Several bills have been introduced which would create systems to help public employees offset healthcare costs following retirement. The bills differ in several key respects, as follows:

The bills differ in the scope of the covered group. Some approaches would mandate that all state employees in MSRS plans and certain other plans must also be contributing members to a health care reimbursement plan. S.F. 1755 (Stumpf); H.F. 1868 (Davids): School Employee Health Care Accounts, is directed at teachers and similar education employees. S.F. 1484 (Pogemiller); H.F. ____ ( ):MPRA; Minneapolis Police Relief Association Voluntary Employee Benefit Organization, is very limited in the scope of covered employees, involving only Minneapolis Police Relief Association covered employees and their survivors and dependents.

Some bills would mandate coverage; others provide options coverage.

At least one bill, S.F. 641 (Pogemiller); H.F. 695 (Osskopp): MSRS; Health Care Reimbursement Plan, has direct pension plan implications, since a portion of the assets in the MSRS active employee investment pool (the SBI Basic Fund) would be used to provide an additional benefit to existing retirees. This bill, and a few of the others, also have budget implications, because employer contributions are mandated.

Different bills would use different investment providers and plan service providers. At least one, S.F. 641 (Pogemiller); H.F. 695 (Osskopp): MSRS; Health Care Reimbursement Plan, would mandate that the State Board of Investment (SBI), invest plan assets. Others would use SBI and/or outside providers. Some would use MSRS as the administering agency. Another would use the Department of Employee Relations (DOER). Others would establish a separate board composed of employee and employer representatives. One would permit local administration, by the Minneapolis Police Relief Association, possibly through a separate corporation established by that organization.

Some bills use a defined contribution approach, while at least one uses a defined benefit approach. S.F. 641 (Pogemiller); H.F. 695 (Osskopp) uses a defined benefit approach, where benefits levels are specified in law. Others use a defined contribution approach. The bills that use a defined contribution approach set up separate accounts for each covered member. The member has a right to the value of the account; the covered employee bears the investment risk; and investments tend to be self-directed. In contrast, S.F. 641 (Pogemiller); H.F. 695 (Osskopp) uses a single investment pool, invested by SBI, consistent with a defined benefit approach.

A somewhat more detailed summary of each set of companion bills follows.

S.F. 641 (Pogemiller); H.F. 695 (Osskopp) S.F. 641 (Pogemiller); H.F. 695 (Osskopp): MSRS; Health Care Reimbursement Plan, would establish a healthcare cost reimbursement plan following a defined benefit pension plan model, but with far more restrictive vesting requirements. The plan would be established consistent with Internal Revenue Code, Section 401(h) requirements, permitting tax sheltering of incoming contributions and benefit payments. These bills have pension fund implications because a healthcare reimbursement benefit would be paid to some individuals who retire before the effective date of the legislation, funded by a transfer of MSRS pension fund assets from the State Board of Investment (SBI) Basic Fund.

Under this proposal, the plan will be funded by a 0.5 percent of salary employee contribution with a matching employer contribution. The purpose is to develop a sufficient asset base to support payments to certain long-service employees when they retire, to help cover the cost of health insurance premiums or other health expenses. Contributions are mandated by all members of the MSRS Legislators Plan; MSRS General Plan; MSRS Correctional Plan; MSRS State Patrol Plan; MSRS Unclassified Plan; MSRS Judges Plan; and the Arts Board, Humanities Commission, Minnesota Historical Society Individual Retirement Account Plan. Retiring members who meet the vesting requirements of the healthcare reimbursement plan are eligible to receive monthly healthcare-cost-reimbursement payments ranging from $55 per month (if benefits to the individual commence in the July 1, 2001 to June 30, 2003 period), escalating to $158 per month if benefits commence on or after July 1, 2012.

Vesting requirements are restrictive. To be eligible for these monthly benefits, the individual must have at least fifteen years of allowable service, be at least age 60, and be eligible to draw retirement benefits at the time of separation from state service. Any terminated employee who does not meeting these vesting requirements (and any vested member who prefers a refund) has a right to a refund of employee contributions plus five percent interest in lieu of any other payments, if applicable. Fund assets would be invested by the State Board of Investment (SBI) in an account separate from retirement fund assets.

Individuals who retire or are disabled before the effective date of the bills from the applicable plans are to receive a $55 per month payment providing the individual had 15 years of service credit and is at least age 60. Retirees and disabilitants who had 15 years of covered service but who are not yet age 60 are entitled to the $55 benefit upon reaching age 60. The healthcare reimbursement benefits for these existing retirees are financed by retirement plan assets in the SBI Basic Fund. Suitable reserves are transferred to the SBI Post Fund.

S.F. 1322 (Stumpf); H.F. 1294 (Mares) S.F. 1322 (Stumpf); H.F. 1294 (Mares): MSRS; Post Retirement Healthcare Savings Plan, would establish a healthcare savings plan with an individual account for each eligible member. The plan will create one or more trusts, eligible for tax-preferred or tax-free treatment. MSRS would contract with public and private entities to provide investment services, record-keeping, and benefit payouts. Contributions are to be determined through a personnel policy of collective bargaining agreement between the state public employer and the applicable bargaining unit.

S.F. ; H.F. 2029 (Haas) S.F. ; H.F. 2029 (Haas): DOER Health Care Account Establishment, would authorize the Commissioner of the Department of Employee Relations to create healthcare accounts or savings plans to prefund retiree health care costs, as determined through collective bargaining, the commissioner’s plan, or the managerial plan. The accounts are to be funded by the employees. The state is prohibited from contributing to the accounts or plans or from covering any administrative costs of the accounts or plans.

S.F. 1484 (Pogemiller); H.F ( ). S.F. 1484 (Pogemiller); H.F. ____ ( ):MPRA; Minneapolis Police Relief Association Voluntary Employee Benefit Organization, would authorize the MPRA to create a voluntary employee benefit organization (VEBO), consistent with Internal Revenue Code, Section 501 (c)(9). The purpose of the VEBO is to provide for payment of health-care-related benefits to MPRA members, retirees, and surviving spouses. Individual accounts are to be established, funded by transfers from the member’s health insurance accounts, contributions by active members with more than 25 years of service which are not directed to the employee’s other health insurance account, and a portion of any disability benefit or post-retirement adjustment paid by the association, which the member designates is to be directed to the VEBO, and any transfer of funds from the city. Local approval is required.

S.F. 1755 (Stumpf); H.F. 1868 (Davids) S.F. 1755 (Stumpf); H.F. 1868 (Davids): School Employee Health Care Accounts, would establish a School Employees Insurance Plan, to be funded by the state and (presumably) matching employee contributions. Individual accounts are to be established. (The drafting refers to a "state-funded plan", and to matching contributions by the employees, but no specific contribution rates are mentioned in the bills.) Employee groups could elect not to participate if health coverage is provided for those employees through another plan. The plan is to be administered by a board composed of employee and employer representatives.

Discussion, Policy Issues.

S.F. 641 (Pogemiller); H.F. 695 (Osskopp) S.F. 641 (Pogemiller); H.F. 695 (Osskopp): MSRS; Health Care Reimbursement Plan, is virtually identical to bills submitted during the previous legislative session. (Those bills were S.F. 2796 (Pogemiller); H.F. 2999 (Mares): MSRS; Health Care Reimbursement Plan.) The LCPR staff memo prepared last session for those bills is attached. The policy issues raised in last session’s memo are summarized as follows:

Design issues. This plan is modeled after a defined benefit pension plan. A single fund or trust is established in which all plan assets are pooled. Individuals receive specific dollar benefits, as specified in law, depending upon whether the individual has sufficient service to vest for a monthly benefit upon termination of service. If not eligible for an annuity, the individual’s only option is to take a refund.

Under a defined benefit approach, there are cross-subsidy effects which the LCPR may wish to consider. To be eligible for any monthly benefit from the plan at retirement, contributing employees who terminate from service must have at least 15 years of covered service, be age 60 or older, and be immediately eligible for a retirement annuity. All other terminating members are eligible only for a refund of the employee contribution plus five percent interest. Because of the long vesting period, coupled with the requirement that the individual must be immediately eligible for a retirement annuity upon termination (age 55 in most of the plans), some groups within the broad proposed membership are more likely to qualify for annuities than other groups. Members of the State Patrol Plan, Correctional Plan, and Judges Plan are most likely to meet vesting requirements of this healthcare reimbursement plan to receive monthly benefits. Members of MSRS General are least likely to qualify, particularly females in that plan, because of the higher turnover rates for females in general employee positions.

Also, as drafted, the proposal provides a windfall to existing retirees financed by retirement plan assets.

Fairness issues. The many contributing members who will never qualify for monthly benefits raises questions of fairness. The LCPR may wish to decide whether the cross subsidies reflect a fair policy. Given that many contributing members will never get a monthly benefit, the LCPR may wish to consider whether it is fair to provide $55 per month health care payment reimbursements to many existing retirees, who never contributed to this healthcare reimbursement plan. Those additional annuities are to be financed by transfers from the MSRS retirement funds (for MSRS General, Correctional, etc.) to the SBI Post Fund. Active employees in those pension plans may view that transfer as unfair. The LCPR may also wish to consider whether the refund is fair. The refund provided to any member who is ineligible to receive a monthly health-care cost reimbursement is an amount equal to the employee contribution plus five percent interest, which is less generous than the refund from a retirement plan.

Use of pension funds for healthcare costs. Since retirement funds are used to finance healthcare reimbursement benefits for some of the retirees, the proposal has a cost to each plan. In any plan that is not fully funded, presumably this will add to amortization requirements. In any plan which has assets in excess of liabilities, the transfer uses some of that excess.

Employer funding support. The plan requires state funds, through the one-half of one percent employer matching contributions.

S.F. 1322 (Stumpf); H.F. 1294 (Mares) S.F. 1322 (Stumpf); H.F. 1294 (Mares): MSRS; Post Retirement Healthcare Savings Plan, would establish a healthcare savings plan with an individual account for each eligible member. The plan will create one or more trusts, eligible for tax-preferred or tax-free treatment. MSRS would contract with public and private entities to provide investment services, record-keeping, and benefit payouts. Contributions are to be determined through a personnel policy of collective bargaining agreement between the state public employer and the applicable bargaining unit.

This approach is s defined contribution approach. The bills require MSRS to create a healthcare savings account for each plan member. MSRS could run the plan itself, or contact with other providers, either within government or outside, to provide various services.

This approach raise several policy issues:

Efficiency questions. Use of outside providers may lead to higher costs for administering the plans. If the accounts are to be self-directed (and that is the impression given in the drafting) the investment growth, in general, is likely to be considerably less than would occur under an SBI fund approach, where SBI is given investment authority to invest the funds of a single group plan.

Coverage issues. Coverage is not mandated in law. Rather, participation is to be determined through collective bargaining agreements. Ultimately, some groups may have the coverage while others do not. Contribution rates are not stated in the bills. Perhaps these are to be determined through separate agreements, which could lead to differences in contribution rates, and different levels of employer-provided support, between different groups.

Cost. The bill drafting suggests that employer contributions would be involved, leading to budgetary impacts.

Issues stemming from defined contributions approach. Under a defined contribution approach, each individual owns the value of his or her account—the accumulated employee contributions and employer contributions (if any) plus all investment earnings. There are no cross subsidization effects, in the sense found under a defined benefit approach. Other consequences of this defined contribution approach, some of them clearly negative, are that the value of an individual’s account will be a function of pay. At the same contribution rates, lower paid individuals will have fewer dollars going into their account than a higher paid individual. Over time the lower paid individual will have an account that is worth considerably less than that of the higher paid individual, but the health-care reimbursement needs may be the same. Also, in a defined contribution approach, investment risk is born by the individual. Weak investment markets or poor investment decisions could cause considerable harm.

Administrative issues. One administrative issue is whether MSRS should be the lead organization under this approach, or whether the various functions should be performed by the DOER or some other executive branch agency. Whatever organization provides administrative support for this program, handling the numerous accounts could be problematic. Numerous separate accounts would need to be maintained, some with very low value, created by individuals who were contributing members for short periods.

S.F. ; H.F. 2029 (Haas) S.F. ; H.F. 2029 (Haas): DOER Health Care Account Establishment, would authorize the Commissioner of DOER to create healthcare accounts or savings plans to prefund retiree health care costs, as determined through collective bargaining, the commissioner’s plan, or the managerial plan. The accounts are to be funded by the employees. The state is prohibited from contributing to the accounts or plans, or covering any administrative costs of the accounts or plans.

This approach seems similar to that suggested by S.F. 1322 (Stumpf); H.F. 1294 (Mares): MSRS; Post Retirement Healthcare Savings Plan, raising many of the same issues. In this proposal, DOER is the lead agency, not MSRS. Employing units are prohibited from contributing.

S.F. 1484 (Pogemiller); H.F ( ). S.F. 1484 (Pogemiller); H.F ( ):MPRA; Minneapolis Police Relief Association Voluntary Employee Benefit Organization, would authorize the MPRA to create a voluntary employee benefit organization (VEBO), consistent with Internal Revenue Code, Section 501 (c)(9). The purpose of the VEBO is to provide for payment of health-care-related benefits to members, retirees, and surviving spouses. Individual accounts are to be established, funded by transfers from the member’s health insurance accounts, contributions by active members with more than 25 years of service which are not directed to the employee’s health insurance account, and a portion of any disability benefit or post-retirement adjustment paid by the association, which the member designates is to be directed to the VEBO, and any transfer of funds from the city. Local approval is required.

This is a defined contribution approach, bearing some similarity to that in bills previously discussed and raise some similar policy issues. We note that S.F. 1484 (Pogemiller); H.F ( ), is limited to a small local group, the group of Minneapolis police officers covered by the MPRA and the survivors and dependents of those members. The proposal mentions separate accounts for each member, and involves investing each of those accounts in an investment vehicle or vehicles selected by a board, to be established.

There a few issues specific to S.F. 1484 (Pogemiller); H.F ( ). The coverage group is very limited. If any new health care arrangement is to be created, one question is whether the coverage group should be this small. Alternatives are any new arrangement covering all Minneapolis police officers, not just those in the old relief association, or including Minneapolis Fire Relief Association, or all Minneapolis firefighters, or all Minneapolis city employees, or Hennepin County employees, or regional public employees, or a statewide public employee health savings plan. There is also the question of whether the MPRA should play any role in setting up or administering this healthcare plan proposal, given the well documented problems on the current MPRA board, weak past investment performance in general, and specific past investment irregularities. Perhaps the city should take a lead administering position. While the bills permit Minneapolis to make contributions or transfers to the new health care arrangement, there is a question of whether employer contributions are appropriate.

S.F. 1755 (Stumpf); H.F. 1868 (Davids) S.F. 1755 (Stumpf); H.F. 1868 (Davids): School Employee Health Care Accounts, would establish a School Employees Insurance Plan, to be funded by the state and (presumably) matching employee contributions. Individual accounts are to be established. (The drafting refers to a "state-funded plan", and to matching contributions by the employees, but no specific contribution rates are mentioned in the bills.) Employee groups could elect not to participate if health coverage is provided for those employees through another plan. The plan is to be administered by a board composed of representatives of the employers and the employee groups.

The proposal suggested in S.F. 1755 (Stumpf); H.F. 1868 (Davids): School Employee Health Care Accounts is vague. While it suggests that state money would be involved, the specific nature of the plan and contribution requirements are not indicated.

Hopefully, this memo provides an adequate overview of the various retiree healthcare-related bills presented to the Legislature during this session. Staff has not attempted to draft any amendments to these bills, pending a decision by the LCPR and Legislature regarding which proposal or proposals, if any, warrant further consideration.