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F I S C A L I M P A C T R E P O R T

SPONSOR Smith

ORIGINAL DATE

LAST UPDATED

2/14/06

HB

SHORT TITLE Restrict Public Employees Returning to Work

SB 300

ANALYST Geisler

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

Indeterminate, see

fiscal impact.

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates: HB 100

Conflicts: SB 713

SOURCES OF INFORMATION

LFC Files

Public Employees Retirement Association (PERA)

SUMMARY

Synopsis of Bill

Senate Bill 300 for the State Permanent Fund Task Force and Legislative Finance Committee

amends the PERA Act on July 1, 2006 to reinstate an earnings limitation of $15,000 before sus-

pension of pension benefits for PERA retirees who return-to-work with a PERA–affiliated public

employer. The earnings limitation will not be applicable to retired members who are already

employed by an affiliated-public employer on or before June 30, 2006, who will be grand-

fathered under existing law. These reemployed retired members will continue to make retired

member contributions through December 31, 2006. Beginning January 1, 2007, the employer

contribution rate for these retired members will be adjusted annually at the determination of

PERA to cover the full actuarial cost to the Fund of their post-retirement employment.

FISCAL IMPLICATIONS

PERA reports that Senate Bill 300 may have a positive fiscal impact on the Fund. It is assumed

that the ability for a retired member to return to work after retirement is a factor in a PERA

member’s timing of his or her retirement. PERA actuaries make assumptions regarding retire-

ment trends for actuarial valuation purposes. In general, actuarial experience indicates that mem-

Senate Bill 300 -- Page 2

bers are retiring at significantly higher rates than currently assumed during the first several years

of service-based eligibility. It is important to note that since removal of its earning limitation for

retirees who return to work with affiliated-public employers, PERA has experienced historically

heavier end-of-year retirements. Currently, PERA has approximately 23,000 retirees; the num-

ber of retirees who have returned to work represents approximately 6-7% of annuitant payroll. It

is unknown whether removal of the earnings limitation for post-retirement employment will re-

quire PERA’s actuaries to modify the retirement trend assumptions used for valuation purposes.

Until PERA’s actuaries have sufficient experience to determine the actuarial cost of the return-

to-work provisions, it is still unknown what impact removal of the earnings limitation has had on

the Fund. If reinstatement of the PERA Act’s earnings limit for retirees who return to work trig-

gers later retirements, there may be a gain to the Fund.

Reinstating an earnings limit will require PERA to make additional changes to its recently im-

plemented pension administration system. Every revision to the PERA Act’s post-retirement

back-to-work provisions results in a change order, with associated costs, to PERA’s existing con-

tract with the vendor.

SIGNIFICANT ISSUES

It is a policy decision for the legislature whether there should be an earnings limitation of

$15,000 for PERA retirees who return to work with an affiliated-public employer. Under current

law, retirees who return to work with affiliated-public employers are required to remit nonre-

fundable retired member contributions when their post-retirement earnings reach $25,000. Ef-

fective July 1, 2006, HB 100 would reinstate an earnings limitation of $15,000 for post-

retirement employment with affiliated-public employers. Upon reaching the $15,000 earnings

limitation, pension benefits for those affected retirees would be suspended, the former retired

members would become contributing PERA members and would accrue service credit until em-

ployment terminates.

The earnings limitation proposed will not affect retired members who are already employed by

an affiliated-public employer on or before June 30, 2006. These already reemployed retired

members will be grandfathered in under existing law, which requires them to continue to make

retired member contributions through December 31, 2006. Beginning January 1, 2007, the em-

ployer contribution rate for these retired members will be adjusted annually at the determination

of PERA to cover the full actuarial cost to the Fund of their post-retirement employment.

The Municipal League notes that municipalities continue to have difficulty in retaining and find-

ing employees in rural areas and that the return to work provision has helped rural employers

retain valuable employees. Employers are not required to hire back retirees—the provision is optional.

In addition, the return to work legislation provides for contributions to cover any negative actuarial cost

caused by the return to work legislation. Since the return to work provision was just implemented in

2004, the Municipal League requests that the legislature allow the provision to remain in place and al-

low PERA to monitor the effect over time.

ADMINISTRATIVE IMPLICATIONS

PERA believes that Senate Bill 300 will have a positive administrative impact on PERA. Re-

turning to an earnings limitation for retirees returning to work with affiliated-public employers

will ease the administrative burden of tracking retiree contributions for post-retirement employ-

ment.

Senate Bill 300 -- Page 3

However, in the short term, PERA will continue to be required to track and account for retiree

contributions on an individual basis for those retired members who are grandfathered in under

the existing law. Beginning January 1, 2007, the employer contribution rate will be adjusted an-

nually to cover the full actuarial cost, if any, of PERA retirees for post-retirement employment.

PERA will be required to implement new electronic employer reporting procedures to address

the two different groups of retired members - those reemployed under the existing law and those

who reemploy before July 1, 2006. PERA anticipates employer reporting confusion regarding

post-retirement employment in the short term.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Duplicated by HB 100. SB 713 makes several changes to the return to work program, including

extending the sit out period from 90 days to 12 months.

OTHER SUBSTANTIVE ISSUES

The PERA Board continues to endorse the enacted 2-year benefit expansion moratorium, passed

by the 47th Legislature as HJM 5 for the retirement systems it administers. It is unknown

whether removal of the earnings limitation for post-retirement employment will require PERA’s

actuaries to modify the retirement trend assumptions used for valuation purposes. Until PERA’s

actuaries have sufficient experience to determine the actuarial cost of the return-to-work provi-

sions, it is unknown what impact removal of the earnings limitation has had on the Fund. The

two-year moratorium on benefit enhancements coincides with the sunset of the PERA Act’s ex-

isting provision requiring retired member contributions through December 31, 2006. This will

provide PERA’s actuaries with two full years of actuarial experience to determine the full actuar-

ial cost of PERA’s existing return-to-work provisions. Thereafter, PERA’s actuaries will be able

to provide the legislature with meaningful actuarial experience and recommendations regarding

the impact of existing back to work provisions.

HB 100 provides that those retired members who are “employed” prior to July 1, 2006 will be

covered under existing law. It is PERA’s experience that retired members change positions dur-

ing their reemployment much like active members. PERA requires retired members to submit

termination notices and applications for certain changes in employment, such as movement

across retirement coverage plans within the same employer or change in state agencies. If a re-

employed retiree under existing law is required to submit a new application to PERA because of

his or her employment/position change after July 1, 2006, they will be subject to HB 100’s pro-

posed earnings limit.

ALTERNATIVES

The 47th Legislature’s HJM 5, which provides for a two-year moratorium on public employment

retirement benefit expansion, will coincide with the sunset of the PERA Act’s provision requir-

ing retired member contributions through December 31, 2006, allowing for two full years of ac-

tuarial experience to determine the full actuarial cost of PERA’s return-to-work provisions.

Thereafter, PERA’s actuaries will be able to provide the legislature with an actuarial experience

study regarding impact of the back to work provisions.

Senate Bill 300 -- Page 4

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

Retirees who return to work with public-affiliated employers are required to remit nonrefundable

retired member contributions when their post-retirement earnings reach $25,000. Retired mem-

ber contributions will continue to be required through December 31, 2006, allowing for two full

years of actuarial experience to determine the full actuarial cost of PERA’s expanded return-to-

work provisions. Beginning January 1, 2007, the employer contribution rate will be adjusted an-

nually at the determination of PERA to cover the full actuarial cost of PERA retirees for post-

retirement employment with PERA affiliates.

GG/mt