PEPSA, Public Employees Pension Service Association

Dec 16, 2008

$25 Million Dollars

$25 Million Question

This issue is raised periodically by PERA members. The question is usually phrased something like this: “Didn’t the State take $25 million of PERA funds at one time? Has it ever been paid back?”

History
In 1982, the State faced a budget shortfall, and PERA as well as the Minnesota State Retirement System (MSRS), the Teachers Retirement Funds (TRA and the three first class city funds), and the Minneapolis Employees Retirement Fund had projected contribution surpluses. The State passed emergency legislation to address the budget shortfall which included a provision requiring employer contributions paid to the seven major pension funds to be diverted to the State General Fund for the first six months in 1983. The legislation also required employee contributions paid by members of these pension funds to be increased to help offset the lost employer contributions. Those additional employee contributions were later refunded to employees in October 1984.

The State General Fund received about $62 million as a result of the employer contribution transfer from these seven major pension funds. For PERA alone, the employer contributions that were diverted to the State General Fund, and the refunding of the extra member contributions resulted in about $25 million of lost income to PERA.

Was that legal?

The legislation was challenged by unions representing PERA members and other pension fund members also affected by the legislation. The Minnesota Supreme Court, in a split decision, upheld the legislation. [See AFSCME Councils v. Sundquist, 388 NW 2d 560(Minn.Sup.Ct. 1983].

How is the issue viewed today?
Many of the legislators in office in 1983 are now gone from the Legislature. Many new legislators are unfamiliar with the issue. Veteran legislators who are familiar with the issue may view matter as legally decided by the Minnesota Supreme Court in 1983. PERA was one of the seven major pension plans affected by the transfer of employer contributions. None of the plans involved have initiated any legislation seeking repayment. Since PERA is in sound financial condition and member benefits have actually been improved since 1983, some may believe there is no obligation to repay the funds.

The legislature understands that as a defined benefit plan, PERA’s eligibility rules, benefit amounts, and funding can and must be adjusted from time to time. But they are
aware that a defined benefit has been promised to our members and must be paid.

Was there compensation to PERA members for the $25 Million diversion?
The money was never paid back to PERA in the form of an actual check. The Legislature has approved a number of PERA’s initiatives to improve member benefits. Here are some examples:

1984

1. The Rule of 85, an early retirement incentive, was approved for those whose age and years of service totaled 85 between April 27, 1984 and December 31, 1986.
2. Early retirement eligibility was changed from age 58 with 20 years of service, or age 62 with ten years of service, to age 55 with 10 years or any age with 30 years of service.
3. The Basic Plan surviving spouse benefit and family minimum and maximum benefits were increased.
4. Interest paid on lump-sum contribution refunds was increased from 3.5 to 5 percent compounded annually for all years of service.

1987

The number of years required for vesting (to be eligible for benefits) was reduced from ten to five years.

1989

1. The number of years required for vesting (to be eligible for benefits) was reduced from five years to three years.
2. The level benefit formula for all years of service was approved for all current members, with a provision that the benefit be determined by using the greater of the current step benefit formula or the new level formula. All new hires, however, are only eligible for the new level formula.
3. The “bounce back” provision was made automatic. In other words, rather than having to take a slightly greater reduction in the benefit amount, a retiring member who selects a joint and survivor option would automatically be eligible to bounce back to the Normal benefit if the optional survivor dies first.
4. Interest paid on deferred accounts was increased to 5 percent for accounts deferred beyond the person’s 55th birthday.

1992

The Minnesota Post Retirement Investment Fund formula for determining annual post retirement adjustments was modified to provide a guaranteed cost-of-living adjustment tied to the Consumer Price Index, in addition to an additional investment related adjustment.

1993

Coordinated Plan was enhanced by providing survivor benefit payments to the surviving spouse or children of coordinated members who have three years of service (are vested), regardless of the age of the member at the time of death.

1997

1. All PERA retirees collecting benefits as of July 1, 1997, received permanent increases in their benefits averaging 8 to 9 percent when the inflation guarantee in the Minnesota Post Retirement Investment Fund’s adjustment formula was lowered from 3.5 to 2.5 percent.
2. All PERA members retiring after July 1, 1997, received improved initial pensions paid for in part by the reduction in the inflation guarantee and an increase in employee contributions for Basic and Coordinated Plan members.

What is the PERA Board’s position?
The PERA Board of Trustees was not consulted on the bill to divert employer contributions in 1982. Nor did the trustees have any input into or approve the solution of solving a state budgetary shortfall by involving public pensions at that time. The PERA Board, in its legislative program has sought to have the funds repaid as a matter of principle. However, other legislative matters, such as benefit enhancements as detailed above, have been given higher priority in the past.

The State Legislature, at the urging of the PERA Board of Trustees, passed legislation, which, hopefully prohibits this kind of transfer again:

“…Money held or credited to a public pension plan as assets, including employee and employer contributions…may be used exclusively to pay retirement annuities, service pensions, disability benefits, survivor benefits, refunds or contributions or other benefits provided under the benefit plan document or documents governing the public pension plan..”M.S. 356.615 (1987)

PERA has also actively and successfully resisted specific attempts to “loan” PERA funds for other purposes, such as the Northwest Airlines restructuring in 1991.

The current Board of Trustees continues to take the position that the money should be repaid. This position will not be actively pursued as long as there are other legislative issues that are deemed to be more important to the members. However, legislators answer to their constituents, and you, as individual PERA members, are free to discuss this issue with your respective legislators.



Home		Dec 16, 2008 $25 Million Dollars $25 Million Question This issue is raised periodically by PERA members. The question is usually phrased something like this: “Didn’t the State take $25 million of PERA funds at one time? Has it ever been paid back?” History In 1982, the State faced a budget shortfall, and PERA as well as the Minnesota State Retirement System (MSRS), the Teachers Retirement Funds (TRA and the three first class city funds), and the Minneapolis Employees Retirement Fund had projected contribution surpluses. The State passed emergency legislation to address the budget shortfall which included a provision requiring employer contributions paid to the seven major pension funds to be diverted to the State General Fund for the first six months in 1983. The legislation also required employee contributions paid by members of these pension funds to be increased to help offset the lost employer contributions. Those additional employee contributions were later refunded to employees in October 1984. The State General Fund received about $62 million as a result of the employer contribution transfer from these seven major pension funds. For PERA alone, the employer contributions that were diverted to the State General Fund, and the refunding of the extra member contributions resulted in about $25 million of lost income to PERA. Was that legal? The legislation was challenged by unions representing PERA members and other pension fund members also affected by the legislation. The Minnesota Supreme Court, in a split decision, upheld the legislation. [See AFSCME Councils v. Sundquist, 388 NW 2d 560(Minn.Sup.Ct. 1983]. How is the issue viewed today? Many of the legislators in office in 1983 are now gone from the Legislature. Many new legislators are unfamiliar with the issue. Veteran legislators who are familiar with the issue may view matter as legally decided by the Minnesota Supreme Court in 1983. PERA was one of the seven major pension plans affected by the transfer of employer contributions. None of the plans involved have initiated any legislation seeking repayment. Since PERA is in sound financial condition and member benefits have actually been improved since 1983, some may believe there is no obligation to repay the funds. The legislature understands that as a defined benefit plan, PERA’s eligibility rules, benefit amounts, and funding can and must be adjusted from time to time. But they are aware that a defined benefit has been promised to our members and must be paid. Was there compensation to PERA members for the $25 Million diversion? The money was never paid back to PERA in the form of an actual check. The Legislature has approved a number of PERA’s initiatives to improve member benefits. Here are some examples: 1984 1. The Rule of 85, an early retirement incentive, was approved for those whose age and years of service totaled 85 between April 27, 1984 and December 31, 1986. 2. Early retirement eligibility was changed from age 58 with 20 years of service, or age 62 with ten years of service, to age 55 with 10 years or any age with 30 years of service. 3. The Basic Plan surviving spouse benefit and family minimum and maximum benefits were increased. 4. Interest paid on lump-sum contribution refunds was increased from 3.5 to 5 percent compounded annually for all years of service. 1987 The number of years required for vesting (to be eligible for benefits) was reduced from ten to five years. 1989 1. The number of years required for vesting (to be eligible for benefits) was reduced from five years to three years. 2. The level benefit formula for all years of service was approved for all current members, with a provision that the benefit be determined by using the greater of the current step benefit formula or the new level formula. All new hires, however, are only eligible for the new level formula. 3. The “bounce back” provision was made automatic. In other words, rather than having to take a slightly greater reduction in the benefit amount, a retiring member who selects a joint and survivor option would automatically be eligible to bounce back to the Normal benefit if the optional survivor dies first. 4. Interest paid on deferred accounts was increased to 5 percent for accounts deferred beyond the person’s 55th birthday. 1992 The Minnesota Post Retirement Investment Fund formula for determining annual post retirement adjustments was modified to provide a guaranteed cost-of-living adjustment tied to the Consumer Price Index, in addition to an additional investment related adjustment. 1993 Coordinated Plan was enhanced by providing survivor benefit payments to the surviving spouse or children of coordinated members who have three years of service (are vested), regardless of the age of the member at the time of death. 1997 1. All PERA retirees collecting benefits as of July 1, 1997, received permanent increases in their benefits averaging 8 to 9 percent when the inflation guarantee in the Minnesota Post Retirement Investment Fund’s adjustment formula was lowered from 3.5 to 2.5 percent. 2. All PERA members retiring after July 1, 1997, received improved initial pensions paid for in part by the reduction in the inflation guarantee and an increase in employee contributions for Basic and Coordinated Plan members. What is the PERA Board’s position? The PERA Board of Trustees was not consulted on the bill to divert employer contributions in 1982. Nor did the trustees have any input into or approve the solution of solving a state budgetary shortfall by involving public pensions at that time. The PERA Board, in its legislative program has sought to have the funds repaid as a matter of principle. However, other legislative matters, such as benefit enhancements as detailed above, have been given higher priority in the past. The State Legislature, at the urging of the PERA Board of Trustees, passed legislation, which, hopefully prohibits this kind of transfer again: “…Money held or credited to a public pension plan as assets, including employee and employer contributions…may be used exclusively to pay retirement annuities, service pensions, disability benefits, survivor benefits, refunds or contributions or other benefits provided under the benefit plan document or documents governing the public pension plan..”M.S. 356.615 (1987) PERA has also actively and successfully resisted specific attempts to “loan” PERA funds for other purposes, such as the Northwest Airlines restructuring in 1991. The current Board of Trustees continues to take the position that the money should be repaid. This position will not be actively pursued as long as there are other legislative issues that are deemed to be more important to the members. However, legislators answer to their constituents, and you, as individual PERA members, are free to discuss this issue with your respective legislators.
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