Focus on New Laws: Changes to PERA Police & Fire

The most notable provision in the sweeping omnibus pension bill is an increase in pension contributions for employees and for cities.
(Published Aug 5, 2013)

The most significant provisions of the 2013 omnibus pension bill (Chapter 111) are the Public Employee Retirement Association Police & Fire (PERA P&F) financial solvency measures, which eliminate the annual contribution shortfall and should place the plan on a more stable financial footing moving forward.

For cities, this means an increase in their employer contribution of 0.9 percent of salary in 2014, and an additional 0.9 percent beginning in 2015. A more detailed summary of the omnibus pension bill can be found on page 38 of the 2013 Law Summaries (pdf).

PERA P&F solvency measures
For fiscal year 2012, the annual contribution to PERA P&F was 7.9 percent less than the required annual contribution. (The required contribution is an amount sufficient to cover the annual benefits, administrative costs, and an amortization contribution to fund future benefits.) The Fund had not received the required annual contribution since 2002, and its funding ratio was projected to decline significantly over the next decade.

In response, the PERA Board recommended to the Legislature a package of solvency measures proposed by police and firefighter organizations. The solvency package was passed by the 2013 Legislature, and included the following provisions:

  • An employer contribution increase of 1.8 percent of salary phased in over two years. Beginning on Jan. 1, 2014, the employer contribution will increase 0.9 percent of salary. The contribution will increase an additional 0.9 percent of salary on Jan. 1, 2015, bringing the total employer contribution rate to 16.2 percent of salary.
  • An employee contribution increase of 1.2 percent of salary phased in over two years. Beginning on Jan. 1, 2014, the employee contribution will increase 0.6 percent of salary. The contribution will increase an additional 0.6 percent of salary on Jan. 1, 2015, bringing the total employee contribution rate to 10.8 percent of salary.
  • A phased-in increase in the early retirement penalty from 1.2 percent to 5 percent of salary. The phase-in begins on July 1, 2014.
  • A two-year delay in a retiree’s first post-retirement benefit increase.
  • An increase in the vesting period for members hired after June 30, 2014. New members will become 50 percent vested after 10 years, and will become fully vested after 20 years.
  • A cap on initial retirement benefits of 99 percent of the average high-five salary for members hired after June 30, 2014.

PERA estimates the solvency measures will bring the plan to 96 percent funding by 2038. Without the measures, the plan’s funding percentage was projected to decrease to 61 percent by 2038.

Added financial support
In addition to the solvency measures recommended by the PERA Board, the Legislature passed a $15.5 million appropriation to provide additional support for PERA P&F, the state troopers retirement fund, and the volunteer firefighters fund. The $15.5 million appropriation is divided as follows:

  • $15.5 million per year into the PERA P&F Fund.
  • $5.5 million per year to municipalities with voluntary firefighter pension funds, for deposit into the respective funds. The amount each municipality receives will be based on the existing fire state aid formula.
  • $1 million per year into the State Patrol Fund. As introduced, the supplemental funding legislation would have imposed a $5 surcharge on each automobile and homeowner’s insurance policy in Minnesota. Due to opposition in the Senate, the surcharge provision was dropped in favor of a general fund appropriation.

Other notable provisions in the pension bill
The omnibus pension bill contained a number of other notable changes to pension law.

  • Duty disability redefined. For P&F employees, the definition of a “duty disability” was changed so it must be the direct result of an injury arising out of inherently dangerous duties. Previous law required the injury arise out of duties specific to protecting the property and personal safety of others and that present inherent dangers specific to the covered positions.
  • Salary definitions modified. The bill made numerous changes to the definition of salary under the PERA plans by including and excluding various forms of periodic compensation:
    • Included in periodic compensation: “pick-up” contributions, post-retirement health care expense plans, reinstated non-wrongful-discharge salary reductions, payments made during personal, parental, or military leaves of absence, and certain medical leaves.
    • Excluded from periodic compensation: Unused annual leave in the form of lump-sum payments, donated sick or personal leave time, retirement incentive payments, per diem payments, and disability insurance payments. (For more information, read “Closer Look at Some Common Types of Pay” in the PERA Employer Manual.)

Practical considerations for cities
The PERA P&F contribution increases take effect on Jan. 1, 2014. The contributions must be deducted from the first paychecks issued in 2014, and apply to the total salary paid in that pay period, even if it was earned in 2013.

The $5.5 million appropriation for the voluntary firefighter funds will be distributed to municipalities other than those solely employing firefighters covered by PERA P&F. The supplemental aid will be paid at the same time cities receive their usual police and fire aid payments, although it will be a separate aid payment. Within 30 days of receipt of the funds from the Department of Revenue (DOR), the municipality must transfer the funds to the treasurer of the applicable volunteer firefighter relief association for deposit in its special fund. At the time of publication, DOR had not determined the aid amounts each municipality will receive.

A number of cities and police and fire groups expressed concern that changes to the early retirement penalty would lead to a mass exodus of early-retirement-eligible officers. In order to address this concern, the Legislature phased in the changes to the early retirement penalties over five years. The phase-in period provides incentives for officers to stay on the force longer. Employees with questions can use the updated MY PERA tool on the PERA website to make individual calculations.

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