S.F. 1863 (Rest); H.F. 1896 (Skoglund) amends Minnesota Statutes, Chapter 3A, which governs the Legislators Retirement Plan, and Chapter 355, which governs public employee Social Security coverage, by providing for a second Social Security referendum for legislators to elect future Social Security coverage and five years of retroactive Social Security coverage, and by specifying the provisions of the Coordinated Program of the Legislators Retirement Plan as the current provision of the Legislators Retirement Plan.

The Legislators Retirement Plan, governed by Minnesota Statutes, Chapter 3A, was enacted in 1965. It is the successor to the Public Employees Retirement Association as the retirement coverage for members of the Legislature. Prior to 1965, there was no separate Legislator's Plan. Legislators were covered under the Public Employees Retirement Association (PERA-General Plan). At that time, PERA-General was a basic plan and no contributions were made into the federal Social Security program for the covered service. PERA-General used a career average salary and had back-loaded accrual rates, heavily favoring long time employees. A member received one percent of career average salary for each of the first ten years of service, two percent of career average salary for each of the next ten years, 2.5 percent for each year between twenty and thirty years of service, and three percent for each year over thirty years of service.

In 1965, the Legislature created a separate Legislative Plan, but current members and new members with prior PERA-General coverage had an option to retain PERA-General coverage. The motivation for establishing a separate Legislator's Plan probably came from a growing recognition that the back-loaded PERA-General Plan was not well suited to provide legislative retirement coverage, since the typical legislator would not be providing many decades of service. Prior to 1977, the Legislator's Plan provided a retirement benefit of 40 percent of the average monthly salary received during the final term of office for the first eight years of service, and an additional 2.5 percent per year for each year beyond eight. For those who left service and were too young to draw a benefit, the annuity augmented at five percent per year. The surviving spouse was entitled to a benefit equal to half the legislator's benefit, and a benefit was also provided to surviving children. The plan members participated in the Minnesota Adjustable Fixed Benefit Fund, a forerunner of the current Minnesota Post Retirement Investment Fund.

Beginning with the 1979 session, the maximum benefit accrual rate for any new legislative service was set at 2.5 percent. This lower accrual rate was adopted in recognition of the changing nature of legislative work. Until the early 1970's, legislative salaries were minimal. In order to provide any meaningful retirement benefit, a high benefit accrual rate was used. As legislative salaries increased in recognition that legislative work was becoming more like a full-time occupation, the Legislature recognized that it needed to revise the benefit accrual rates downward. The legislative salary for pension purposes was redefined to exclude an additional compensation for leadership positions. A twenty year cap on creditable service was also imposed. The Legislator's Plan was revised in 1978 and 1979 to use the high-five average salary rather than the average salary in the final term in office and the normal retirement age was increased from age 60 to age 62, with age 60 becoming the earliest age for retirement with a reduced annuity. Vesting for a retirement annuity was reduced from eight years to six years. In 1989, the definition of salary was changed to include regular and special session per diem payments, the deferred annuity augmentation rates were revised to three percent per year up to the year in which the ex-legislator becomes age 55, and five percent per year thereafter, the reduction factors for early retirement were revised to require a more substantial penalty, and the 20 year cap on service credit was removed. Members who were no longer accruing service credit because their service exceeded 20 years were authorized to again begin accruing service credit. The 1989 removal of the Legislative Plan service credit cap was made retroactive in 1992. Long-term legislators, including those in deferred status, with uncredited service prior to June 2, 1989, were authorized to purchase service credit for the uncredited period and the affected legislators were required to contribute nine percent of salary received during the uncredited period plus six percent interest from the midpoint of the period of uncredited service to the date of payment. Payment had to be received prior to retirement or by January 1, 1994, whichever was earlier.

In 1997, the annual benefit accrual rates for the Legislators Retirement Plan were increased from 5.00 percent (pre-1997 service) or 2.5 percent (post-1978 service) to that annual individual benefit accrual rate that has the same actuarial value as the one percent annual post retirement adjustment benefit reduction imposed by the same legislation (approximately a 2.7 percent benefit accrual rate). For new legislators first serving in office after July 1, 1997, retirement coverage is by the Unclassified State Employees Retirement Program of the Minnesota State Retirement System (MSRS-Unclassified), a defined contribution pension plan. An individual Social Security coverage election referendum was held with an opportunity to elect MSRS-Unclassified coverage by pre-July 1, 1997, legislators in 1998.

S.F. 1863 (Rest); H.F. 1896 (Skoglund) would permit the 173 current members of the Legislature who are covered by the Legislators Retirement Plan, a basic (not supplementing Social Security) retirement plan, to elect Social Security coverage for their legislative service in a second referendum on the issue, with prospective Social Security coverage and five years of retroactive (pre-referendum) coverage. Legislators electing Social Security coverage in the second referendum would retain past and future coverage by the Legislators Retirement Plan.

The proposed legislation raises several pension and related public policy issues that may merit Commission consideration, including the following:

1. Appropriateness of Adding Social Security Coverage To a Plan With Basic Retirement Plan Coverage. The policy issue is the appropriateness of adding Social Security coverage to a basic retirement plan without reconfiguring the basic retirement plan benefit coverage as a coordinated retirement plan. The Legislators Retirement Plan is a basic retirement plan, meaning that the retirement plan provides the sole retirement benefit for that service, without Social Security coverage. As a basic retirement plan, the Legislators Retirement Plan provides a larger benefit accrual rate (2.7 percent of the highest five successive years average salary per year of service credit) than a coordinated retirement plan (typically 1.7 percent of the highest five successive years average salary per year of service credit). In every prior coordination of a Minnesota public pension plan, the prior plan benefit accrual rate was reduced (and the member and employer contribution rates also were reduced). If the Commission determines that it is good policy to downsize a benefit plan benefit accrual rate upon coordination, Amendment LCPR01-128 would create a Legislators Retirement Plan Coordinated Program that essentially replicates other coordinated programs.

2. Appropriateness of Proposed Deviation From 1997 Legislation. The policy issue is the appropriateness of the proposed second Social Security referendum and the retention of the current Legislators Retirement Plan benefits as the subsequent benefit plan following the 1997 legislative changes in the retirement coverage for members of the Legislature, where new legislators and legislators who so elect were covered by Social Security and the Unclassifed State Employees Retirement Program of the Minnesota State Retirement System (MSRS-Unclassified), a defined contribution pension plan. The 1997 legislation was an outgrowth of Commission deliberations during the 1997 Session and was followed by a mandated Commission review of the issue during the 1997-1998 Interim. That mandated study produced no recommendation by the Commission of changes in the 1997 legislation. The Commission may benefit from taking testimony on what circumstances have changed during the interval to cause a shift in the 1997 policy now.

3. The Need To Accommodate The Application of Social Security Offsets To Basic Retirement Benefit. The policy issue is whether or not there is any need to accommodate the application of offsets or reductions provided for in Social Security law. To avoid having individuals with modest amounts of earnings covered by Social Security and other earnings outside Social Security coverage, like legislators covered by Minnesota Statutes, Chapter 3A, be more favorably treated by Social Security as low income individuals, Social Security instituted the Government Pension Offset in 1977 and the Windfall Elimination Provision in 1983. Background information on Social Security coverage from the 1997-1998 Interim Commission study on the 1997 legislator’s retirement coverage changes, including the Social Security Windfall Elimination Provision and the Government Pension Offset, is attached, as Attachment A. Publications on the Windfall Elimination Provision and the Government Pension Offset from the Social Security Administration are also attached.

4. The Appropriateness of Retroactive Social Security Coverage And The Source Bearing Any Retroactive Coverage Cost. The policy issues are the appropriateness of allowing for retroactive Social Security coverage and what source is the appropriate source for bearing that cost. The proposed legislation would allow legislators to elect retroactive Social Security coverage, with the payment of back Social Security taxes by the Executive Director of the Minnesota State Retirement System (MSRS) from an appropriation made for that purpose, and with the reimbursement by the legislator of a portion of those retroactive amounts. Amendment LCPR01-138 makes the reimbursement amount for existing legislators the amount of the retroactive employee Social Security contributions paid. Amendment LCPR01-139 makes the reimbursement amount for electing legislators the amount of all retroactive Social Security contributions paid.

5. Cost and Appropriation. The policy issue is the cost to the State of Minnesota of the proposed legislation and the effect of that cost on budget division appropriation targets. The proposed legislation would impose two costs on the State, with one cost being the Social Security employer taxes for future Social Security coverage for legislators and with the other cost being the retroactive Social Security taxes. The retroactive Social Security taxes would be minimally reimbursed under the proposed legislation, half reimbursed under Amendment LCPR01-138, and fully reimbursed under Amendment LCPR01-139. The reimbursement amounts do not return to the State General Fund under the proposed legislation, but would simply be paid to MSRS. Amendment LCPR01-140 would direct any reimbursement to the State General Fund.

6. Appropriateness of the Proposed Legislation In Light of a Self-Help Remedy. The policy issue is the appropriateness of the proposed legislation when there exists a self-help remedy for legislators of maintaining substantial non-legislative employment in the private sector, which would be covered by Social Security. Substantial earnings covered by Social Security, which would counter the effect of the windfall elimination provision, are $14,175 in calendar year 2000 (up 5.59 percent from $13,425 in calendar year 1999).

7. Timing of Change and Impact of Constitutional Prohibition on Compensation Increase During Current House Term. The policy issue is the compliance of the immediate effective date of the proposed legislation with the requirement in Article IV, Section 9, of the Minnesota Constitution, which prohibits any increase in legislative compensation during a current House member’s term. Amendment LCPR01-141 would make the second Social Security referendum legislation effective on January 15, 2003, in compliance with the Minnesota Constitution.