MINUTES PUBLIC EMPLOYEES RETIREMENT ASSOCIATION. Meeting of the Board of Trustees. June 13, 2013

Transcription

1 MINUTES PUBLIC EMPLOYEES RETIREMENT ASSOCIATION Meeting of the Board of Trustees June 13, 2013 The Board of Trustees of the Public Employees Retirement Association met in regular session in the Association offices, 60 Empire Drive, Room 117, Saint Paul, Minnesota, on Thursday, June 13, 2013, at 9:30 a.m., notice having been given ten days prior thereto by the Secretary. The following members were present: Don Rambow President Paul Bourgeois Kathryn Green Richard Jacobsen Bruce Jensen Leigh Lenzmeier Louise Olson (via conference call) Celeste Grant representing Rebecca Otto Clint Schumacher Thomas Stanley (via conference call) Lawrence Ward constituting a quorum. Staff members present: Mary Most Vanek, Executive Director; Dave DeJonge, Assistant Executive Director; Allen Eldridge, Pension Services Manager; Tim Grundtner, Assistant Pension Services Manager; Linda Habel, Education/Legislative Services Manager; Cheryl Keating, Manager of Account Information Management; Scott McLeod, Account Information Management Caseworker; Julie Leppink, Legal Director and Mary Daly, Executive Program Specialist. Attorney General Representative: Kevin Finnerty. Others present: Paul Zech, Attorney for Douglas County Hospital; Carl Vaagenes, Douglas County Hospital; Teresa Thompson, Attorney for Tim Hunt; Tim Hunt, Alexandria Clinic; Sheldon Swaney, PERA member; Brian Rice, POFM/MPFF/MPFA; Erica Noe, Gabriel, Roeder, Smith & Co; Bonnie Wurst, Gabriel, Roeder, Smith & Co; Sheri Wroblewski, Gabriel, Roeder, Smith & Co and Tamar Gronvall, Attorney General s Office. 1.0 Call to Order President Rambow called the meeting to order at 9:30 a.m. The agenda was taken in the following order. He noted that Trustees Olson and Stanley were participating in today s meeting via telephone conference call as permitted by Minnesota Statutes Section 13D.015.

2 Minutes, Board of Trustees - 2 June 13, Consent Calendar 3.0 Appeals 2.1 Approval of Minutes and Operational Report Ward moved to accept the consent calendar as presented. The motion was seconded by Bourgeois and passed unanimously. 3.1 In the Matter of the Appeal of the Douglas County Hospital Regarding the PERA Membership of Timothy Hunt Reference was made to a Report of Facts, Events and Issues from Julie Leppink and Scott McLeod dated June 13, 2013, and to an Employment Agreement between Alexandria Clinic and Timothy Hunt, dated April 30, 2011 Leppink stated that the issue before the Board is whether or not Mr. Timothy Hunt, Administrator of Management Services for Alexandria Clinic, is an independent contractor or a public employee for the services he provides to Douglas County Hospital. She reported the following facts associated with the matter. - Douglas County Hospital (Hospital) is a public hospital whose employees are required to be PERA members. - The Hospital purchased two medical clinics from Alexandria Clinics (AC) in After the purchase took place, PERA staff requested documentation regarding the purchase to find out why most of the 170 workers became public employees and new PERA members, while a few remained private employees, including Mr. Hunt. - The Hospital entered into two service agreements, one for physicians and the second for nurse practitioners and two managers, the clinic administrator (Administrator) and the director of clinical services (Director). - PERA staff determined that for PERA purposes, Mr. Hunt was an employee of the Hospital and a mandatory PERA member. - The Hospital appealed PERA staff s decision to PERA s Executive Director, who after reviewing the evidence, affirmed staff s decision. - The Executive Director applied the following factors to determine whether Mr. Hunt was an independent contractor or a public employee. o Who has the right to control the means and manner of performance? - The Administrator reports directly to the Hospital Chief Executive Officer; - the Administrator supervises Hospital employees; - the Hospital exercises authority over the Administrator; - the Hospital sets the rules, regulations and policies that the Administrator must follow; - the Administrator is responsible for enforcing those polices with Hospital employees who report to him; - the Hospital has final authority for all administrative decisions and personnel policies and approval of all outside contracts and personal actions;

3 Minutes, Board of Trustees - 3 June 13, the Hospital provides liability insurance and controls whether and when the Administrator may provide professional services to others and in fact bills for those services. o What is the mode of payment? - The Hospital pays the Administrator s salary; it is paid to the AC and then to Mr. Hunt and the Hospital must approve any changes to the Administrator s compensation. o Who furnishes the materials and controls the work premises? - The Hospital provides the work premises, equipment and retains ownership of medical records, reports and claims. o Does the employer have the right to discharge? - The agreement is a three-year term with an option to terminate if the parties agree to do so. Leppink concluded, that based on the facts and evidence presented, staff is requesting that the PERA Board affirm the determination that the Administrator is a public employee of the Hospital, under Minn. Stat Subd. 2, not an independent contractor or employee of an independent contractor, and therefore, subject to mandatory PERA membership under Minn. Stat , Subd. 2(a). Paul Zech, representing Douglas County Hospital, requested that the Board of Trustees not affirm the Executive Director s determination. He stated that Mr. Hunt is an employee of the Alexandria Clinics, the entity that performs the independent contractor services. Mr. Hunt is not now, nor has ever been an employee of the Hospital. Mr. Zech continued that they don t disagree with the factors PERA staff used when determining whether or not Mr. Hunt is an independent contractor or a public employees, they differ on how the facts play out. o Who has the right to control the means and manner of performance? - Mr. Hunt reports to the Board of Directors of the AC; he reports to the CEO of the Hospital in the way any independent contractor would report to the CEO; - the Hospital is contracting for a service from the AC and they are accountable for following the standard policies and procedures of the Hospital. o What is the mode of payment? - Mr. Hunt is an employee of the AC; the AC pays him, and all the Hospital does is make lump payments to AC on a periodic basis (24 times a year); - AC gives the Hospital an estimate of the salary and benefits; the Hospital does not know what portion paid is salary or what portion are benefits; - the Hospital needs to approve the change in compensation because it might impact the monthly amount the hospital pays to AC; if AC had other resources and wanted to pay the administrator above and beyond what the hospital is providing, the Hospital would have no influence over that.

4 Minutes, Board of Trustees - 4 June 13, 2013 o Does the employer have the right to discharge? - Under the employment agreement, Mr. Hunt s employment is at the will of AC, not the Hospital; there is no ability for the Hospital to terminate Mr. Hunt s employment; - Mr. Hunt is free to provide services as a consultant to other entities, through AC. Mr. Zech concluded that they understand that there can be some variations regarding how you look at a set of facts, but this is a rather unusual circumstance where neither the Hospital nor Mr. Hunt wishes the Administrator to be a PERA participant because he is already a participant in other plans and receives benefits because of his employment status with AC. The Trustees asked many qualifying questions of Mr. Zech in order to determine whether or not Mr. Hunt is an independent contractor or a public employee for the services he provides to Douglas County Hospital. Mr. Hunt and a Hospital representative were also present at the meeting and responded to some of the Board s questions. Lenzmeier moved that the Board of Trustees determine that Mr. Timothy Hunt does not meet the criteria of an employee of Douglas Hospital for PERA purposes. The motion was seconded by Ward. Bourgeois stated that he will be voting against the motion. He noted that the salary agreement with the independent contractor cannot be modified without consent of the Douglas County Hospital; the Hospital is controlling the compensation for Mr. Hunt. Rambow stated that he will also be voting against the motion because the contract has provisions that are specifically written for Mr. Hunt only and are not generic. Rambow called the question which passed by majority with Bourgeois, Green, Jacobsen, Rambow and Stanley voting no. Green moved that the Board of Trustees direct their attorney to prepare a written order on this matter. The motion was seconded by Lenzmeier and passed unanimously. 3.2 Benefit Appeal Re: Sheldon Swaney (Miscalculation of Retirement Benefit) Reference was made to a memo from Mary Most Vanek dated May 31, 2013 and to Minnesota Statutes , Retirement Benefit Formula Percentages Sheldon Swaney requested that the Board overturn staff s decision to lower his monthly PERA benefit by $ per month. Vanek provided some background information on how benefits are calculated; she explained that there are two ways to calculate benefits, a Level Rate and a Step Rate. Vanek continued that Sheldon Swaney retired from a MERF-covered public service position in March 2001 and subsequently was employed in a PERA-covered position and began to accrue service credit in PERA. Mr. Swaney qualified for an unreduced benefit under Minnesota Statutes, Section , the Rule of 90. A Rule of 90 benefit can only be

5 Minutes, Board of Trustees - 5 June 13, 2013 calculated using the Step Rate, which is 1.2 percent for each of the first ten years of service and 1.7 percent for each year thereafter. Although Mr. Swaney s benefit statements said that the Step Rate had been used, the system used the Level Rate, which gave Mr. Swaney 1.7 percent per year and incorrectly increased his benefit. Staff also used this incorrect formula when they prepared retirement estimates and processed Mr. Swaney s first payment upon his retirement on October 1, Mr. Swaney also selected a joint and survivor optional annuity based on the incorrect estimate. As a result of the application of the Level Rate, Mr. Swaney was initially paid a benefit applying percent to his average salary, before further calculation for his joint and survivor optional annuity choice. He should have received a benefit calculated on a base benefit equivalent to percent of his average salary. Mr. Swaney received an annuity for six months before the overpayment was discovered during a routine audit. A letter sent by staff explaining the error and a subsequent letter by Vanek incorrectly described the reason for error. The calculation was then corrected and Mr. Swaney informed of the corrections and that his benefit would be reduced. The law requires PERA to correct the monthly amount, and if the calculation error is discovered within three years of the start of receiving the benefit, to recover the overpaid amount. Staff recommendation: That the Board affirm staff s decision to reduce Mr. Swaney s benefit to the correct amount. Staff further recommends that because the calculation error was found within the fiscal year that his PERA benefit payment was effective, staff is directed to determine the amount of the reduction in the monthly benefit needed to recover the overpaid benefits, spreading recovery over 5 years or over the expected lifetime of the member, dependent upon discussion and agreement with Mr. Swaney as to the period of recovery to be applied. Staff further recommends that if Mr. Swaney and his wife want to change the joint and survivor annuity option selected, given the monthly benefit amount originally is lower than expected, staff provide a new retirement application for their completion, and adjust the benefit payment according to the new option selection, retroactive to his initial date of retirement, October 1, Sheldon Swaney addressed the Board voicing his frustrations with PERA and the 15 percent reduction in his benefit, which he believes is a significant difference from earlier estimates. Mr. Swaney also stated that he believed that his benefit calculated under the Rule of 90 should not have been reduced. Vanek explained that a member eligible for the Rule of 90 could find that applying the 1.7 percent to all years of service and reducing the benefit according to the age at retirement may produce a greater benefit. In Mr. Swaney s case, his Rule of 90 benefit payable when he retired would have provided only percent of the average of his highest five consecutive years of salary. Using the 1.7 percent per year of service and applying the required reduction, however, yielded a base benefit equal to percent of his average salary. PERA paid him

6 Minutes, Board of Trustees - 6 June 13, 2013 the latter benefit because that calculation, even with a reduction, yielded a higher benefit than the Rule of 90 without a reduction. Mr. Swaney continued that he has been receiving benefit estimates since some of them generated by staff and some by the system calculator--and they all gave him the higher benefit amount. When he met with a staff member to finalize his retirement plans, that staff member gave him an estimate with the lower benefit amount, and when questioned why, stated that he was not eligible for rule of 90. Mr. Swaney questioned this and was subsequently told that he did qualify under the rule of 90 and the higher amount would be paid. Mr. Swaney retired based on this information. Mr. Swaney then asked which benefit statement is correct and questioned how he can trust what staff has presented. He further stated that the PERA disclaimer that states that estimates are only estimates and they may change, is fine when there is information that is missing, but it should not cover staff errors in calculations. Green noted that the Board does not have authority to alter or make amends for what has happened; they are bound by Minnesota Statutes Section subd. 7, which requires PERA to recalculate an erroneous benefit payable and to recoup any overpayments made when the error is discovered. Green moved that the Board accept staff s recommendation and move forward with rectifying this account. The motion was seconded by Jensen and passed unanimously. Grant proposed having the account recalculated by an independent party outside PERA so that it can be assured that the calculations are accurate. 4.0 Policy Decision Items Rambow moved that PERA have its auditor (actuary), Gabriel Roeder Smith & Company ( GRS ), review the calculations of benefits owed to Mr. Sweeney to ensure that PERA s latest calculations are accurate. The motion was seconded by Grant and passed unanimously. Green moved that the Board of Trustees direct their attorney to prepare a written order on this matter. The motion was seconded by Rambow and passed unanimously. 4.1 Outstanding Issue Related to the Duluth Salary Determination beginning FY2009 Reference was made to a memo dated June 3, 2013 Leppink reminded the Trustees that the Court of Appeals (Court) ruled that deferred compensation should be reported as salary for PERA purposes, but the Court did not specify nor do PERA s governing statutes give direction on how to deal with the issue of collecting contributions on unreported amounts paid by the City of Duluth s current and former employees deferred compensation accounts from August 2007 forward.

7 Minutes, Board of Trustees - 7 June 13, 2013 A question raised in discussions is whether all employees are interested in having to make contributions on amounts deposited into their deferred compensation accounts, because those amounts may not fall in their highest five years of earnings that will be used by PERA to calculate a retirement benefit. Staff is recommending that the most effective solution to resolving this issue is to seek special legislation. The legislation would accommodate the following: 1. Individual employees who want to make the contributions on the amounts deposited by the City into the employees deferred compensation accounts can do so, but they must make the contributions on those amounts for the entire period they cannot carve out a limited time period. 2. For any individual employee who wants to make the contributions, the City will be required to make the corresponding employer contributions. 3. Individuals already retired who choose to make the contributions, after receipt of both the employee and employer contributions, will have their monthly benefits adjusted retroactively to their date of retirement. 4. PERA will not charge interest on any of these payments. Bourgeois moved that the staff move forward with special legislation to offer this choice to the affected employees for the period beginning August The motion was seconded by Green and passed unanimously with Grant abstaining. 4.2 Results of Trustees Ranking of Educational Session Vanek reported the results of the Trustees ranking of educational sessions that the consulting actuary, Gabriel, Roeder, Smith & Company (GRS) makes available. The top choices were: 1. Can a Plan Design Save Your Pension Program & Government? 2. Actuarial 101: Pension Basics 3. Tools and Tips for Balancing Plan Funding and Benefits 4. Post-Employment Cost of Living Adjustments: Strategies & Trends PERA is allowed one free session, as is the Minnesota State Retirement Systems (MSRS) who also contracts with GRS. Staff is proposing that we try to arrange a joint educational session with MSRS, most likely in September, and ask GRS to combine two subjects into one presentation. The Trustees felt that sharing resources was a good approach. 5.0 Informational Items 5.1 Legislative Update Reference was made to Chapter Omnibus Pension Bill and to Chapter Omnibus Tax Bill

8 Minutes, Board of Trustees - 8 June 13, 2013 Vanek reported that the police and fire bill passed as presented, and as of October 1, 2013, the Department of Revenue will annually contribute to the Police and Fire Fund $9 million dollars until the P&F is 90 percent funded or the State Patrol Plan is 90 percent funded, whichever one is later. Also, language for duty disability was rewritten to provide clearer definitions. Also passed, was a modification to the retirees annual adjustment that will help the funded ratio from bouncing back and forth each time it reaches 90 percent funded. Each of PERA s Funds (General, Police & Fire and Correctional) must be 90 percent funded for two consecutive years before the annual retirement adjustment is increased to 2.5 percent, but the 2.5 percent will not be lowered back to 1 percent unless the applicable fund drops to 85 percent or lower for two consecutive years or 80 percent in one year 5.2 Police and Fire Retirements Modeling Various Assumptions To follow up on the legislative changes that were just passed, Bonnie Wurst, Actuary from GRS, presented some assumptions and projections on the Police and Fire Plan, specifically the retirement assumptions. There is a general expectation that there will be fewer early retirements, but there will be more at age 55 and older not a reduction in retirements, but rather a shift. She stated that they will continue to monitor this assumption using actual experience data. Wurst continued with some funded status projections, assuming a 1 percent annual postretirement benefit increase; an assumed rate of return on assets of 8 percent through June 30, 2017 and 8.5 percent thereafter. In 2012, the P&F Plan was 78 percent funded; with the legislative changes benefit changes, contribution increases, and the $9 million dollars State contribution, it is projected that the Plan will get to 90 percent funded by Using a higher rate of return, 12 percent for one year only (then return to the 8 and 8.5 percent) and the legislative changes, the Plan will get to 90 percent funded by Wurst continued that they looked at the projection of what would happen if significantly more active members decide to retire in the coming year because of the legislation. What if the number of retirements doubles between July 1, 2013 and June 30, 2014 (compared to expected retirements)? What if 75 percent of eligible members retire between July 1, 2013 and June 30, 2014? It would delay the 90 percent funded ratio; there is a shift from active payroll on which contributions are collected to the retired payroll on which benefits are paid, but the funded status is still tracking in an upward direction. Initially, there will not be enough new members hired to replace the retired members down on both count and payroll then there would be some catch-up years more hires than normal, but eventually it would return to normal (it would take between 8 and 13 years).

9 Minutes, Board of Trustees - 9 June 13, FYI 5.3 Fiduciary Responsibilities, Ethics and Gifts Due to time constraints, Lenzmeier moved that the Board defer this item to the August Board Meeting. The motion was seconded by Bourgeois and passed unanimously. 5.4 SBI Quarterly Report for period ending March 31, 2013 Reference was made to a memo from Mary Most Vanek dated May 29, 2013 and to SBI Report Highlights Vanek reported that returns for the quarter ending March 31, 2013, were 6.1 percent. At the end of the third quarter of the fiscal year, the Combined Funds portfolio value was about $51.9 billion. Grant updated the Trustees on the process to replace the SBI Executive Director. A search firm has been chosen to conduct a nation-wide search. President Rambow called the Trustees attention to the following items of interest: How the IRS Wrecked Your Pension, News article from the Daily Beast, May 9, (k) Folly Continue, Article by Alicia Munnell at the Boston College Center for Retirement Research 7.0 Other Business Rambow reported that legislation was recently enacted to change the salary range for State agency heads whose salary was capped by the Governor s salary; it also removed the language that capped employees to the agency heads salary. Rambow will be meeting with the chairs of MSRS and TRA to discuss a possible salary adjustment for the executive directors. 8.0 Date of Next Meeting The next meeting of the PERA Board of Trustees will be held Thursday, August 8, 2013, 9:30 a.m., in Room 117 of the Retirement Systems of Minnesota Building. 9.0 Adjournment There being no further business to come before the Board, Jensen moved to adjourn the meeting at 11:41 a.m. The motion was seconded by Schumacher and passed unanimously. Mary Most Vanek, Executive Director Saint Paul, Minnesota