HB 21: Crucial for a COLA

HB 21 would create a funding deposit account for MPERS to accomplish two purposes:

1. avoid about an 8% increase to the annual employer contribution rate by requiring that future COLAs (after FY 22) be both prefunded and less expensive, while providing retirees more clarity regarding their timing; and
2. provide a source of funding to pay down the oldest unfunded accrued liability sooner, but only when the contribution rate would be lower than in the previous fiscal year.

The bill would move MPERS from the COLA charge card to the prepaid debit card and provide an option for paying down debt sooner. It would authorize the MPERS board of trustees to require an employer contribution rate up to the following limits:

1. when the contribution rate would be equal or greater than the previous year's rate, the board can optionally set the rate up to 0.85% greater than the fiscal year's rate. The proceeds could go towards paying future COLAs (sole source of COLA funding); and
2. in a fiscal year when the contribution rate would be lower than the previous year, the board can optionally set the rate at the otherwise required rate plus up to 0.85% plus half the difference between the rates for the two years. Up to half the difference between the rates for the two years goes to pay down the oldest UAL (the rest, for future COLAs).

Under HB 21, COLAs may not exceed 3% of benefit or be payable to the retiree or survivor until one year since benefit commencement. The board of trustees can designate the COLA as recurring or nonrecurring, whether it will be based on the retiree or survivor's current or original benefit, set minimum age requirements, and/or require that there be a minimum period since benefit commencement. No legislative approval would be required to grant a COLA.

What happens if HB 21 doesn’t pass? Well, if the board decides to grant a COLA (which one COLA by itself would increase the employer contribution rate by about 1.66% for the next 15 years), then the board's actuary may decide that this means that COLAs are likely to be granted every time that they can under current law. To prefund COLAs under current law (as the Legislative Auditor's actuary has requested us to do for the past several years), our actuary will likely recommend a minimum annual employer contribution rate increase of about 8% (so that we can pay for a current AND future COLAs, as determined by MPERS' July 2021 actuarial study). Although this will satisfy the Legislative Auditor and provide a prepaid source of funding for COLAs, it presumably won’t sit well with employers. Therefore, we’d likely be back at the legislature in 2023 in search of an alternative solution. And the threat of a possible 8% increase in the employer contribution rate might scare the board from granting a COLA at all.

HB 23: COLA Crowd-Out

This bill is not sponsored by MPERS. The Legislative Committee is recommending that the Board oppose this bill. It would eliminate all the retire-rehire provisions that the MPERS board of trustees unanimously supported just two years ago in order to help ensure that the employer contribution rate doesn't get out of control.

These provisions resulted in ongoing significant savings for employers. A potential COLA would cost about an 1.66% in additional annual employer contributions for 15 years. With an upcoming employer contribution rate of 31.25%, employers likely would not have the appetite for both that AND the increased costs of HB 23 (which would very likely be more expensive than the COLA itself). Board members would have to take that into consideration if HB 23 passed and weigh that against retirees' significant inflation concerns.

The Legislative Committee would like to let retirees know that passage of this bill could hurt their chances of receiving a COLA (which the board will consider at its June 22, 2022 meeting). If you want to increase the chance of the board granting a COLA, please contact your legislators and the House Retirement committee members to let them know of your opposition to HBs 23 and 25 (see below) and support for HB 21.

See below on HB 18 regarding a potential compromise between HBs 23 and 18.

HB 18: Sensible Changes

Present law generally applicable to other reemployment, including contract and part-time employment, provides that the retirement benefit of a retiree who returns to work for an employer in the system is suspended during any such employment that occurs within 24 months of the person's retirement.

As currently proposed, HB 18 would make the following changes:

1. provide that the required suspension does not apply to those who retired with 30 years or more of service credit;
2. provide that the required suspension does not apply to employment as a police officer for not more than 100 hours per month or as an elected official other than a police chief;
3. require payment of employer and employee contributions to the system during such employment, except for an elected official who is a member of another retirement system, but also provides for a refund of the employee contributions; and
4. requires a suspension of retirement benefits during the first 60 days after retirement even for those otherwise exempted from the suspension required by present law.

As a potential compromise with the proponents of HB 23, the Legislative Committee is recommending that the board request an amendment to HB 18 to:

1. lower the suspension period under present law from 24 months to 12 months;
2. eliminate the proposed exception for those who retired with 30 years or more of service credit; and
3. decrease the proposed exception for employment as a police officer for not more than 100 hours per month to not more than 50 hours per month.

Given cost concerns, the compromise only works if the those who retired with 30 years or more of service credit are eliminated from the proposed exception. However, those retirees would only be subject to a 12 month rather than a 24 month suspension period.

That said, HB 18 will result in additional costs for employers. Just not nearly as much as HB 23.

HB 25: No Good for No One

The Legislative Committee is recommending that the board oppose HB 25, which could result in an extreme increase to employer contributions due to having to lower the assumed rate of return.

It would prohibit us from investing in companies with policies that prohibit investing in energy companies, prohibit doing business with energy companies, or prohibit entering contracts with energy companies. Because the bill doesn't define "energy company," if we stayed invested in equities or corporate fixed income, we would not be able to ensure that we could meet the requirements of the bill. We’d have to liquidate all our investments and purchase governmental securities.

Even if the term “energy company” was defined, how would we know if they had any of these policies? Well, we'd have to hire costly experts. And even if the bill were more narrowly tailored, it still would result in increased costs. Any investment restrictions whatsoever are going to limit our ability to invest in index funds or commingled funds, which have the cheapest fees.

Regardless, the provisions of this bill would infringe upon the board of trustees' fiduciary duties regarding investments.