PERA OVERPAYMENT INFORMATION

8/11/2010  

Minnesota Police & Peace Officers Assoc. on Pension Issues

PERA has another class action pension lawsuit on their hands, brought by Howard Swanson a retired City of Duluth retiree and five others.

       The Contract Clause of the Minnesota Constitution restricts the Defendants from enacting and enforcing laws that adversely affect pension benefits of public employees have already earned and are receiving.

     The named Plaintiffs having made the requisite contributions to the Plans throughout their public sector employment, having met the age and service eligibility requirements to receive a pension, having terminated their employment, and having begun receiving pension benefits from the Plans, their right to annual post retirement adjustments were terms of a contract binding on the State of Minnesota and the Plans.

     The named Plantiffs are contractually entitled to benefits at the levels that were specified under Minnesota law when they began receiving their pensions, which include the annual post retirement adjustments.

Go to www.minnesotapensions.com for more information.

Order for Further Proceedings - May 20, 2010

    This *letter was mailed to about 70 retirees requesting donations for legal defense.

Monday, August 10, 2009, 7:00 p.m.

09-0513R - RESOLUTION ESTABLISHING A PROCEDURE TO CORRECT ERRORS RELATED TO ELIGIBLE SALARY REPORTING TO THE PUBLIC EMPLOYEES RETIREMENT ASSOCIATION (PERA).

      This should be very important to you as a City retiree, if you retired after 1996 as you will get a permenent reduction in your monthly pension if the interpretation of the law is not changed. Read the letter below and if you agree, please write or email your State Legislator . The email addresses of our Duluth delegation are listed below.

      There is little time left!   Thank you.

 Included in the long document link below is PERA's explanation of the overpayment discovery.

State of Minnesota \ LEGISLATIVE COMMISSION ON PENSIONS AND RETIREMENT

S.F. 578 (Betzold); H.F. xxx (2009 Administrative Bill); Amendment Replacing

PERA Erroneous Receipts and Disbursements, Recovery of Overpayments Language

Note: You will need the free Adobe Reader installed to access this document

Beginning January 1, 1995, the employer shall contribute $25 each month to any

employee's deferred compensation plan which exists pursuant to this article. Beginning January 1, 1996, the amount of the employer's contribution shall be increased to a sum of $50 each month.”

As you can see, there is no mention of diverting these monies to health insurance.  That modification occurred in later contracts and I am told, at the urging again, of Mr. Nollenberger.  It is reported to me by then AFSCME Basic Unit Business Manager, Tony Orman, that Mr. Nollenberger wanted to encourage members to select family coverage under a plan similar to an HMO. Mr. Orman indicated Mr. Nollenberger wanted the deferred compensation money to be available to apply to the family premium so that employees could feel like it was not money out of their pockets, reasoning deferred compensation money was money that would not be missed.

This suggests to me that in 1995, this contribution was appropriately characterized by Mr. Nollenberger as salary.  In subsequent contracts, Mr. Nollenberger may not have considered or been concerned with how changes might later affect that characterization.   

Secondly, you state that to give “disparate treatment to those who chose to direct the payment to deferred compensation would result in some employees, but not all, (bold added) being able to increase their PERA salary simply through the exercise of choice.” 

Actually, all employees were initially and properly increasing their PERA salary with this money.  Subsequently, some chose to decrease their PERA salary by applying it to family health insurance instead.  All had the default option, to do nothing and receive the deferred compensation and therefore continue to benefit their PERA salary.  Only those with family coverage were eligible to divert deferred compensation to health insurance premiums and those eligibles who chose to do so, had to actually divert the money to health insurance instead and thus decrease their PERA salary.  Is that really disparate treatment?

In November 2008 the City was investigating this matter.  Having been the previous Chief Administrative Officer, I was interviewed as part of that investigation by Human Resources Manager, Kim Hall.  I informed Ms. Hall that during my tenure as CAO, I reviewed old negotiation files saved by Mr. Nollenberger that were stored in what was at that time, my office.  I informed her I was looking at those files in the context of labor negotiations concerning health insurance and that while I did not recall noticing anything specific to deferred compensation since it was not of interest to me at that time, there was a considerable amount of notes, some of which were likely relevant to the deferred compensation negotiations.

I can only assume Ms. Hall has arranged for review of those files as part of her investigation and has shared with you any relevant information that has been found.  I also assume you will have shared any such information with the Attorney General’s Office.       

Kind regards,

John Hall

Past President, City of Duluth Supervisory Association

Duluth, MN 55803

halljed@gmail.com

218.390.3117

Published with permission from John Hall, Past President, City of Duluth Supervisory Association and former CAO City of Duluth. 

November  21, 2008

Ms. Mary Most Vanek, Executive Director
Public Employees Retirement Association
60 Empire Drive, Suite 200
St. Paul, MN 55103

Dear Ms. Most Vanek,

As you are aware, the City of Duluth and PERA have apparently agreed to correct what has been referred to as a mistaken policy decision by the City of Duluth to consider Deferred Compensation (DC) payments from the City to employees as salary instead of benefits.  I have read in the local media that this correction is required by law and will result in reduced pension benefits for pensioners.  I have some personal knowledge of this situation that I hope you will consider before implementing your plan.

As background I recall that in the early nineties, DC was a program offered by Minnesota State Retirement System (MSRS).  Both the State and the City were unsatisfied with participation by municipal employees and actively encouraged increased participation.  Brown bag sessions were held extolling the virtues of disciplined saving, employee work time was authorized to meet with MSRS representatives, and City employees were appointed to a Deferred Compensation City Commission.  Karl Nollenberger, the City's Chief Administrative Officer at the time, was a participant in the DC program, having negotiated a large contribution into his personal DC plan. 

The first contractual DC payments made by the City to it's public employees occurred under the 1995 contract between the City of Duluth and the City of Duluth Supervisory Association (CDSA), a labor unit comprised of managers and department heads of which I was president.  I negotiated this contract feature with Mr. Nollenberger.  Others involved in this negotiation included CDSA Executive Board members and possibly the City personnel manager, Bob Hartl, Director of Administrative Services, Monte Ollenburger, and Deputy City Attorney, Bryan Brown.   I don't recall specifically, it was a long time ago.

During these negotiations, the City desired settlement of the contract and had agreed to a percentage raise, however the raise was inadequate to allow settlement.  Mr. Nollenberger was able to offer additional money but he wanted it to be a dollar amount, not a percentage, because he wanted to avoid the compounding effect of an additional percent raise over time.  He pointed out that an additional percent in the contract would of course be multiplied by subsequent percentage increases, a compounding which he referred to as "the creep."   This was undesirable from his perspective. 

DC seemed to fit the needs of both sides.  It allowed the City the ability to offer a fixed number of dollars instead of a percentage, an amount that would not automatically be increased with subsequent percentage increases.  It allowed the bargaining unit to achieve a raise amount satisfactory to employees.  It fit the City's and the State's priority to increase participation in the disciplined personal savings program, assuming that once everyone was participating, it would increase interest and stimulate additional savings.
  
My fellow Executive Board members were not enthusiastic about DC and I knew I would receive the same resistance from my members.  Employees didn't trust this program primarily because in its initial form, the pay deferred remained the property of the City, held in trust for the employee, until it was actually paid out.  Employees still resented a budget balancing on the part of the State some ten years earlier in which the Legislature had helped itself to PERA funds and they were concerned the City might one day do the same with their deferred pay.
 
I supported DC because it was in the interest of the members and clearly good public policy.  It was of great concern to me as head of the CDSA however, that the employee receive no less ultimate value from a dollar raise going into deferred pay, than from a dollar raise going immediately and directly to the employee.  It was critical that I be able to assure members their money would be safe both from the clutches of the City and the State and that there be no other diminished value to the money. 

Because municipal employee pensions are determined by percentage calculations of their earnings, it was an obvious concern to me that deferred money be included in that calculation.  Mr. Nollenberger assured me that deferred compensation was simply that, pay like any other pay only deferred, held only temporarily by the City and the State, but earned and paid at the time of earning, excluded from total earnings in terms of immediate taxable income but included in pension calculations as normal pay would be.  I relayed those assurances repeatedly to members of my bargaining unit to accomplish approval of that contract.  In subsequent years other bargaining units achieved similar features in their contracts.
 
I have been asked by media if I checked the legality of the City's assurances.  I wish I could recall for you that I did.  On the other hand I ask myself, why would I?  The City Administration said DC would be included in the pension calculation.  Why would I expect to be misled, through honest mistake or otherwise?  If I had asked to see proof, I can assure you that particular City Administrator would have been offended.

I do not know what the relevant law was in 1994 or 1995 when this provision was negotiated.  I look at the present law and have to assert the pure and simple truth is, to paraphrase Oscar Wilde, neither pure nor simple.  A trained lawyer may conclude as you and the City do, that such compensation must be treated as a benefit rather than salary.  A simple union president however, would be unlikely to casually check and immediately reach that same conclusion, particularly without pre-existing suspicion the city might negotiate such a provision and come back some fifteen years later to announce they have changed their mind, it was all a mistake.  Even now as I now look at M.S.A. 353.01, subd, 10 per City direction, I still do not see that deferred compensation is specifically excluded.  
If this agreement truly was defective, it seems nearly impossible to unwind it fairly.  Any error was committed by the City, not the employee.  The City got what it wanted from the agreement.  It avoided a percentage raise and the resultant compounding.  If it reneges at this juncture, does it go back for each employee and recalculate the 1995 raise and each subsequent DC raise as a percentage and then compound them over the years? And then does PERA recalculate pensions using those numbers?  Would you suggest that even though PERA accepted contributions all those years, has made full investment use of the funds, it should now be allowed to simply refund the contributions?  Or should PERA pay interest?  How does one compensate the employee who made life decisions based on contracts negotiated in good faith and based on assurances from legitimate authority?  Finally, if it is appropriate that an employee's pension be calculated as a percentage of that employee's earnings, what argument justifies that any part of an employee's pay should be excluded based on having been saved rather than spent?
 
Clearly, people are driving this issue now on the part of the City who were not involved, or even present when this feature was negotiated and have no knowledge of how or why it was handled as it was.  In fact, one of the functionaries who administered this program years ago believes PERA was consulted at the time and concurred with the treatment.  For the City to arbitrarily reverse course now, a decade and a half later, appears to be a strategy to gain a one time cash infusion from PERA and balance the budget of a City lacking the ability to solve it's own problems.  I cannot imagine these questions resolved without participation by the courts.
   
I note several exceptions in the legislative definition of salary that appear to have originated from situations similar to this problem.  It seems that if you are a plumber, a pipefitter or an operating engineer, deferred compensation is salary.  If you are a City Manager, deferred compensation is salary.  In fact, it seems that payments made before a specific date may have just been grandfathered in.  This surely must be the result of plumbers and city managers or other affected participants going to the legislature and obtaining exceptions granted on the basis of fairness.  Might that be a more appropriate solution to this problem as well? 
 
Of the entities to this conundrum, only the employees appear without culpability.  Any error was made by the City Administration.  PERA accepted and profited from contributions for many years.  Employees simply did as instructed.  Yet the resolution crafted by PERA and the City rewards the City with a large cash refund, leaves PERA  whole or with profit, and incurs substantial damage on employees and retirees.  It  reminds one of Bovard’s concern over two wolves and a sheep voting on what to have for dinner. 

I urge you to reconsider your decision and search for alternatives that avoid harm to employees or pensioners in these economically distressed times.  
                   
Kind Regards

John Hall
Past President, City of Duluth Supervisory Association
120 E Wabasha St   
Duluth MN  55803
218-390-3117
halljed@gmail.com

Cc
Nick Petrangelo, President, CDSA
Jon Haataja, President, City of Duluth Police Union
Erik Simonsen, President, Firefighters Union
Norma Johnson, President, City of Duluth Confidential Union 
David Wiesen, AFSCME Local 66 Basic Union

Dec. 12, 2008
 
          Mary Vanek of PERA responds to an email from a member who does not agree with PERA and City of Duluth interpretation of MN statute 353.01, Subd. 10 and inquires as to how PERA came to their interpretation of the Minnesota Statutes and whether or not payments to a deferred compensation plan should receive different treatment than payments towards health insurance premiums.

                                                                 ______

The other section of statute to which you refer, which states that "Salary does not mean: ... (2) employer-paid amounts used by an employee toward the cost of insurance coverage, employer-paid fringe benefits, flexible spending accounts, cafeteria plans, health care expense accounts, ... or any payments in lieu of any employer-paid group insurance coverage, including the difference between single and family rates that may be paid to a member with single coverage and certain amounts determined by the executive director to be ineligible; ..." has always been interpreted by PERA to include "employer-paid" contributions to a deferred compensation plan as a "fringe benefit."

We came to our conclusion on the Duluth payment based upon the language we reviewed in the Duluth bargaining agreement which states that the employer-paid amount is ... "for either contribution to a qualifying and approved deferred compensation plan, or for contribution to a city-sponsored family dependent hospital-medical plan premium, whichever is designated by the employee during the open window for insurance selection or at the time of a life event."  We view this employer paid amount as ineligible salary from two perspectives -- the individual can choose to have the amount deposited into a deferred compensation plan or used to offset a higher hospital-medial plan premium. Either way, it is a stated additional employer-paid amount of money available to employees, which we deem to be a fringe benefit. Moreover, to give disparate treatment to those who chose to direct the payment to deferred compensation would result in some employees, but not all, being able to to increase their PERA salary simply through the exercise of choice.

What Social Security defines as includable salary does not direct what PERA must include as salary for our purposes. Minnesota Statutes define and guide for us what we do and do not include.

I appreciate your so clearly stating your position. I hope that my response addresses for you how PERA interprets its statute and why we have arrived at our position.

Mary Vanek

Mary Most Vanek, Executive Director
Public Employees Retirement Association
60 Empire Drive, Suite 200
St. Paul, MN  55103
(651) 296-8358

12-12-08

A member sends a letter to Mary Most Vanek, Executive Director of PERA challenging

their interpretation of salary.

                                                           ______

            I do not agree with the PERA and City of Duluth interpretation of MN statute 353.01, Subd. 10.  I do not agree that the employer contributions towards active employees (or now retired employees) deferred compensation plans should be excluded from "salary". 
             The first sentence of Subd. 10 reads:  Salary. (a) Subject to the limitations of section 356.611, "salary" means: (1) the periodic compensation of a public employee, before deductions for deferred compensation, supplemental retirement plans, or other voluntary salary reduction programs, and also means "wages" and includes net income from fees;
            The fact that the salary is an amount determined before deductions for deferred compensation means deferred compensation is included in the salary.
Subd. 10 (b)  Salary does not mean:
            (2)  employer-paid amounts used by an employee toward the cost of insurance coverage, employer-paid fringe benefits, flexible spending accounts, cafeteria plans, health care expense accounts, day care expenses, or any payments in lieu of any employer-paid group insurance coverage, including the difference between single and family rates that may be paid to a member with single coverage and certain amounts determined by the executive director to be ineligible;
            Somehow, I believe part of this last paragraph (2) has been interpreted to include deferred compensation as an excludable part of "salary".  I think the items in (2) are all excluded from Social security taxation and Federal taxation.  My feeling is that the non-taxable nature of the non-salary items defines them as excludable components of "salary".   As I have verified on my check stubs and W-2 Wage and Tax Statement, all deferred compensation monies have been taxed by Social Security and will be taxed on a deferred basis when I draw them out of the retirement account, including the deferred compensation money that the city contends should not have been reported as salary".       The ruling by PERA is inconsistent with the Federal Government and Social Security guidelines on what is taxable income (i.e. "salary") and hopefully will be reviewed before long term reductions are made to the retiree pension payments.
            I suggest that the City of Duluth separate out the monies that were directed to deferred comp contributions from those directed to other (i.e. health insurance costs) uses.  I believe the monies directed to health insurance plans are legitimate non-taxed exclusions from income and specifically fall under the items mentioned in (2).  Employees who directed this money toward insurance costs benefited by avoiding taxation on this amount and by paying for part of the family health insurance plan they chose instead of their city-provided single health insurance plan; whereas employees who directed the money toward deferred comp, while benefiting in savings accruals, were taxed immediately by social security and must anticipate deferred income taxes.  Again, I paid social security taxes and eventually will be paying income taxes on this money, and I believe it should be included in "salary".
Thank you for your consideration in this matter.

          The City of Duluth and PERA decided that the City had overpaid PERA over the past 10 years resulting in possible pension payment deductions required of retirees and probably a smaller life-time pension payout in the future for those retirees affected by this mistake on the part of the City.

 The City of Duluth's Explanation to the retirees affected by their decision.