to analyze proposed pension legislation "with particular reference to analysis of their cost," the Commission may wish to consider deferring action until the funding impact can be updated. PERA may reasonably want to rely on the advice of its actuary to ensure the accuracy of any update, which will result in additional expense. This too is a topic for the PERA board and the Commission may want to understand the cost and timing of an actuarial update as well as the PERA board's position on incurring the additional expense.
- Precedent. The legislation creates precedent and may lead to more requests from retirees in this and other plans for increases in benefits whenever they become aware that similarly situated pension recipients are receiving greater benefits. As drafted, the legislation amounts to acquiescence to a request to swap plans, a less generous plan for a more generous plan. A group of retirees is not satisfied with the benefits currently provided to them and they are requesting to instead be provided with benefits levels more comparable to that which they would have at the current time if they were instead covered by the PERA-P&F Plan in its entirety. This could lead to requests from other groups of retirees under the other public pension plans that they also receive benefits comparable to those that would be provided by plans with richer benefit formulas, such as the Teachers Retirement Association, and higher post-retirement adjustment rates, rather than the benefits under their own plans. This would create additional liabilities, be difficult for the plans to administer, and make predicting liabilities and funding requirements nearly impossible.
- Reversing Irrevocable and Informed Elections. Commission staff understands that the record indicates that these retirees' elections were intended to be irrevocable, that the retirees were given notice of that fact, and that these retirees' elections were freely made. Where pension benefits are the result of choices freely made by a plan's members, the Commission may reasonably choose to decide that PERA-P&F and the taxpayers are under no obligation to relieve these individuals from the consequences of their actions.
Under the applicable consolidation laws (Minn. Stat. Ch. 353A), active members of the local relief association at the time of consolidation were given a choice between the local benefit plan in its entirety (local plan retirement/disability/survivor provisions plus local plan post-retirement adjustments), or the PERA-P&F Plan in its entirety (PERA-P&F retirement/disability/survivor provisions plus PERA-P&F post-retirement adjustments).
Individuals who, at the time of consolidation had already terminated from the employment for which they were covered by the local relief association were limited to benefits under local relief association laws, except that they could choose post-retirement adjustments under the local plan provisions or those of PERA-P&F. Thus, regardless of whether the retirement, disability, or survivor benefit was computed under local law or PERA-P&F provisions, the individual had a choice between local plan and PERA-P&F post-retirement adjustments. Local plan post-retirement adjustment adjustments typically are tied to changes in active duty salary. While procedures differed between local plans, generally the retirees were to receive the same percentage increase in benefits as the percentage increase in the local salaries being paid to top grade patrol officers or firefighters. The PERA-P&F adjustments, for much of this period, was a percent increase matching inflation, plus additional amounts related to investment results in excess of the plan's investment return assumption. Through portions of the 1980s, post-retirement adjustments may have been higher when computed under the local plan laws. During the 1990s, the adjustments under the PERA-P&F provisions were very generous, because of exceptional returns to the stock market, providing increases likely to have exceeded those provided by local plan provisions. More recently, particularly since 2010, PERA-P&F adjustments have been very low, and we are again in a period where adjustments are very likely to be higher under local plan provisions. For the indefinite future, the PERA-P&F plan is expected to provide only a 1% annual post-retirement adjustment.
- Concern that Members May Not Have Received Adequate Counseling When Electing Benefits. While Commission staff has no information to suggest that this is a concern, it is possible that PERA staff may not have provided adequate counseling and information prior to member elections. If that occurred, the question is whether the legislation is a reasonable approach to address such a concern, since benefit increases are provided on a global basis to a large group of benefit recipients. The Commission may wish to consider that addressing a problem of deficient counseling may be more appropriate for individual legislation when the facts of each case have been investigated and determined and the Commission is able to give attention to the specific arguments and equity issues in each case.
- Windfall Concern. The Commission may wish to consider that within the group covered by the legislation are individuals who were active members at the time of consolidation and who specifically chose local plan benefits because they provided the individual with a specific advantage, e.g., the local plan provided the individual with a higher benefit. The local plans typically permitted individuals to retire with full benefits as early as age 50, which would not be permitted under PERA-P&F, and local plans often would provide benefits to a surviving spouse at no direct cost to the retiree. In contrast, under PERA-P&F the individual would have had to take a monthly benefit reduction to provide survivor coverage. If an individual specifically chose local plan benefits for reasons such as this, and is now to receive a further increase in benefits under this legislation, that adjustment may be considered as a windfall.
- Post-Retirement Adjustment Issues. If the legislation is intended to address a perceived problem due to differences over time in local plan post-retirement adjustments compared to PERA-P&F post-retirement adjustments, Commission members may wish to consider that many local plans provided adjustments matching the percentage increase in active duty police officer or firefighter salaries. Over the long term, those increases are likely to have at least kept pace with, and probably exceeded, inflation, which should have provided excellent protection for retirees. For retirees with that protection, there is little basis for a claim of harm. In any event, anyone receiving post-retirement adjustments based on local plan provisions is receiving those adjustments because the active member, retiree, or disabled individual freely elected those adjustments rather than those of PERA-P&F.
- Future Post-Retirement Adjustments Are Only 1%. After increasing the pension amount, the legislation provides that the pension is to be adjusted over time using the PERA-P&F post-retirement adjustment procedure. Doing so overturns the supposedly irrevocable election of local plan post-retirement adjustments which each retiree covered by the legislation freely made. In addition to reversing that election, the legislation saddles that individual or his or her survivor with post-retirement adjustments, going forward, which are likely to be inferior to those provided under the local law provisions. PERA-P&F post-retirement adjustments are currently only 1% per year. If the legislation is enacted, the group is likely to request additional legislation in the future, claiming that this legislation harmed them going forward.
- PERA Board Position is Unknown. Commission staff understands that the PERA board has not adopted a formal position regarding these benefit increases. Since the PERA board may be in the best position to understand the impact of these benefit increases on the fund generally and are charged as fiduciaries with protecting the fund, among other duties, the Commission may wish to consider deferring action until the PERA board's position is known.