Bill tightens Police and Fire disability qualifications

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1 The Summer 2004 Newsletter of the Public Employees Retirement Association of Minnesota Assets over $12.5 billion Active membership over 151,000 Legislative Edition The number of Police and Fire members receiving disability benefits nearly doubled from 1988 to 2003, growing from 314 to 614. This Issue: Retirement planning timeline Pg. 4 Temporary pension increase Pg. 5 Bill tightens Police and Fire disability qualifications Statute language that has allowed many police officers and firefighters to leave public service early on a disability benefit rather than waiting for retirement has been tightened slightly under legislation enacted this year. The Omnibus Pension Bill (House file 1086/Senate File 676) was signed by Governor Tim Pawlenty May 29. The Police and Fire disability portion of the bill was authored by Sen. Don Betzold, DFL-Fridley, and becomes effective July 1. It requires that disability applicants provide proof that they are unable to perform the duties of the positions they held on the date of injury or onset of an illness causing the disability if the application is filed within two years of the date it occurred. When the application is filed more than two years after the injury or illness occurred, applicants must prove they are unable to perform their current duties. Employers must also provide evidence concerning the inability of an applicant to meet these requirements. The new law also attempts to contain the number of applications for duty-related disability, which provides a significantly higher base benefit and plan-subsidized survivor benefits. It requires that duty-related disability PERA has newly-appointed retiree trustee Marcia Farinacci, former acting director of the Minnesota Office of Strategic and Long Range Planning, is PERA s newest trustee. Farinacci, who left the state post in February, was appointed by Governor Tim Pawlenty to replace Lois Riecken in representing annuitants on the Board of Trustees. The St. Paul resident will serve a four-year term that expires in January, Prior to her acting director position, Farinacci was deputy director of the state agency. She has also served on the staff of Gov. Arne Carlson and U.S. Senator Rudy applications be supported by a Workers Compensation first report of injury. It provides for the suspension of the application process or current benefits if an individual refuses to submit to a medical examination or to authorize the release of medical evidence requested by the Association. And it requires the individual to discontinue working as a police officer or firefighter within 45 days of disability approval. This last provision is designed to prevent individuals from continuing to improve their benefit and leaving at their convenience. Skyrocketing claims It s not our intent to deny disability benefits to anyone who is deserving, said Mary Most Vanek, PERA executive director. However, we have seen Police and Fire disability applications skyrocket over the past five years. The way our law was written in the past was so broad and open to interpretation that it was difficult to deny a claim, no matter how far from the original intent of the statute it was. In instances where we tried to contest the benefit, we rarely prevailed. (Continued on page 3) Boschwitz and worked for Roseville Independent School District 623. Riecken, a Clear Lake resident, served on the PERA Board for 19 years, eight as the counties representative and an additional 11 years as the governor-appointed annuitant representative. At PERA s March meeting, the trustees elected Dawn Hulmer, a member-elected representative from Duluth, as board president. Steven Devich, Richfield, was elected vice president. Devich is also an elected representative on the PERA Board.

2 Summer 2004 resident s Message Dawn Hulmer Board Directory PERA s trustees invite you to notify them personally of any concerns you have regarding your retirement association. Dawn M. Hulmer Board President General Membership Rep. City of Duluth Treasurer s Office Duluth City Hall, Room 105 Duluth, MN (218) Steven L. Devich Board Vice President General Membership Rep. City of Richfield 6700 Portland Ave. S. Richfield, MN (612) Patricia Anderson State Auditor 525 Park Street, Suite 400 St. Paul, MN (651) Ross E. Arneson General Membership Rep. 410 S. 5th St. PO Box 3129 Mankato, MN (507) Marcia Farinacci Annuitant Rep North Grotto St. Paul, MN (651) Walter C. Gray Public Rep W. Broadway Ave., #206 Crystal, MN (763) Terri Heaton Cities Rep. 85 7th Place E., Suite 100 St. Paul, MN (651) Dennis Hegberg Counties Rep. Washington County Gov t Center st Street N., P.O. Box 6 Stillwater MN (651) Thomas L. Marshall Police & Fire Rep st. Avenue S. Duluth, MN (218) Terry A. Martinson School Board Rep. PO Box Whiteside Avenue Buhl, MN (218) Gary R. Norstrem Retiree/Disabilitant Membership Rep Portland Ave. White Bear Lake, MN (651) P&F disability It s a matter of economics PERA is an Equal Opportunity Employer The system s broke, and we re trying to fix it. The system I m referring to is PERA s Police and Fire Fund more specifically, disability benefit provisions that cover our Police and Fire members. Established in 1959, PERA s Police and Fire Fund has approximately 10,000 active members today. There are over 4,000 retirees in the plan and just over 600 individuals receiving disability benefits. The problem is the number of members qualifying for disability benefits is growing at an alarming rate, threatening the future funding of the plan. In the last five years, the number of P&F members receiving disability benefits has nearly doubled, growing from 314 to 614. At that rate of expansion, our actuaries tell us that if some measures to stem the tide are not taken it will be necessary to increase member and employer contribution rates substantially more than should be necessary to maintain adequate funding. It boils down to economics. Members who receive disability benefits, particularly dutyrelated disability, receive significantly higher benefit amounts then their counterparts who work until retirement and receive a regular pension. That means proportionately they pay less for the benefits they receive. In addition, they have automatic survivor protection until age 65. Regular retirees must pay for such protection through permanent reductions in their monthly benefits. I have to emphasize that PERA has never had a problem with supporting disability benefits for those who truly qualify, particularly for police officers and firefighters who are directly injured while performing their duties. However, we do have a problem with benefit language that allows people with questionable qualifications to receive disproportionate pensions at the expense of everyone else in the program. Until now, PERA has been hamstrung by a rather broad definition of disability for our P&F members. The law basically says a member is disabled if he or she is unable to perform the duties of a police officer or firefighter. The courts have often interpreted this to mean the duties of a regular line officer or firefighter regardless of the type of duty currently being performed by the member. Thus, an administrator working at a desk only has to prove he or she cannot chase down a criminal or carry someone from a burning building to qualify for the higher disability benefit even if the injury occurred years before and has had no effect on their current duties. Exacerbating the situation was legislation passed in 1997 that requires employers to pay full health care premiums until age 65 for Police and Fire members injured in the line of duty. It s equivalent to adding hundreds of dollars to the disability benefit each month. While not part of PERA s benefit structure, it has had a direct influence on the number of disability applications we see. This basically leaves PERA with two alternatives seek higher contribution rates, which will affect all P&F members and their employers, or try to put reasonable limits on the qualifications for disability benefits. While other actuarial factors will force us to eventually increase contributions, enactment of minor curbs on disability benefits will go a long way toward assuring stability for the plan and adequate future funding. The Omnibus Pension Bill tries to address some of our problems. It requires more proof of disability than was true in the past, it requires employer involvement and gives us a few tools to ensure we have adequate evidence to make an informed determination. Again, PERA is not trying to deny disability benefits for members who deserve them, but we have a fiduciary responsibility to preserve the integrity and fairness of the plan for all our P&F members. Dawn Hulmer President, PERA Board of Trustees The is published as a service to members of the Public Employees Retirement Association. Toll Free , or (651) , Between 8:00 a.m. and 4:30 p.m. Fax Number (651) Internet Mary Most Vanek Executive Director (651) This document is available in alternative formats to individuals with disabilities by calling or through the Minnesota Relay Service at

3 The 3 P&F disability benefits (Continued from page 1) The number of Police and Fire members receiving disability benefits nearly doubled from 1998 to 2003, growing from 314 to 614. During the same time, costs for those benefits increased by a factor of four. Disability pensions now make up 10 percent of all benefits paid by the Police and Fire Fund. By comparison, disabled workers represent only 4 percent of Coordinated Plan benefit recipients. Other factors In addition to the increased benefit amount paid to many disabled members, there are three other factors spurring applications two outside PERA s control. State legislation enacted in 1997 requires employers to continue paying employer health insurance premiums until age 65 for Police and Fire members injured in the line of duty. Approval of that benefit is based on approval of a line-ofduty disability benefit from PERA. Federal law makes the base in-line-of-duty disability benefit (60 percent of average salary) tax free until age 50. Finally, under PERA law, a surviving spouse qualifies for 50 percent of a disabled P&F member s average salary during the last six months of service, with no reduction in the member s monthly benefit. A retired member must take a significant reduction in the monthly pension for equal survivor protection. The fund s future The bottom line is we will soon need to increase contribution rates for Police and Fire members and their employers, said Vanek. Our actuaries recommended and we recently implemented some much needed assumption changes for the fund. They included longer life expectancies, earlier retirements, fewer members leaving for other employment and the upsurge in disability claims. Coupled with the contribution reductions in 1999 and loss of investment income over the last three years, the surplus the fund once enjoyed has evaporated. Actuaries now estimate the fund has a 4.02 percent contribution rate deficiency. Disability is the wild card because it is extremely difficult to anticipate the full effects of the new legislation at this time. It s hard to judge how much of a reduction these law changes will have on the number of disability claims we receive and ultimately approve, concluded Vanek. But we must also remember the issue of fairness for all the participants in the plan. Active members in the plan and members who retired with a regular retirement benefit are subsidizing the benefits of those who leave with a disability pension. People who use those benefits in ways we don t believe were intended are just hurting their coworkers. Funding issues need to be addressed As with many other issues this year, legislation relating to pensions was somewhat uneventful. We were able to pass administrative items that will address some concerns with the Police and Fire Plan, and members who are receiving disability benefits may now attempt to return to work without immediately losing their benefits something supported by the Board for several years, and finally enacted. The hard work is ahead of us. The 2005 legislature will be faced with reviewing the financial condition of a number of the state s pension funds, including PERA s Coordinated and Police and Fire plans. There was a last minute attempt to address the funding concerns of the Minneapolis teachers plan this year, but time ran out for that effort, so it will be back next year for more serious discussion. When we sought contribution rate increases in 2001, we asked for a second step increase. If we had received authority to take that second step, we would be in better financial shape today. No one could have anticipated the effects of the market declines especially for three years running but the fact that we entered the down cycle already collecting less than we needed means our situation in the Coordinated Plan only got worse. For many years, the Police and Fire Plan had assets that exceeded what we needed to pay current and projected benefits for members, but it has now joined the ranks of the under-funded plans. An increasing number of members using benefits earlier and in ways not anticipated, along with the recent market declines, require additional funding for that plan also. We ll continue to study the plan s benefit design and funding requirements. And, the Board continues to study the way other funds pay increases to retirees. Our Post Fund has produced generous increases in the past, but the markets have taken a toll here as well. We want to ensure our retirees receive reasonable cost-of-living adjustments so their purchasing power is not totally eroded over their lifetime. We have a full plate already. The 2004 session just ended, but that doesn t mean we don t have anything to do. We ll keep you posted on our progress and will be seeking your input as ideas are developed. The Director s Corner Mary Most Vanek Executive Director

4 A timeline for retirement planning One of the aspects of retirement planning we stress at PERA s Preretirement Workshops is the need to prepare well in advance of retirement itself. In fact, proper retirement planning begins years before your final day as a public employee. Below is an abbreviated version of a timeline we provide members at our workshops. It is designed only as a guide to assist members in considering some of the issues that should be explored prior to retirement. Annually: Re-evaluate your long- and short-term goals. Have they changed and what do you have to do to accommodate those changes? Examine your PERA Personal Benefit Statement (PBS) and annual Social Security estimates. They will likely make up a good share of your retirement income. Review your PBS for accuracy of personal data, salary, service and beneficiary information. Study your contributions to your employer-sponsored tax-deferred programs. These savings will be supplementing your PERA pension and Social Security income after you retire while lowering your taxable income today. Also, assess your asset allocation to see if it still meets your needs. Every 3-5 years: After examining your financial preparations for retirement and other goals, consider whether you feel confident in your decisions and course of action. Do you need the assistance of a financial planner? Review your will, power of attorney, health care declaration and other estate planning documents. Don t forget joint ownership of property; life insurance, investment plan and pension plan beneficiaries; and access to your safe deposit box in your estate planning. Do any changes need to be made? years from Retirement: Begin to think about what you plan to do in retirement. Second career? Part time or volunteer work? Return to school? Travel? You may want to start living some of these dreams as a prelude to retirement. Are they what you envisioned? Start examining alternatives to meet the cost of long-term care. How will the potential costs fit into your retirement financial plans? Consider longterm care insurance, reverse mortgages, personal savings and other potential funding sources. 2-5 years from retirement: Attend a PERA Preretirement Workshop, or at least meet with an association benefit counselor. Consider which pension option will best meet your income needs and those of your survivor. Share your planning knowledge with your children and encourage younger coworkers to attend a PERA Dollar$ and $ense workshop. Perhaps they will be inspired to start planning sooner. Update your resume, particularly if you plan to begin a second career or work part time after leaving public service. Begin really practicing retirement. If you plan to travel, take some extended vacations. If you plan to work, consider starting a part-time job now. Going back to school? Take a few evening classes. Take a close look at your expenses and income today and after retirement. What will change? Depending on whom you talk to, experts estimate you will need from 80 to 100 percent of your pre-retirement income to maintain your standard of living after you retire. Remember: there is no accurate rule of thumb here. Your income needs will depend on your debt load, retirement lifestyle plans and many other factors. If you are participating in a deferred compensation plan (457 Plan), consider taking advantage of the catch up provision. This provision doubles the regular contribution maximum for the three calendar years prior to reaching full retirement age or Rule of 90 for your PERA pension. Talk to your deferred comp. representative. Part 2 of the timeline will appear in the next issue of The. Take a close look at your expenses and income today and after retirement. What will change? Your income needs will depend on your debt load, retirement lifestyle plans and many other factors. 4

5 Summer 2004 The 5 Under this option, a member s monthly pension is supplemented between the time he or she retires and age 62. Yes, we do programs Are you planning an employee orientation, staff development session, retirement program or a benefit fair? Consider inviting PERA. Representatives from the Pension Services Education Division can provide information and education to your employees about retirement and their PERA benefits. To schedule someone to speak to your group, or set up an information booth, please call Allen Eldridge at (651) or allen.eldridge@ state.mn.us The Temporary Pre-62 Increase Getting more of your pension up front Among the benefit options available to PERA members at retirement, probably the least understood is our Temporary Pre-Age 62 Increase. As the name implies, this option is only available to members who retire before reaching age 62. Think of it as getting more of your pension up front. Under this option, a member s monthly pension is supplemented between the time he or she retires and age 62. The dollar amount of the supplement is totally dependent on the individual s age at retirement the closer the retiree is to age 62, the closer the supplement is to $100. Upon reaching age 62, the monthly benefit will be permanently reduced by $100. In addition, there is a second adjustment this one for any post-retirement benefit increases between retirement and age 62. This reduction is only applied to the supplemental amount of the pension and amounts to only a few dollars. It s tied to Social Security Age 62 was chosen because that is the age at which most individuals first become eligible for Social Security benefits. While the PERA pension is reduced at that time, the amount of the average Social Security payment is three to four times greater than the decrease in the PERA benefit. Thus, a member choosing this option and beginning Social Security at age 62 will see a net increase in monthly income even though the PERA pension was reduced. The option is available to all PERA members, even if they do not qualify for Social Security benefits. An example: Here s an example of how it works. Let s say a member s Single-life pension at just over age 58 is $1,000 a month. Under the Temporary Pre-Age 62 Increase, this amount would be supplemented $72.45 per month. Now our retiree is receiving $1, per month. Now, let s say the Post Retirement Investment Fund formula increases this benefit by 5 percent between retirement and age 62. Our retiree is now receiving $1, per month. At age 62, PERA will immediately reduce the monthly benefit by $100. Now our retiree s pension is $1, Since the $72.45 monthly supplement was increased 5 percent, or $3.62, by the Post Fund, this same amount is subtracted at age 62. Thus, our retiree now is receiving a monthly pension of $1, This $ reduction is more than offset by the Social Security benefit most individuals are entitled to at age 62. In addition, since our retiree saw a larger monthly benefit for nearly four years, it will take over 10 years for the reduction in the benefit at age 62 to equal the additional payments made between ages 58 and 62 that s age 72. Math doesn t seem right? Here s the reasoning. If our retiree had not chosen the Pre-Age 62 increase, at age 62 the monthly benefit would be $1,050 the original $1,000 per month plus the 5 percent increase. Since our member chose to receive the supplement, the age 62 benefit is now $1,022.45, a difference of only $27.55 per month. However, between ages 58 and 62, the supplement provided our retiree with an additional $3, in income. Dividing the difference in the age 62 pension amounts into the additional income received shows our retiree is dollars ahead for the next 124 months just over 10 years. Is it for you? If you consider that the average PERA retiree has a life expectancy of 20 to 30 years after retirement, you see the average total benefit received would be higher by not using the supplement. However, most retirees have a greater income need early in retirement when they are typically more active. This is especially true of people who choose to retire well before Social Security benefits can begin. Thus, the supplement was designed to provide retirees with a slightly more even total monthly income throughout their retirement years. In fact, the supplement was originally called the Level Income Option for just that reason.

6 Public Employees Retirement Association of Minnesota 60 Empire Drive, Suite 200, St. Paul MN ADDRESS SERVICE REQUESTED PRSRT STD U.S. Postage PAID St. Paul, MN Permit 171 Summer 2004 Duluth office now in limited operation PERA is now staffing its Duluth office two days a week. Currently, members can meet with a PERA counselor there Tuesday or Wednesday, between 8:00 a.m. and 4:30 p.m. Located in Suite 204 of the Medical Arts Building, 324 W. Superior Street, the office is scheduled to go into full operation in July. Members wishing to meet with a PERA representative in Duluth are asked to schedule an appointment at least one week in advance to allow PERA sufficient time to prepare benefit estimates. To schedule an individual conference, please call The Omnibus pension bill approved It was the final day of the session before the Minnesota Legislature gave its approval to the Omnibus Pension Bill. In addition to tightening qualifications for disability benefits under PERA s Police and Fire Plan (see page 1), there were several other provisions affecting PERA. The two most prominent are: Military Service The provision of PERA statute allowing the purchase of service credit for military service on an actuarial basis was extended to May Originally scheduled to sunset in May, the two-year extension allows members to pay the full actuarial value of the future lifetime increase in benefits. While expensive, some members have used this provision to generate a larger monthly PERA pension. Unrenewed was the provision that allowed members to make the same type of actuarial credit purchase for parental or family leave or a break in service that interrupted a member s public career. That provision expired May 16. Trial Work Period Until now, PERA has had no trial work provision in its disability law similar to that offered by Social Security. Now, an individual may continue to receive disability benefits for up to six months while attempting to rejoin the workforce. However, PERA s income limits will still apply during this period and no PERA deductions will be taken from the individual s salary if he or she returns to PERA-covered employment. 6