EMPLOYEE BENEFITS PROGRAMS COMMITTEE
The Employee Benefits Programs Committee has statutory jurisdiction over legislative measures that affect retirement, health insurance, and retiree health insurance programs of public employees. Under North Dakota Century Code (NDCC) Section 54-35-02.4, the committee is required to consider and report on legislative measures and proposals over which it takes jurisdiction and which affect, actuarially or otherwise, retirement programs and health and retiree health plans of public employees. Section 54-35-02.4 also requires the committee to take jurisdiction over any measure or proposal that authorizes an automatic increase or other change in benefits beyond the ensuing biennium which would not require legislative approval and to include in the report of the committee a statement that the proposal would allow future changes without legislative involvement. The committee is allowed to solicit draft measures from interested persons during the interim and is required to make a thorough review of any measure or proposal it takes under its jurisdiction, including an actuarial review. A copy of the committee's report must accompany any measure or amendment affecting a public employee's retirement program, health plan, or retiree health plan which is introduced during a legislative session. The statute provides that any legislation enacted in contravention of these requirements is invalid and benefits provided under that legislation must be reduced to the level in effect before enactment. In addition, Section 54-52.1-08.2 requires the committee to approve terminology adopted by the Public Employees Retirement System (PERS) Board to comply with federal requirements; Section 18-11-15 requires the committee to receive notice from a firefighters' relief association concerning service benefits paid under a special schedule; 2001 Session Laws, Chapter 330, Section 5, requires the committee to receive notice from the Public Employees Retirement System Board of the date the board receives a letter ruling from the Internal Revenue Service that the section allowing a member to purchase service credit with pretax or aftertax money does not jeopardize the qualified status of the Highway Patrolmen's retirement system; and 2001 Session Laws, Chapter 494, Section 11, requires the committee to receive notice from the Public Employees Retirement System Board of the date the board receives a letter ruling from the Internal Revenue Service that the section allowing a member to purchase service credit with pretax or aftertax money does not jeopardize the qualified status of the Public Employees Retirement System.
The Legislative Council assigned to the committee responsibility to receive periodic reports from the Central Personnel Division (Human Resource Management Services) on the implementation, progress, and bonuses provided by state agency programs to provide bonuses to recruit or retain employees in hard-to-fill positions. The Legislative Council also assigned to the committee a study directed by Section 41 of Senate Bill No. 2015 of public employee health insurance benefits, including options for providing health insurance for state employees, availability of other health insurance plans, single versus family coverage, employee contributions, and unitization of premium rates for budgeting purposes.
Committee members were Senators Karen K. Krebsbach, (Chairman), Richard Brown, Ralph L. Kilzer, and Carolyn Nelson and Representatives Bill Amerman, Al Carlson, Mike Grosz, Jim Kasper, and Francis J. Wald. Representative Wayne W. Tieman was a member of the committee until his resignation on January 1, 2004.
The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2004. The Council accepted the report for submission to the 59th Legislative Assembly.
CONSIDERATION OF RETIREMENT AND HEALTH PLAN PROPOSALS
The committee established April 1, 2004, as the deadline for submission of retirement, health, and retiree health proposals. The deadline provided the committee and the consulting actuary of each affected retirement, health, or retiree health program sufficient time to discuss and evaluate the proposals. The committee allowed only legislators and those agencies entitled to the bill introduction privilege to submit retirement, health, and retiree health proposals for consideration.
The committee reviewed each submitted proposal and solicited testimony from proponents, retirement and health program administrators, interest groups, and other interested persons.
Under NDCC Section 54-35-02.4, each retirement, insurance, or retiree insurance program is required to pay, from its retirement, insurance, or retiree health benefits fund, as appropriate, and without the need for a prior appropriation, the cost of any actuarial report required by the committee which relates to that program.
The committee referred every proposal submitted to it to the affected retirement or insurance program and requested the program authorize the preparation of actuarial reports. The Public Employees Retirement System used the actuarial services of The Segal Company in evaluating proposals that affected retirement programs and the actuarial services of Gallagher Benefit Services, Inc., in evaluating proposals that affected the public employees health insurance program. The Teachers' Fund for Retirement Board of Trustees used the actuarial services of Gabriel, Roeder, Smith and Company in evaluating proposals that affected the Teachers' Fund for Retirement.
The committee obtained written actuarial information on each proposal. In evaluating each proposal, the committee considered the proposal's actuarial cost impact; testimony by retirement and health insurance program administrators, interest groups, and affected individuals; the impact on state general or special funds and on the affected retirement program; and other consequences of the proposal or alternatives to it. Based on these factors, each proposal received a favorable recommendation, unfavorable recommendation, or no recommendation.
A copy of the actuarial evaluation and the committee's report on each proposal will be appended to the proposal and delivered to its sponsor. Each sponsor is responsible for securing introduction of the proposal in the 59th Legislative Assembly.
Teachers' Fund for Retirement (TFFR)
Former NDCC Chapter 15-39 established the teachers' insurance and retirement fund. This fund, the rights to which were preserved by Section 15-39.1-03, provides a fixed annuity for full-time teachers whose rights vested in the fund before July 1, 1971. The plan was repealed in 1971 when the Teachers' Fund for Retirement was established with the enactment of Chapter 15-39.1. The plan is managed by the Teachers' Fund for Retirement Board of Trustees.
The Teachers' Fund for Retirement became effective July 1, 1971. The Teachers' Fund for Retirement is administered by a board of trustees. A separate state investment board is responsible for the investment of the trust assets, although the Teachers' Fund for Retirement Board of Trustees establishes the asset allocation policy. The Retirement and Investment Office is the administrative agency for the Teachers' Fund for Retirement. The Teachers' Fund for Retirement is a qualified governmental defined benefit retirement plan. For Governmental Accounting Standards Board purposes, it is a cost-sharing, multiple-employer public employee retirement system.
Every certified teacher of a public school in the state participates in the Teachers' Fund for Retirement. This includes teachers, supervisors, principals, and administrators. Noncertified employees such as teacher's aides, janitors, secretaries, and drivers are not allowed to participate in the Teachers' Fund for Retirement. Eligible employees become members at the date of employment.
An active member contributes 7.75 percent of salary per year. The employer may "pick up" the member's assessments under Internal Revenue Code Section 414(h). The member's total earnings are used for salary purposes, including overtime, and including nontaxable wages under a Section 125 plan, but excluding certain extraordinary compensation, such as fringe benefits or unused sick or vacation leave.
The district or other employer that employs a member contributes 7.75 percent of the member's salary. Employees receive credit for service while members. A member may also purchase credit for certain periods, such as time spent teaching at a public school in another state, by paying the actuarially determined cost of the additional service. Special rules and limits govern the purchase of additional service.
A member is eligible for a normal service retirement benefit at age 65 with credit for three years of service or when the sum of the member's age and years of service is at least 85--the Rule of 85. The monthly retirement benefit is 2.00 percent of final average compensation, defined as the average of the member's highest three-plan year salaries with monthly benefits based on one-twelfth of this amount, times years of service. Benefits are paid as a monthly life annuity, with a guarantee that if the payments made do not exceed the member's assessments plus interest, determined as of the date of retirement, the balance will be paid in a lump sum to the member's beneficiary.
A member may retire early after reaching age 55 with credit for three years of service. In this event, the monthly benefit is 2.00 percent of final average compensation times years of service, multiplied by a factor that reduces the benefit 6 percent for each year from the earlier of age 65 or the age at which current service plus age equals 85.
A member is eligible for disability retirement benefits provided the member has credit for at least one year of service. The monthly disability retirement benefit is 2.00 percent of final average compensation times years of service with a minimum 20 years of service. The disability benefit commences immediately upon the member's retirement. Benefits cease upon recovery or reemployment. Disability benefits are payable as a monthly life annuity with a guarantee that, at the member's death, the sum of the member's assessments plus interest as of the date of retirement that is in excess of the sum of payments already received will be paid in a lump sum to the member's beneficiary. All alternative forms of payment are also permitted in the case of disability retirement. Disability benefits are converted to normal retirement benefits when the member reaches normal retirement age or age 65, whichever is earlier. A member with at least three years of service who does not withdraw contributions from the fund is eligible for a deferred termination benefit. The deferred termination benefit is a monthly benefit of 2.00 percent of final average compensation times years of service. Final average compensation and service are determined at the time the member leaves active employment. Benefits may commence unreduced at age 65 or when the Rule of 85 is met. Reduced benefits may commence at or after age 55 if the member is not eligible for an unreduced benefit. The form of payment is the same as for normal retirement.
A member leaving covered employment with less than three years of service is eligible to withdraw or receive a refund benefit. Optionally, a vested member (one with three or more years of service) may withdraw assessments plus interest in lieu of the deferred benefits otherwise due. A member who withdraws receives a lump sum payment of employee assessments, plus the interest credited on these contributions. Interest is credited at 6 percent.
To receive a death benefit, death must have occurred while an active or inactive, nonretired member. Upon the death of a nonvested member, a refund of the member's assessments and interest is paid. Upon the death of a vested member, the beneficiary may elect the refund benefit; payment for 60 months of the normal retirement benefit, based on final average compensation and service determined at the date of death; or a life annuity of the normal retirement benefit, based on final average compensation and service as of the date of death, but without applying any reduction for the member's age at death.
There are optional forms of payment available on an actuarial equivalent basis. These include a life annuity payable while either the participant or the participant's beneficiary is alive, "popping-up" to the original life annuity if the beneficiary predeceases the member; a life annuity payable to the member while both the member and beneficiary are alive, reducing to 50 percent of this amount if the member predeceases the beneficiary, and "popping-up" to the original life annuity if the beneficiary predeceases the member; a life annuity payable to the member, with a guarantee that, should the member die prior to receiving 60 payments, the payments will be continued to a beneficiary for the balance of the five-year period; a life annuity payable to the member, with a guarantee that, should the member die prior to receiving 240 payments, the payments will be continued to a beneficiary for the balance of the 20-year period; a life annuity payable to the member, with a guarantee that, should the member die prior to receiving 120 payments, the payments will be continued to a beneficiary for the balance of the 10-year period; or a nonlevel annuity payable to the member, designed to provide a level total income when combined with the member's Social Security benefit. The option to receive a life annuity payable to the member with a guarantee that, should the member die prior to receiving 60 payments, the benefits will be continued to a beneficiary for the balance of the five-year period is not available to employees who retire on or after August 1, 2003. Retirees who elected this option before August 1, 2003, are not affected. In addition, members may elect a partial lump sum option at retirement. Under this option, a member receives an immediate lump sum equal to 12 times the monthly life annuity benefit and a reduced annuity. The reduction is determined actuarially. The member can then elect to receive the annuity benefit in one of the other optional forms, except that members who receive a partial lump sum option may not elect the level income option. The partial lump sum option is not available to disabled retirees or retirees who are not eligible for an unreduced retirement benefit. Actuarial equivalencies are based on tables adopted by the board of trustees.
From time to time the Teachers' Fund for Retirement statutes have been amended to grant certain postretirement benefit increases. In 2001 two conditional annual benefit adjustments, equal to .75 percent of the benefit being paid to each retiree and beneficiary, were approved by the Legislative Assembly. The first adjustment became payable beginning with the July 2001 payment and the second became payable beginning July 2002. These increases were conditional, and were to be paid only if there were positive margin as determined by the prior actuarial valuation, or if the amount of negative margin was small, as defined by the statutes. However, the Teachers' Fund for Retirement has no automatic cost-of-living increase features.
Since 1991 there have been several plan changes in the Teachers' Fund for Retirement. Effective July 1, 1991, the benefit multiplier was increased from 1.275 percent to 1.39 percent for all future retirees. The Legislative Assembly also provided a postretirement benefit increase for all annuitants receiving a monthly benefit on June 30, 1991. The monthly increase was the greater of a 10 percent increase or a level increase based on years of service and retirement date of $3 per year of service for retirements before 1980, $2 per year of service for retirements from 1980 to 1983, and $1 per year of service for retirements from 1984 through June 30, 1991. The minimum increase was $5 per month, and the maximum increase was $75 per month.
In 1993 the benefit multiplier was increased from 1.39 percent to 1.55 percent for all future retirees. The Legislative Assembly also provided a postretirement benefit increase for all annuitants receiving a monthly benefit on June 30, 1993. The monthly increase was the greater of a 10 percent increase or a level increase based on years of service and retirement date of $3 per year of service for retirements before 1980, $2.50 per year of service for retirements from 1980 to 1983, and $1 per year of service for retirements from 1984 through June 30, 1993. The minimum increase at this time was $5 per month, and the maximum increase was $100 per month. The minimum retirement benefit was increased to $10 times years of service up to 25, plus $15 times years of service greater than 25. Previously, it had been $6 up to 25 years of service, plus $7.50 over 25 years of service. The disability benefit was also changed at this time to 1.55 percent of final average compensation times years of service using a minimum 20 years of service.
In 1997 the benefit multiplier was increased from 1.55 percent to 1.75 percent for all future retirees, the member assessment rate and employer contribution rate were increased from 6.75 to 7.75 percent, and a $30 per month benefit improvement was granted to all retirees and beneficiaries.
In 1999 the vesting requirement was reduced from five years of service to three years of service. The early retirement reduction factor was changed to 6 percent per year from the earlier of age 65 or the date as of which age plus service equals 85 rather than from 65 in all cases. An ad hoc cost-of-living adjustment was provided for all retirees and beneficiaries. This increase was equal to an additional $2 per month for each year of service plus $1 per month for each year since the member's retirement. Finally, the benefit multiplier was increased from 1.75 to 1.88 percent.
In 2001 an ad hoc cost-of-living adjustment was provided for all retirees and beneficiaries. The ad hoc cost-of-living adjustment increase was equal to an additional $2 per month for each year of service plus $1 per month for each year since the member's retirement. Retirees and beneficiaries were also eligible to receive the two conditional annual benefit adjustments equal to .75 percent times the monthly benefit, payable July 1, 2001, and July 1, 2002. The benefit multiplier was also increased from 1.88 percent to 2.00 percent.
In 2003 the partial lump sum option was adopted, equal to 12 times the monthly life annuity benefit. However, this option is not available if the level income option is elected and is not available for the reduced retirement or disability retirement. The 5-year certain and life option was replaced with the 20-year certain and life option. However, this provision did not impact retirees who retired under the 5-year certain and life option. Employer service purchase was authorized. Active members of the Department of Public Instruction were permitted to make a one-time irrevocable election to transfer to the Public Employees Retirement System in fiscal year 2004. Both assets and liabilities for all Teachers' Fund for Retirement system service was transferred for electing employees. Transferred assets were based on the actuarial present value of the member's accrued Teachers' Fund for Retirement benefit, or the member's contribution account balance if larger.
The latest available report of the consulting actuary was dated July 1, 2004. The primary purposes of the valuation report are to determine the adequacy of the current employer contribution rate, to describe the current financial condition of the Teachers' Fund for Retirement, and to analyze changes in the fund's condition. In addition, the report provides information required by the Teachers' Fund for Retirement in connection with Governmental Accounting Standards Board Statement No. 25 and provides various summaries of the data. Valuations are prepared annually, as of July 1 of each year, the first day of the Teachers' Fund for Retirement's plan and fiscal year. Concerning the financing objectives of the Teachers' Fund for Retirement Board of Trustees, the consulting actuary reported that the member and employer contribution rates are intended to be sufficient to pay the fund's normal cost and to amortize the fund's unfunded actuarial accrued liability in level payments over a period of 20 years from the valuation date. The funding period is set by the board of trustees and is considered reasonable by the actuary.
As of July 1, 2004, the employer contribution rate required in order to meet these goals was 11.34 percent. This is greater than the 7.75 percent rate currently required by law. The margin between the rate mandated by law and the rate necessary to fund the unfunded actuarial accrued liability in 20 years is -3.59 percentage points. This negative margin increased from -1.19 percentage points on July 1, 2003, mainly because of the recognition of investment experience losses from prior years. This increase would have been even larger if not for the 18.9 percent market return in fiscal year 2004. If the 7.75 percent contribution rate remains in place, and all actuarial assumptions are exactly realized, including an 8.00 percent investment return on the actuarial value of assets, then the unfunded actuarial accrued liability will never achieve complete amortization, i.e., the Teachers' Fund for Retirement has an infinite funding period. The funded ratio, the ratio of the actuarial value of assets to the actuarial accrued liability, decreased from July 1, 2003. The funded ratio on July 1, 2003, was 85.1 percent while it was 80.3 percent as of July 1, 2004. This decrease is also due to the recognized investment experience losses from prior years.
However, the consulting actuary reported that this picture of the Teachers' Fund for Retirement may be slightly optimistic. All of the standard actuarial measurements, including the funded ratio and the margin, are functions of the actuarial value of assets, which recognize investment gains and losses, the positive or negative difference between the actual net investment return on market value and the assumed 8.00 percent investment return, over a period of five years, at the rate of 20 percent per year. Therefore, 60 percent of the investment losses in fiscal year 2003 and 80 percent of the investment gains in fiscal year 2004 are not yet reflected in the actuarial measurements. As these gains and losses are recognized over the next four valuations, the consulting actuary expects the negative margin to increase and the funded ratio to continue to decrease, in the absence of changes in the benefit and contribution structure of the Teachers' Fund for Retirement and in the absence of other experience gains or losses. The funded ratio would have been 76.4 percent, rather than 80.3 percent, if the market value of assets had been used rather than the actuarial value of assets. As of July 1, 2003, the funded ratio based on market value of assets was 69.5 percent.
Under Governmental Accounting Standards Board Statement No. 25, the plan must determine an annual required contribution. This must be sufficient to cover the normal cost and to amortize the unfunded actuarial accrued liability over a period not longer than 30 years. A 40-year period can be used through the July 1, 2005, actuarial valuation. The amortization may be determined as a level dollar amount or as a series of contributions that increase with assumed payroll increases. The board of trustees previously decided to designate the 20-year benchmark contribution rate, or the 7.75 percent statutory rate, if greater, as the annual required contribution for the Teachers' Fund for Retirement. As of July 1, 2003, the 7.75 percent rate was less than the 20-year benchmark rate. This is also true as of July 1, 2004, so the Teachers' Fund for Retirement will be required to report in its Comprehensive Annual Financial Report for the current fiscal year ending June 30, 2004, that actual contributions received were less than the annual required contribution. There are no other accounting consequences for the state or the school districts that sponsor Teachers' Fund for Retirement, since it is a "cost-sharing, multiple-employer" retirement system. The 2004 Comprehensive Annual Financial Report includes information showing that in fiscal year 2005, the contributions received will be 68 percent of the actuarial required contribution, 7.75 percent ÷ 11.34 percent.
The actuarial valuation reflects the benefit and contribution provisions set forth in state law. There were no changes made to these provisions since the previous actuarial valuation, although 22 employees of the Department of Public Instruction transferred from the Teachers' Fund for Retirement to the Public Employees Retirement System. Actuarial assumptions and methods are set by the board of trustees, based upon recommendations made by the plan's actuary. These assumptions were last changed in 2000 following an analysis of the plan experience for the preceding five years. The consulting actuary reported that the assumptions are internally consistent and are reasonable, based on the actuarial experience of the Teachers' Fund for Retirement. The results of the actuarial valuation are dependent on the actuarial assumptions used. Actual results can and almost certainly will differ, as actual experience deviates from the assumptions. Even seemingly minor changes in the assumptions can materially change the liabilities, calculated contribution rates, and funding. The actuarial calculations are intended to provide information for rational decisionmaking.
The fund had 16,720 members on July 1, 2004. Of this total, 9,826 were active members, 5,373 were retirees and beneficiaries, 1,346 were inactive vested members, and 175 were inactive nonvested members. The total payroll was $376.5 million. The average salary was $38,321, the average age was 44.9 years, and the average service was 14.7 years.
The assets at market value were $1,374.7 million with an actuarial value of $1,445.6 million. The return on the market value of assets was 18.9 percent for the year ending June 30, 2004. This compares to 2.1 percent for the fiscal year ending June 30, 2003. The return on the actuarial value of assets was 1.9 percent for the year ending June 30, 2004. This compares to .6 percent for the fiscal year ending June 30, 2003. The ratio, actuarial value to market value, was 105.2 percent and the external cashflow was -1.5 percent. The consulting actuary reported that the normal cost percentage is 10.29 percent, the unfunded actuarial accrued liability increased from $251.9 million to $354.8 million and the funded ratio, actuarial assets divided by actuarial accrued liability, decreased from 85.1 to 80.3 percent. The funding period increased from 43.6 years to infinity. The benchmark contribution requirement based on the 20-year funding rate is 11.34 percent and thus the available margin is -3.59 percent. The total losses were $107.5 million, of which $87.8 million was due to asset experience and $19.7 million was due to liability experience.
The following is a summary of the proposals affecting the State Investment Board and the Teachers' Fund for Retirement over which the committee took jurisdiction and the committee's action on the proposals:
Bill No. 50
Sponsor: Board of TrusteesProposal: Revises the definition of salary for purposes of TFFR to incorporate changes in the federal Internal Revenue Code made through August 1, 2005; revises minimum distribution requirements for purposes of TFFR to incorporate changes in the federal Internal Revenue Code made through August 1, 2005; revises benefit limitations for purposes of TFFR to incorporate changes in the federal Internal Revenue Code made through August 1, 2005; provides that retired members who return to teaching are required to pay the required contributions on all salary unless the employer has elected to pick up all or a portion of its employees' contributions, in which case the employer and employee are required to pay the employee contribution based on the pickup methodology used by the employer; provides that a retired member who returns to teaching under the annual hour limit is not entitled to earn any additional service credit during the period of reemployment and is not entitled to receive a refund of any additional contributions paid and that retirement benefits may not be adjusted to reflect changes in the retired member's age or final average salary at the end of the period of reemployment; provides that the form of payment elected by the retired member remains effective during and after the period of reemployment and that additional benefits normally available to active members, such as disability benefits, are not available to reemployed retired members; provides that members who return to active service in a critical shortage area or discipline are required to pay the required contributions on all salary received by the retired member unless the employer has elected to pick up all or a portion of its employees' contributions, in which case the employer and employee are required to pay the employee contribution based on the pickup methodology used by the employer and that the employer must pay the required employer contributions in a like manner; provides that a retired member who returns to active service in a critical shortage area or discipline is not entitled to receive a refund of any additional contributions paid; revises the withdrawal provisions applicable to TFFR to incorporate changes in the federal Internal Revenue Code made through August 1, 2005; provides that the TFFR Board administer the plan in compliance with the federal Internal Revenue Code and regulations adopted pursuant to the code as they apply to governmental plans.
The committee amended the bill at the request of the board of trustees to remove the provisions requiring employer and employee contributions when retirees return to covered employment.
Actuarial Analysis: The consulting actuary reported that there is no measurable actuarial cost to the bill.
Committee Report: Favorable recommendation.
Bill No. 51
Sponsor: State Investment BoardProposal: Requires the executive director of the Retirement and Investment Office to conduct an employee criminal history record investigation for any individual first employed by the Retirement and Investment Office after July 31, 2005, who has unescorted physical access to the office or any security-sensitive area of the office as designated by the executive director.
Actuarial Analysis: The State Investment Board reported that the proposal would have no actuarial impact to any of the funds invested by the State Investment Board nor would it cause any significant cost to be incurred by the Retirement and Investment Office.
Committee Report: No recommendation as this proposal was withdrawn at the request of the sponsor.
Bill No. 165
Sponsor: Representative Bette B. Grande
Proposal: Allows teachers who teach a summer school course or program on a short-term contract basis to elect not to participate in TFFR.
Actuarial Analysis: The consulting actuary reported the actuarial cost of the provisions to be negligible.
Committee Report: No recommendation.
Public Employees Retirement System (PERS)
The Public Employees Retirement System is governed by NDCC Chapter 54-52 and includes the Public Employees Retirement System main system, judges' retirement system, National Guard retirement system, law enforcement with prior main service, law enforcement without prior main service, and an optional defined contribution retirement plan; Highway Patrolmen's retirement system; Job Service North Dakota retirement plan; and retiree health benefits fund. The plan is supervised by the Retirement Board and covers most employees of the state, district health units, and the Garrison Diversion Conservancy District. Elected officials and officials first appointed before July 1, 1971, can choose to be members. Officials appointed to office after that date are required to be members. Most Supreme Court and district court judges are members of the plan but receive benefits different from other members. A county, city, or school district may choose to participate on completion of an employee referendum and on execution of an agreement with the Retirement Board. Political subdivision employees are not eligible to participate in the defined contribution retirement plan. The Retirement Board also administers the uniform group insurance, life insurance, flexible benefits, deferred compensation, and Chapter 27-17 judges' retirement programs. The Chapter 27-17 judges' retirement program is being phased out of existence except to the extent its continuance is necessary to make payments to retired judges and their surviving spouses and future payments to judges serving on July 1, 1973, and their surviving spouses as required by law.
Members of the main system and judges are eligible for a normal service retirement benefit at age 65 or when age plus years of service is equal to at least 85--the Rule of 85. Members of the National Guard retirement system are eligible for a normal service retirement at age 55 and three consecutive years of service. Members of the law enforcement retirement system are eligible for a normal service retirement at age 55 and three consecutive years of service or when age plus service is equal to at least 85--the Rule of 85. The retirement benefit for a member of the main system is 2.00 percent of final average salary multiplied by years of service. The retirement benefit for a member of the judges' retirement system is 3.50 percent of final average salary for the first 10 years of service, 2.80 percent for each of the next 10 years of service, and 1.25 percent for service in excess of 20 years. The retirement benefit for members of the National Guard and law enforcement retirement systems is 2.00 percent of final average salary multiplied by years of service. A member of the main system is eligible for an early service retirement at age 55 with three years of service, a member of the judges' retirement system is eligible for early service retirement at age 55 with five years of service, and members of the National Guard and law enforcement retirement systems are eligible for early service retirement at age 50 with three years of service. The retirement benefit for a member who elects early service retirement is the normal service retirement; however, a benefit that begins before age 65, or Rule of 85, if earlier, is reduced by one-half of 1 percent for each month before the earlier of age 65 or the age at which the Rule of 85 is met. The early service retirement benefit for a member of the judges' retirement system is the normal service retirement; however, a benefit that begins before age 65, or Rule of 85, if earlier, is reduced by one-half of 1 percent for each month before age 65. The early service retirement benefit for a member of the National Guard retirement system is the normal service retirement benefit; however, a benefit that begins before age 55 is reduced by one-half of 1 percent for each month before age 55. The early service retirement benefit for a member of the law enforcement retirement system is the normal service retirement benefit; however, a benefit that begins before age 55, or Rule of 85, if earlier, is reduced by one-half of 1 percent for each month before age 55.
A member of the main system, National Guard, or law enforcement retirement system with six months of service who is unable to engage in any substantial gainful activity is eligible for a disability benefit of 25 percent of the member's final average salary at disability with a minimum of $100 per month. A member of the judges' retirement system with six months of service who is unable to engage in any substantial gainful activity is eligible for a disability benefit of 70 percent of the member's final average salary at disability minus Social Security and workers' compensation benefits paid. A member of the main system, National Guard, or law enforcement retirement system is eligible for deferred vested retirement at three years of service, and a member of the judges' retirement system is eligible for deferred vested retirement at five years of service.
For a member of the main system or judges' retirement system, the deferred vested retirement benefit is the normal service retirement benefit payable at age 65 or the Rule of 85, if earlier. Reduced early retirement benefits may be elected upon attainment of age 55. The deferred vested retirement benefit for a member of the National Guard retirement system is the normal service retirement benefit payable at age 55. Reduced early retirement benefits may be elected upon attainment of age 50. The deferred vested retirement benefit for a member of the law enforcement retirement system is the normal service retirement benefit payable at age 55 or the Rule of 85, if earlier. Reduced early retirement benefits may be elected upon attainment of age 50.
The surviving spouse of a deceased member of the main system, the National Guard, or law enforcement retirement system who had accumulated at least three years of service before normal retirement is entitled to elect one of four forms of preretirement death benefits. The preretirement death benefit may be a lump sum payment of the member's accumulated contribution with interest; the member's accrued benefit payable for 60 months to the surviving spouse; 50 percent of the member's accrued benefit, not reduced on account of age, payable for the surviving spouse's lifetime; or continuation portion of a 100 percent joint and survivor annuity, only available if the participant was eligible for normal retirement. The surviving spouse of a deceased member of the judges' retirement system who had accumulated at least five years of service is entitled to elect one of two forms of preretirement death benefits. The preretirement death benefit may be a lump sum payment of the member's accumulated contribution or 100 percent of the member's accrued benefit, not reduced on account of age, payable for the spouse's lifetime.
In lieu of a monthly retirement benefit, terminating nonvested members and terminated vested members may elect to receive accumulated member contributions with interest. Member contributions through June 30, 1981, accumulate with interest at 5 percent, member contributions from July 1, 1981, through June 30, 1986, accumulate with interest at 6 percent, and member contributions after June 30, 1986, accumulate with interest at .5 percent less than the actuarial interest rate assumption. The standard form of payment is a monthly benefit for life with a refund to the beneficiary at death of the remaining balance, if any, of accumulated member contributions. Optional forms of payment are a 50 percent joint and survivor annuity; 100 percent joint and survivor annuity, with "pop-up" feature; 5-year certain and life annuity; 10-year certain and life annuity; or a level Social Security income annuity. The standard form of payment for a member of the judges' retirement system is a monthly benefit for life, with 50 percent payable to an eligible survivor. In addition to the optional forms of payment available to the members of the main system, National Guard, and law enforcement retirement systems, a member of the judges' retirement system may elect to receive a life annuity. Final average salary is the average of the highest salary received by the member for any 36 consecutive months employed during the last 120 months of employment.
Except for the employer contribution rate for the National Guard and the law enforcement retirement systems, contribution rates are specified by statute. The contribution rate for a member of the main system is 4 percent, and the employer contribution is 4.12 percent. The employee contribution for the judges' retirement system is 5 percent, and the employer contribution is 14.52 percent. The contribution rate for a member of the National Guard retirement system is 4 percent, and the employer contribution is 8.33 percent. The contribution rate for a member of the law enforcement retirement system with prior main service is 4 percent, and the employer contribution is 8.31 percent. The contribution rate for a member of the law enforcement retirement system without prior main service is 4 percent, and the employer contribution is 6.43 percent. A part-time employee in the main system contributes 8.12 percent with no employer contribution. Effective January 1, 2000, a member's account balance includes vested employer contributions equal to the member's contributions to the deferred compensation program under NDCC Chapter 54-52.2. The vested employer contributions may not exceed $25 or 1 percent of the member's salary, whichever is greater, for months 1 through 12 of service credit; $25 or 2 percent of the member's monthly salary, whichever is greater, for months 13 through 24 of service credit; $25 or 3 percent of the member's monthly salary, whichever is greater, for months 25 through 36 of service credit; and $25 or 4 percent of the member's monthly salary, whichever is greater, for service exceeding 36 months. The vested employer contributions may not exceed 4 percent of the member's monthly salary and are credited monthly to the member's account balance. The fund may accept rollovers from other qualified plans under rules adopted by the Retirement Board for the purchase of additional service credit. For many employees, no deduction is made from pay for the employee's share. This is a result of 1983 legislation that provided for a phased-in "pickup" of the employee contribution in lieu of a salary increase at that time.
In 1989 the Legislative Assembly established a retiree health insurance credit fund account with the Bank of North Dakota with the purpose of prefunding hospital benefits coverage and medical benefits coverage under the uniform group insurance program for retired members of the Public Employees Retirement System and the Highway Patrolmen's retirement system receiving retirement benefits or surviving spouses of those retired members who have accumulated at least 10 years of service. The employer contribution under the Public Employees Retirement System was reduced from 5.12 to 4.12 percent, under the judges' retirement system from 15.52 to 14.52 percent, and under the Highway Patrolmen's retirement system from 17.07 to 16.07 percent or 1 percent of the monthly salaries or wages of participating members, including participating Supreme Court and district court judges, and the money was redirected to the retiree health insurance credit fund.
The latest available report of the consulting actuary is dated July 1, 2004. According to that report, the combined net assets of the Public Employees Retirement System and Highway Patrolmen's retirement system were $1,309,271,534 at market value. This compares to $1,129,905,422 on July 1, 2003. The combined actuarial value of these funds was $1,236,490,403. Of the combined valuation assets, $1,172,258,036 is allocated to the Public Employees Retirement System main system; $20,765,171 to the judges' retirement system; $1,383,824 to the National Guard retirement system; $2,114,663 to the law enforcement retirement system, with prior main service; $11,388 to the law enforcement retirement system, without prior main service; and $39,957,321 to the Highway Patrolmen's retirement fund. The return on the market value of assets for 2003-04 for the Public Employees Retirement System fund was 16.64 percent, compared to 5.20 percent for the preceding year. The return on the actuarial value of the assets for 2003-04 for the Public Employees Retirement System fund was 3.16 percent, compared to the investment return assumption of 8 percent. As a result, the fund experienced an investment loss on an actuarial value basis of approximately $55 million. The ratio of the actuarial assets to the market value of assets for the fund is 94.4 percent. On July 1, 2003, this ratio was 106.7 percent.
The actuarial value of assets is determined by spreading market appreciation and depreciation over five years beginning with the year of occurrence. Interest and dividends are recognized immediately. This procedure results in recognition of all changes in market value over five years. This procedure is applied to the combined assets of the Public Employees Retirement System and the Highway Patrolmen's retirement system income funds to determine the combined actuarial value of the systems. The amount of actuarial value of the write-up or write-down recognizes changing market values and is considered part of the investment income for the year. This procedure treats realized and unrealized capital gains or losses equally. In other words, the sale of a security, either at a gain or loss, has no immediate effect on the value of assets for actuarial purposes. If the market value has gone up, the increase is gradually recognized in the value of the fund's assets and does not have to be sold for the appreciation to be realized. This automatic recognition of market value appreciation or depreciation eliminates any need for making investment decisions for the explicit purpose of meeting the investment return assumption. The investment returns for the last 10 years for the combined funds are summarized in the following table:
| Plan Year Ending June 30 | Market Value | Actuarial Value |
| 1995 | 14.24% | 8.98% |
| 1996 | 15.78% | 11.65% |
| 1997 | 19.90% | 13.14% |
| 1998 | 15.65% | 14.02% |
| 1999 | 10.88% | 14.73% |
| 2000 | 9.43% | 13.71% |
| 2001 | (4.47)% | 9.36% |
| 2002 | (6.94)% | 3.91% |
| 2003 | 5.19% | 2.18% |
| 2004 | 16.65% | 3.16% |
The fund had 17,636 active members on July 1, 2004. Of this total, 17,522 were active members of the main system; 46 were active members of the judges' retirement system; 17 were active members of the National Guard retirement system; 39 were active members of the law enforcement retirement system, with prior main service; and 12 were active members of the law enforcement without prior main service system. The total payroll was $501,002,180 and the average salary was $28,408. There were 986 inactive members as of July 1, 2004, with vested rights to deferred retirement benefits. The average deferred monthly benefit for this group was $404. There were also 63 members on leave of absence from the main system. For these groups, the liability is carried for their deferred retirement benefits.
The consulting actuary reported that the present rate of contributions is not sufficient to meet the actuarially determined requirement for 2004-05, based upon the actuarial assumptions and financing objectives approved by the Retirement Board. The consulting actuary recommended that the Retirement Board continue to review these results and projected future performance to determine appropriate measures to mitigate the difference between the actuarial and statutory contribution rates. There were two new groups included in the Public Employees Retirement System during the 2003-04 year. They were law enforcement with prior main service and law enforcement without prior main service. The actuarial valuation reflected an asset transfer from the main system to the law enforcement with prior main service of $2,176,156 as of June 30, 2004. The transferred amount was equal to the main system actuarial accrued liability for the 40 participants who transferred from the main system to the law enforcement with prior main service system.
The contribution requirements consist of the normal cost and an administrative expense allowance, plus the cost of amortizing the unfunded liability over a scheduled period of years. The Retirement Board has adopted an open amortization schedule of 20 years. The calculated employer contribution requirement is 6.30 percent of payroll. The statutory contribution rate is 4.12 percent of payroll. Thus, the statutory contributions are less than the actuarial contribution requirement by 2.18 percent of payroll, and the margin available in the main system is -2.18 percent of payroll or 4.12% - 6.30%.
The report for the judges' retirement system indicated that an employer contribution of 12.44 percent of payroll is required to fund the system. The statutory employer contribution rate is 14.52 percent of payroll. Thus, statutory contributions exceed the actuarial contribution requirement by 2.08 percent of payroll. This results in an actuarial margin of 2.08 percent or 14.52% - 12.44%.
The report for the National Guard retirement system indicated that an employer contribution of 3.25 percent of payroll is required to fund the system. The contribution rate set by the Retirement Board is 8.33 percent of salary. Thus, statutory contributions exceed the actuarial contribution requirement by 5.08 percent of payroll. This results in an actuarial margin of 5.08 percent or 8.33% - 3.25%.
The report for the law enforcement with prior main service system indicated that an employer contribution of 7.88 percent of payroll is required to fund the system. The employer contribution rate is 8.31 percent of payroll. Thus, contributions exceed the actuarial contribution requirement by .43 percent of payroll. This results in an actuarial margin of .43 percent or 8.31% - 7.88%. The report for the law enforcement without prior main service system indicated that an employer contribution of 8.35 percent of payroll is required to fund the system. The employer contribution rate is 6.43 percent of payroll. Thus, contributions are less than the actuarial contribution requirement by 1.92 percent of payroll and the margin available in this system is -1.92 percent payroll or 6.43% - 8.35% .
A member of the Highway Patrolmen's retirement system is eligible for a normal service retirement at age 55 with at least 10 years of eligible employment or with age plus service equal to at least 80--the Rule of 80. The normal service retirement benefit is 3.6 percent of final average salary for the first 25 years of service and 1.75 percent for service in excess of 25 years. A member is eligible for an early service retirement at age 50 with 10 years of eligible employment. The early service retirement benefit is the normal service retirement benefit; however, a benefit that begins before age 55 or the Rule of 80, if earlier, is reduced by one-half of 1 percent for each month before age 55. A member is eligible for a disability benefit at six months of service and an inability to engage in substantial gainful activity. The disability benefit is 70 percent of the member's final covered salary at disability less workers' compensation, with a minimum of $100 per month. A member is eligible for deferred retirement benefits upon 10 years of eligible employment. The deferred retirement benefit is the normal service retirement benefit payable at age 55 or the Rule of 80, if earlier. Vested benefits are indexed at a rate set by the Retirement Board based upon the increase in final average salary from the date of termination to the benefit commencement date. Reduced early retirement benefits may be elected upon attainment of age 50.
Preretirement death benefits are available to a surviving spouse of a deceased member of the Highway Patrolmen's retirement system who had accumulated at least 10 years of service in one of the three forms--a lump sum payment of accumulated contributions with interest; monthly payment of the member's accrued benefit for 60 months; or 50 percent of the member's accrued benefit, not reduced on account of age, for the surviving spouse's lifetime. If the deceased member had accumulated less than 10 years of service or if there is no surviving spouse, then a death benefit equal to the member's accumulated contributions with interest is paid in a lump sum.
The normal form of benefit for the Highway Patrolmen's retirement system is a monthly benefit for life with 50 percent of the benefit continuing for the life of the surviving spouse, if any.
Optional forms of payment are a 100 percent joint and survivor annuity, 5-year certain and life annuity, and 10-year certain and life annuity. Final average salary is the highest salary received by the member for any 36 consecutive months employed during the last 120 months of employment. The member's contribution is 10.30 percent of monthly salary. The state contributes 16.70 percent of monthly salary for each participating member. A member's contributions earn interest at an annual rate of 7.50 percent.
The latest available report of the consulting actuary for the Highway Patrolmen's retirement fund is dated July 1, 2004. According to that report, the Highway Patrolmen's retirement fund had net assets with an actuarial value of $39,957,321 and a market value of $42,309,251. Total active membership was 132, and an employer contribution of 19.03 percent of payroll was necessary to meet the normal cost of the Highway Patrolmen's retirement fund. The statutory contribution rate is 16.70 percent of payroll. Thus, the actuarial margin is -2.33 percent of payroll or 16.70% - 19.03%.
The latest available report of the consulting actuary for the retiree health insurance credit fund is dated July 1, 2004. According to that report, the fund had net assets with a market value of $30,163,400 and an actuarial value of $28,949,719. The rate of return on the market value basis was 15.19 percent for the year ending June 30, 2004. On an actuarial basis, the rate of return was 2.00 percent for that year. Total active membership was 18,017 (7,173 males and 10,844 females). The statutory contribution rate is 1.00 percent of payroll. An employer contribution of .99 percent of payroll is required to fund the plan. This results in an actuarial margin of .01 percent of payroll. Members are required to participate in the uniform group insurance program and the current benefit amount is $4.50 times years of service.
The consulting actuary also reviewed the retirement plan for employees of Job Service North Dakota. The Public Employees Retirement System Retirement Board assumed administration of this plan from Job Service North Dakota pursuant to legislation enacted in 2003. This is a closed retirement plan for employees of Job Service North Dakota. As of July 1, 2004, the plan had 60 fully vested active employees with total annual salaries of $2,459,508. There were five inactive employees as of July 1, 2004, with vested rights. There were 100 pensioners and beneficiaries as of July 1, 2004, and 113 pensioners and beneficiaries receiving annuities from the Travelers Plan as of July 1, 2004. Thus, total plan participants as of July 1, 2004, was 278. The scheduled contribution at the end of the year ending June 30, 2004, was zero and thus the normal cost was zero. Effective July 1, 1999, the scheduled contribution will be zero as long as the plan's actuarial value of assets exceeds the actuarial present value of projected benefits. If, in the future, the liabilities of the plan exceed its assets, a "scheduled contribution" will be determined based on the funding policy adopted by the employer. The July 1, 2004, actuarial valuation reported the actuarial value of assets at $67,505,163 and the actuarial present value of projected benefits at $61,845,450. The total market value of assets was $73,302,185.
The following is a summary of the proposals affecting the Public Employees Retirement System over which the committee took jurisdiction and the committee's action on each proposal:
Bill No. 52
Sponsor: Retirement Board
Proposal: Revises the purchase of service credit provisions applicable to the Highway Patrolmen's retirement system for qualified military service; provides that permanent and total disability for purposes of the Highway Patrolmen's retirement system is based solely on a contributor's inability to perform the contributor's duties arising out of physical or mental impairment; for the Highway Patrolmen's retirement system provides that the joint and survivor 100 percent retirement payment option is the actuarial equivalent joint and survivor 100 percent option, the life with 10-year certain retirement benefit payment option is the actuarial equivalent life with 10-year certain option, adds an actuarially equivalent life with 20-year certain option, and eliminates the life with 5-year certain option; provides an actuarially equivalent partial lump sum distribution option with a 12-month maximum lump sum distribution for the Highway Patrolmen's retirement system; provides that the Retirement Board administer the Highway Patrolmen's retirement system plan in compliance with provisions of the federal Internal Revenue Code in effect through August 1, 2005; provides that information relating to beneficiaries under the Highway Patrolmen's retirement system may be disclosed to other beneficiaries of the same member; provides that information and records under the Highway Patrolmen's retirement system may be disclosed to the general public, but only after the board has been unable to locate the member for a period in excess of two years, and limited to the member's name and the fact that the board has been unable to locate the member; changes the definition of peace officer for purposes of PERS to require persons employed after August 1, 2005, be employed 32 hours or more per week and at least 20 weeks each year of employment; provides that participating members of the law enforcement retirement plan who begin employment after August 1, 2005, are ineligible to participate concurrently in any other retirement plan administered by PERS; requires the executive director to conduct an employee criminal history record investigation for any individual first employed by PERS after July 1, 2005, who has unescorted physical access to the office or any security-sensitive area of the office as designated by the executive director; provides that the life with 10-year certain option is the actuarially equivalent life with 10-year certain option, adds an actuarially equivalent life with 20-year certain option, and eliminates the life with 5-year certain option distribution option; provides an actuarially equivalent joint and survivor level Social Security option, with 50 or 100 percent options, which is available only to members who retire before attaining the age at which they may begin to receive unreduced Social Security benefits; adds an actuarially equivalent partial lump sum distribution option with a 12-month maximum lump sum distribution; revises the purchase of service credit provisions applicable to PERS for qualified military service; provides that the Retirement Board administer the plan in compliance with the federal Internal Revenue Code in effect through August 1, 2005; revises the definition of eligible employee for purposes of the defined contribution plan to provide that if a participating member loses permanent employee status and becomes a temporary employee, the member may still participate in the defined contribution retirement plan; revises the military service provisions applicable to the defined contribution retirement plan; provides that a surviving spouse beneficiary may elect one or a combination of several of the methods of distribution currently provided for the defined contribution retirement plan but that a beneficiary who is not the surviving spouse may only choose a lump sum distribution of the accumulated balance; and repeals provisions relating to prior service credit under the Public Employees Retirement System
The committee amended the bill at the request of the PERS Board to remove the actuarially equivalent life with 20-year certain option.
The committee amended the bill at the request of the PERS Board to remove the expanded definition of disability under the Highway Patrolmen's retirement system and delete the employee background check provisions.
Actuarial Analysis: The consulting actuary reported that the proposal, as amended, will have no actuarial impact. The reported actuarial cost impact of the proposal, as submitted, on the Highway Patrolmen's retirement system is summarized in the following table:
| Valuation Results | Retirement Bill No. 52.02* | |
| Actuarial accrued liability | $44,468,717 | $44,524,994 |
| Normal cost | $1,251,027 | $1,267,787 |
| Required contribution | $1,026,385 | $1,047,072 |
| Required contribution increase | - | $20,687 |
| As a percentage of payroll | - | .38% |
| Payroll | $5,393,150 | $5,393,150 |
| *Assumes an increase in the number of disability retirements. | ||
This bill would have no or minimal impact on the Public Employees Retirement System and the retiree health benefits fund.
Committee Report: Favorable recommendation.
Bill No. 53
Sponsor: Retirement Board
Proposal: Defines final average salary for purposes of the Highway Patrolmen's retirement system and the PERS main system for contributors who retire on or after July 1, 2009, as the average of the highest salary received by the contributor for any 36 months employed during the last 180 months of employment; defines final average salary, for an employee employed on August 1, 2005, as the average of the highest salary received by the contributor for any 36 months employed during the last 120 months of employment multiplied by 1.03; provides that if the Retirement Board determines that the retirement fund has obtained a total return on investment of 11.2 percent or higher for the fiscal year ending June 30, 2005, or June 30, 2006, and that the retirement fund has the necessary margin to pay for the benefit, the board is required to authorize a one-time payment to each retiree receiving benefit payments of 50 percent of the retiree's then current monthly benefit payment.
The committee amended the bill at the request of the sponsor to remove the provisions of the bill that have an actuarial cost.
Actuarial Analysis: The proposal, as amended, has no actuarial cost impact. The actuarial consultant reported that a total annualized additional return on the market value of assets of approximately .85 percent from the trust fund would offset the cost for the one-time postretirement payment. This payment is contingent on an 11.20 percent annualized return on investment.
Actuarial Cost Analysis: The bill's impact on the July 1, 2004 actuarial valuation results for the affected retirement systems is summarized in the following tables:
Highway Patrolmen's Retirement System
| Valuation Results | Three Percent Final Average Salary Increase | |
| Actuarial accrued liability | $44,468,717 | $45,092,327 |
| Normal cost | $1,251,027 | $1,287,436 |
| Required contribution | $1,026,385 | $1,106,315 |
| Required contribution increase | - | $79,930 |
| As a percentage of payroll | - | 1.48% |
| Payroll | $5,393,150 | $5,393,150 |
For the one-time postretirement payment equal to 50 percent of the member's current monthly benefit payment, the increase in the actuarial accrued liability would be $97,078. A total annualized additional return on the market value of assets of approximately .29 percent from the trust fund would offset the cost for the one-time postretirement payment. This payment is contingent on an 11.20 percent annualized return on investments.
Main, Judges, and National Guard - One-Time Postretirement Payment
For the one-time postretirement payment equal to 50 percent of the member's current monthly benefit payment, the increase in the actuarial accrued liability would be $2,063,273. A total annualized additional return on the market value of assets of approximately .85 percent from the trust fund would offset the cost for the one-time postretirement payment. This payment is contingent on an 11.20 percent annualized return on investments.
Public Employees Retirement System - Main System
| Valuation Results | Three Percent Final Average Salary Increase | |
| Actuarial accrued liability | $1,250,849,240 | $1,274,301,827 |
| Normal cost | $44,743,189 | $45,862,040 |
| Required contribution | $31,157,298 | $33,912,912 |
| Required contribution increase | - | $2,755,614 |
| As a percentage of payroll | - | .56% |
| Payroll | $494,519,798 | $494,519,798 |
Public Employees Retirement System - Judges
| Valuation Results | Three Percent Final Average Salary Increase | |
| Actuarial accrued liability | $18,420,517 | $18,793,908 |
| Normal cost | $935,392 | $963,806 |
| Required contribution | $548,288 | $604,824 |
| Required contribution increase | - | $55,536 |
| As a percentage of payroll | - | 1.26% |
| Payroll | $4,415,921 | $4,415,921 |
Public Employees Retirement System - National Guard
| Valuation Results | Three Percent Final Average Salary Increase | |
| Actuarial accrued liability | $1,150,323 | $1,174,966 |
| Normal cost | $56,058 | $57,590 |
| Required contribution | $18,502 | $21,754 |
| Required contribution increase | - | $3,252 |
| As a percentage of payroll | - | 0.57% |
| Payroll | $569,829 | $569,829 |
Public Employees Retirement System - Law Enforcement With Prior Main Service
| Valuation Results | Three Percent Final Average Salary Increase | |
| Actuarial accrued liability | $2,427,097 | $2,498,956 |
| Normal cost | $223,964 | $117,100 |
| Required contribution | $91,822 | $99,973 |
| Required contribution increase | - | $8,151 |
| As a percentage of payroll | - | 0.79% |
| Payroll | $1,165,355 | $1,165,355 |
Public Employees Retirement System - Law Enforcement Without Prior Main Service
| Valuation Results | Three Percent Final Average Salary Increase | |
| Actuarial accrued liability | $10,430 | $10,671 |
| Normal cost | $40,185 | $41,336 |
| Required contribution | $27,667 | $28,835 |
| Required contribution increase | - | $1,168 |
| As a percentage of payroll | - | 0.35% |
| Payroll | $331,277 | $331,277 |
Committee Report: Favorable recommendation.
Bill No. 201
Sponsor: Senator David P. O'Connell
Proposal: Provides that an employee who is eligible for normal retirement who accepts a retirement benefit under the defined benefit plan and who subsequently becomes employed with a participating employer may elect to permanently waive future participation in the retirement plan and maintain that employee's retirement status.
Actuarial Analysis: Pending.
Committee Report: No recommendation because the committee received the proposal at its last committee meeting and requested the Public Employees Retirement System Retirement Board to obtain a technical review and actuarial analysis of the proposal.
Uniform Group Insurance Program
Bill No. 11
Sponsor: Senator Tim Mathern
Proposal: Requires the Retirement Board to contract with one or more nondomestic pharmacy benefits managers to facilitate the purchase of eligible Canadian prescription drugs by eligible employees and persons receiving retiree health benefits.
Actuarial Analysis: The consulting actuary reported that Public Employees Retirement System members may obtain prescription drugs from Canada or other foreign suppliers although there is no explicit design incentive to do so. Subject to its technical comments, if the Public Employees Retirement System plan waived copayments or coinsurance to encourage its members to use Canadian suppliers the plan could likely experience drug cost-savings. The proposed legislation would allow the Retirement Board to provide financial incentives for plan participants to utilize Canadian pharmacies.
The consulting actuary reported that evaluating the true financial impact of this proposed bill cannot be done without extensive actuarial modeling. Even with modeling, predicting individual decisions regarding whether to purchase prescription drugs available in Canada from a domestic or nondomestic pharmacy benefits manager is very difficult. A number of variables, including benefit design, drug cost differentials between the United States and Canada, as well as an individual's personal beliefs about potentially violating federal law, would have to be quantified. Benefits literature appears to conclude that many, but not all, prescription drugs can be obtained less expensively in Canada. However, the overall prediction of savings to the Retirement Board and its plan participants would depend on accurate measurement of the variables mentioned above. The consulting actuary did note that Minnesota provides a similar incentive in its public employee health insurance plan.
The consulting actuary cautioned that it is not qualified to render legal advice. However, it reported that it is the understanding of its Corporate Compliance Department that drug reimportation is not legal under federal law. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 requires the Secretary of Health and Human Services to conduct a comprehensive study and prepare a report to Congress on whether and how importation could be accomplished in a manner that ensures safety. This report is not expected to be completed until later this year. Until such time as this report is presented and accepted by Congress, it is the position of the consulting actuary that drug importation is not allowed by federal law. Consequently, the consulting actuary recommended that the Legislative Assembly obtain a legal opinion on the proposed bill concerning this issue. The consulting actuary also noted that the Public Employees Retirement System is a fully insured plan with Blue Cross Blue Shield of North Dakota. Due to the above legal concerns, Blue Cross Blue Shield of North Dakota or other vendors may not be willing to incorporate this feature under their plan designs. Therefore, the consulting actuary reported that considerations should be given to adding wording that this provision is subject to the Public Employees Retirement System being able to negotiate this feature with its carrier. The other option would be for the state to "hold harmless" the carrier, which would require additional authorization to the proposed legislation.
Committee Report: Unfavorable recommendation.
Bill No. 22
Sponsor: Senator Tim Mathern
Proposal: Allows any person who is without health insurance coverage to participate in the uniform group insurance program subject to minimum requirements established by the Retirement Board.
Actuarial Analysis: The consulting actuary reported that with minimum requirements as established by the Retirement Board and a minimum participation period of 60 months for private sector employer groups, the proposed bill would not have a significant impact upon the Public Employees Retirement System plan as long as the Retirement Board can use appropriate underwriting rules and premium adjustments to make sure that the introduction of these additional members would not increase the overall risk profile of the existing plan. The bill as written states that employers, employees, and uninsured individuals may participate in the uniform group insurance program "subject to minimum requirements established by the board." There is a question whether the Health Insurance Portability and Accountability Act allows the Public Employees Retirement System to underwrite new applicants to its plans in a manner to eliminate adverse selection. In particular, the Act's nondiscrimination rules severely restrict the use of medical underwriting and risk-adjusted premiums for health care coverage. The pertinent question identified by the consulting actuary is whether the Act prohibits the Retirement Board from using medical underwriting and risk-adjusted premiums when adding the new groups to the uniform group insurance program. The Public Employees Retirement System uniform group insurance program clearly meets the Act's definition of a "covered entity" as a health plan. Therefore, it is subject to the nondiscrimination requirements unless it qualifies for an exemption. A nonfederal governmental employer that provides self-funded group health plan coverage to its employees may elect to exempt its plan from the nondiscrimination requirements of the Act. However, applicability is very limited. It does not apply to either insured or self-funded plans of employers that are not governmental employers nor to insured plans of governmental employers. An election must be completed annually. However, the consulting actuary reported that it is likely that this exception may not apply if the Public Employees Retirement System allows private sector plans into its program as permitted by the proposed bill. As noted, the exception only applies to "governmental employers." As long as the Public Employees Retirement System continues to insure its health plans, it is the position of the consulting actuary that the plan must comply with the Act's nondiscrimination requirements. Consequently, the Retirement Board would not be able to "apply medical underwriting and risk-adjusted premiums" as stated in the proposed bill. Alternatively, if the board decides to self-fund and allow nongovernmental employees into the plan as allowed by the proposed bill, the consulting actuary questioned whether the governmental exemption would then apply. To determine estimated fiscal impact of not being able to medically underwrite or risk-adjust, new applicants would require separate actuarial analysis. However, one indication of a potential additional cost to group health plans as the result of the Act's impact comes from the economic impact study done by the Department of Labor and the Department of Health and Human Services. These federal agencies estimated that the Act's nondiscrimination rules would add approximately "1 percent to total health plan expenditures."
Committee Report: Unfavorable recommendation.
Bill No. 43
Sponsor: Senator Rich Wardner
Proposal: Provides that for purposes of a provision allowing retirees who have accepted a retirement allowance from a political subdivision's retirement plan to elect to participate in the uniform group insurance program without meeting minimum requirements at age 65, when the employee's spouse reaches age 65, upon the receipt of a benefit, or when the spouse terminates employment, retirement allowance means a payment or payments to a participant of an employer-sponsored pension or retirement plan who terminated employment by retirement on or after achieving normal retirement age and who was vested in the employer plan at the time of retirement.
Actuarial Analysis: The consulting actuary reported that its primary concerns with the bill is that it would expend the number of people eligible to a group that is not as healthy, it would create different coverage provisions for state and political subdivision employees, and it could result in the loss of coverage for some employees, e.g., disability and early retirees.
Under the bill as proposed, the consulting actuary reported that the number of early retirees who become eligible for the plan likely would increase. The bill could result in retirees joining the plan at much lower ages. Average health costs of the program could be adversely affected. Because early retiree premium rates are blended with the actives, any increase in costs due to an influx of early retirees could ultimately impact the costs paid by the state to fund the uniform group insurance program.
The Retirement Board's own claim experience points out the added costs of early retirees who do not qualify for the retiree health credit. Of the 619 non-Medicare retirees who were members of the plan in 2003, 305, or 49 percent, had no retiree health credits. The average cost in 2003 for this group was 17 percent greater than the 314, or 51 percent, of the members who had a retiree health credit due to meeting current age and longevity standards. Although not a sample size sufficient to draw any definite conclusions, the consulting actuary reported that it does support the general belief that retirees who are eligible for a credit are better risks than those who are not. To the extent this group grows and the costs increase due to adverse selection, the proposal would have an impact on the active employer rates since the premium for this group is set by statute. Any costs to this group beyond the premium become a cost to the active group.
Using the Retirement Board's own experience in enrollment and applying Blue Cross Blue Shield of North Dakota's proposed renewal rates gives some indication of the potential additional cost to the plan as the result of the proposed bill. An additional 50 early retirees who did not qualify for retiree credit would add almost $57,000 per year in costs to the plan. One hundred new early retirees would add almost $114,000 in new costs per year. Ultimately, these additional costs would have to be absorbed by the active employee group.
In conclusion, the consulting actuary reported that it was concerned that the proposal would expand access to the uniform group insurance program to more pre-Medicare retirees which would be harmful to the overall financial health of the program. The consulting actuary reported that to protect the integrity of the program, it suggested that the Retirement Board continue to apply actuarially determined and consistent standards for retiree health insurance eligibility.
Committee Report: Unfavorable recommendation.
Bill No. 54
Sponsor: Retirement Board
Proposal: Allows the Retirement Board to receive money from third parties, including the federal government, pursuant to one or more federal programs and appropriates this money on a continuing basis for the board's use in paying benefits, premiums, or administrative expenses of the uniform group insurance program; allows the Retirement Board to negotiate the proposed bid price and specifications with any or all health insurance bidders; allows the Retirement Board to establish a plan of self-insurance for providing health insurance benefits coverage under a completely self-administered, self-insurance plan under the uniform group insurance program; provides that if the Retirement Board implements a self-administered, self-insurance program, the total amount of all premiums received for purposes of paying claims and administrative expenses is appropriated to the board on a continuing basis and that the board may employ whatever full-time equivalent staff is necessary to properly and efficiently implement and administer the program; allows the Retirement Board to develop a provider network by negotiating a contract with health care providers and associations.
Actuarial Analysis: The consulting actuary reported no adverse financial impact to the Public Employees Retirement System from any of the provisions in the bill. To the extent that the bill would create a more competitive environment for the Public Employees Retirement System's health plan business, it could result in lower costs. If increased competition reduced costs by one-half of 1 percent, the resulting savings to the system would be almost $1.2 million per year. It would give the Retirement Board more flexibility in the areas of contract negotiations, accepting outside funds, evaluating self-administration, and establishing its own health provider network. If given the legislative freedom to pursue these concepts, the Retirement Board could evaluate each on its own merit as to potential short- and long-term cost-savings that it would provide.
Committee Report: Favorable recommendation.
Bill No. 55
Sponsor: Retirement BoardProposal: Increases the employer contribution to the retiree health benefits fund from 1 percent of the monthly salaries and wages of all participating members to 1.45 percent and increases the retiree health benefits fund credit from $4.50 to $5.
Actuarial Analysis: The consulting actuary reported that the proposal would have a positive impact on the retiree health benefits fund of .30 percent. The bill's impact on the July 1, 2004, actuarial valuation results for the retiree health benefits fund is summarized in the following table:
| Valuation Results | Retirement Bill No. 55.02 | |
| Actuarial accrued liability | $74,589,006 | $82,876,673 |
| Normal cost (midyear) | $2,403,360 | $2,670,400 |
| Required contribution | $5,139,793 | $5,891,940 |
| Required contribution increase | - | $7,520,147 |
| As a percentage of payroll | - | 0.15% |
| Payroll | $518,516,285 | $518,516,285 |
| Statutory contribution rate | 1% | 1.45% |
| Contribution requirement rate | 0.99% | 1.14% |
| Margin | 0.01% | 0.31% |
Committee Report: Unfavorable recommendation.
Old-Age and Survivor Insurance System (OASIS)
Bill No. 56
Sponsor: Retirement Board
Proposal: Increases primary insurance benefits under the Old-Age and Survivor Insurance System fund from $906.62 to $933.28 on August 1, 2005, and $959.94 on August 1, 2006; appropriates $23,000 from the general fund to PERS to pay Old-Age and Survivor Insurance System benefits to remaining beneficiaries.
The committee amended the bill at the request of the PERS Board to reduce the appropriation from $23,000 to $19,000.
Actuarial Analysis: The consulting actuary reported that the bill would have an actuarial impact on the Old-Age and Survivor Insurance System plan. Based on three plan participants, and reflecting the pay as you go funding policy, the annual cost for each of the next two years is simply the total of the expected benefit increases, or $959.76 (3 participants x $26.66 benefit increases x 12 months). The appropriation contained in the bill is sufficient to fund the benefit increase.
Committee Report: Favorable recommendation.
ADDITIONAL COMMITTEE RESPONSIBILITIES
The Public Employees Retirement System Board reported that no action by the committee was required under NDCC Section 54-52.1-08.2 to approve terminology adopted by the Retirement Board to comply with federal requirements. The committee was not notified by any firefighters relief association pursuant to Section 18-11-15(5) that requires the Employee Benefits Programs Committee to be notified by a firefighters relief association if it implements an alternate schedule of monthly service pension benefits for members of the association. The committee was notified by the Public Employees Retirement System Board that the board had received a letter ruling from the Internal Revenue Service that the sections allowing a member to purchase service credit with pretax or aftertax money do not jeopardize the qualified status of the Highway Patrolmen's retirement system or the Public Employees Retirement System.
Pursuant to NDCC Section 54-06-31, the committee received periodic reports from the director of Human Resource Management Services on the implementation, progress, and bonuses provided by state agency programs to provide bonuses to recruit or retain employees in hard-to-fill positions. The director testified that under Section 54-06-31 state agencies may pay recruitment and retention bonuses only if the agency has a written policy in place identifying eligible positions or occupations and provisions for providing and receiving bonuses, the agency has filed a copy of the written policy with Human Resource Management Services, and the agency reports to Human Resource Management Services each bonus provided to an employee under the program. State agencies must fund bonus programs from within their salaries and wages budgets. Bonuses do not increase base salary and, therefore, do not require sustained funding. Recruitment bonuses include sign-on bonuses and referral bonuses. The director testified that recruitment bonuses are proving to be a successful tool in attracting qualified applicants in a very tight labor market, thus enhancing the state's recruitment efforts in hard-to-fill positions. The director testified that retention bonuses provide another tool for managers to retain highly skilled employees who are in high demand in the marketplace. The retention bonuses also help reduce turnover costs while conveying to employees recognition of their valuable skills and the work they perform for the state. The director reported that eight agencies have adopted policies for recruitment or retention bonus programs. These include the Bank of North Dakota, Department of Corrections and Rehabilitation, Highway Patrol, Department of Human Services, Information Technology Department, Department of Transportation, Job Service North Dakota, and the State Water Commission. The director reported that while Job Service North Dakota and the State Water Commission have adopted policies, neither has provided any recruitment or retention bonuses. The director reported that six agencies have identified critical and hard-to-fill positions and awarded 223 bonuses to employees since the authorization legislation was enacted.
PUBLIC EMPLOYEE HEALTH INSURANCE BENEFITS STUDY
Uniform Group Insurance Program
Health insurance benefits are offered to public employees under the provisions of a uniform group insurance program established by the Legislative Assembly in 1971 and codified as NDCC Chapter 54-52.1. In 1963 the Legislative Assembly had enacted Chapter 52-12, which authorized any department, board, or agency of the state to act on its own behalf or in conjunction with other agencies to enter a group hospitalization and medical care plan and group life insurance plan for state employees. The agencies were required to pay five dollars per month for each participating employee's insurance premium and employees were required to pay the balance of the insurance premium. An employee could elect to participate in a single plan or family plan. The 1971 legislation establishing the uniform group insurance program repealed Chapter 52-12.
North Dakota Century Code Section 54-52.1-02 provides that the purpose of the uniform group insurance program is to promote the economy and efficiency of employment in the state's service, reduce personnel turnover, and offer an incentive to high-grade men and women to enter and remain in the service of state employment. This section provides that the uniform group must be composed of eligible and retired employees and be formed to provide hospital benefits coverage, medical benefits coverage, and life insurance benefits coverage. Eligible employees include permanent employees who are employed by a governmental unit, including members of the Legislative Assembly; judges of the Supreme Court; paid members of state or political subdivision boards, commissions, or associations; full-time employees of political subdivisions; elected state officers; and disabled permanent employees who are receiving compensation from the North Dakota Workforce Safety and Insurance fund. A permanent employee is one whose services are not limited in duration, who is filling an approved and regularly funded position in a governmental unit, and who is employed at least 17.5 hours per week and at least five months each year or for those first employed after August 1, 2003, is employed at least 20 hours per week and at least 20 weeks each year of employment.
North Dakota Century Code Section 54-52.1-04 requires the Public Employees Retirement Board to receive bids for the provision of hospital benefits coverage, medical benefits coverage, life insurance benefits coverage for a specified term, and employee assistance program services, and to accept the bid of and contract with the carrier that in the judgment of the board best serves the interests of the state and its eligible employees. This section allows the board to utilize the services of consultants on a contract basis in order that the bids received may be uniformly compared and properly evaluated. In determining which bid, if any, will best serve the interests of eligible employees and the state, the board is required to give adequate consideration to the economy to be effected; the ease of administration; the adequacy of the coverages; the financial position of the carrier, with special emphasis as to its solvency; and the reputation of the carrier and any other information that is available tending to show past experience with the carrier in matters of claim settlement, underwriting, and services. Each uniform group insurance contract entered into by the board is required by Section 54-52.1-05 to include as many optional coverages as deemed feasible and advantageous by the board, a detailed statement of benefits offered, including maximum limitations and exclusions, and other provisions the board deems necessary or desirable.
North Dakota Century Code Section 54-52.1-03 provides that a retiree who has accepted a periodic distribution from the defined contribution plan pursuant to Section 54-52.6-13 who the board determines is eligible for participation in the uniform group insurance program or has accepted a retirement allowance from the Public Employees Retirement System, the Highway Patrolmen's retirement system, the Teachers' Insurance and Annuity Association of America - College Retirement Equities Fund (TIAA-CREF) for service credit earned while employed by North Dakota institutions of higher education, the retirement system established by Job Service North Dakota under Section 52-11-01, the judges' retirement system established under Chapter 27-17, or the Teachers' Fund for Retirement may elect to participate in the uniform group without meeting minimum requirements at age 65, when the member's spouse reaches age 65, upon the receipt of a benefit, or when the spouse terminates employment. If a retiree or surviving spouse does not elect to participate at the times specified in this section, the retiree or surviving spouse must meet the minimum requirements established by the board. The retiree or surviving spouse must pay directly to the board the premiums in effect for the coverage then being provided. A retiree who has met the initial eligibility requirements of this section to begin participation in the uniform group insurance program remains eligible as long as the retiree maintains the retiree's participation in the program by paying the required premium pursuant to rules adopted by the board.
Except for employees receiving retirement benefits or who are eligible to participate under applicable federal law, an employee may not continue as a member of the uniform group upon termination of employment. However, a member or former member of the Legislative Assembly or that person's surviving spouse may elect to continue membership in the uniform group within the applicable time limitation after either termination of eligible employment as a member of the Legislative Assembly or termination of other eligible employment or, for a surviving spouse, upon the death of the member or former member of the Legislative Assembly. The member or former member of the Legislative Assembly or that person's surviving spouse must pay the premiums in effect for the coverage provided directly to the Retirement Board.
North Dakota Century Code Section 54-52.1-06 requires each department, board, or agency to pay to the Retirement Board each month from its funds appropriated for payroll and salary amounts a state contribution in the amount as determined by the primary carrier of the group contract for the full single rate monthly premium for each of the eligible employees enrolled in the uniform group insurance program and the full rate monthly premium in an amount equal to that contributed under the alternate family contract, including major medical coverage, for hospital and medical benefits coverage for spouses and dependent children of its eligible employees enrolled in the uniform group insurance program. The board is then required to pay the necessary and proper premium amount for the uniform group insurance program to the proper carrier or carriers on a monthly basis. The combined health insurance premium for the 2003-05 biennium is $488.70 per month.
North Dakota Century Code Sections 54-52.1-03.1 and 54-52.1-03.4 govern participation by political subdivisions, employees of certain political subdivisions, and temporary employees in the uniform group insurance program. Section 54-52.1-03.1 provides that a political subdivision may extend the benefits of the uniform group insurance program to its permanent employees subject to minimum requirements established by the Retirement Board and a minimum period of participation of 60 months. If the political subdivision withdraws from participation in the uniform group insurance program before completing 60 months of participation, the political subdivision is required to make payment to the Retirement Board in an amount equal to any expenses incurred in the uniform group insurance program that exceed income received on behalf of the political subdivision employees as determined under rules adopted by the board. A retiree who has accepted a retirement allowance from a participating political subdivision's retirement plan may elect to participate in the uniform group insurance plan without meeting minimum requirements at age 65, when the employee's spouse reaches age 65, upon the receipt of a benefit, when the political subdivision joins the uniform group insurance plan if the retiree was a member of the former plan, or when the spouse terminates employment. If a retiree or surviving spouse does not elect to participate at the times specified, the retiree or surviving spouse must meet the minimum requirements established by the Retirement Board. Each retiree or surviving spouse is required to pay directly to the board the premiums in effect for the coverage then being provided. The board may require documentation that the retiree has accepted a retirement allowance from an eligible retirement plan other than the Public Employees Retirement System.
North Dakota Century Code Section 54-52.1-03.4 provides that an employee of a county, city, school district, district health unit, or park district that is not participating in the uniform group insurance program pursuant to Section 54-52.1-03.1 and who is not eligible for any other employee group health plan may elect to participate in the uniform group insurance program by completing the necessary enrollment forms and qualifying under the medical underwriting requirements established by the Retirement Board. The board may use risk-adjusted premiums for individual insurance contracts to implement the provisions of this section. The employee participating in the uniform group insurance program under this section is required to pay monthly to the Retirement Board the premium in effect for the coverage being provided.
Also, temporary employees may elect to participate in the uniform group insurance program by completing the necessary enrollment forms and qualifying under medical underwriting requirements of the program. Temporary employees utilizing this provision are required to pay monthly to the board the premiums in effect for the coverage being provided. This section prohibits political subdivisions, departments, boards, or agencies from making a contribution for coverage under this section.
North Dakota Century Code Section 54-52.1-04.3 requires the Retirement Board to establish under a self-insurance plan a contingency reserve fund to provide for adverse fluctuation in future charges, claims, costs, or expenses of the uniform group insurance program. Under this provision, the board is required to determine the amount necessary to provide a balance in the contingency reserve fund equal to three and one-half months of claims paid based on the average monthly claims paid during the 12 months immediately preceding March 1 of each year. The board is authorized to arrange for the services of an actuarial consultant to assist the board in making this determination. All money in the contingency reserve fund is appropriated for the payment of claims and other costs of the uniform group insurance program during periods of adverse claims or cost fluctuations.
Under NDCC Sections 54-52.1-04.7, 54-52.1-04.8, and 54-52.1-04.9, the Retirement Board is authorized to establish a dental plan, a vision plan, and a long-term care plan and is required to establish an employee assistance program available to persons in the medical and hospital benefits coverage group. Section 54-52.1-14 requires the Retirement Board to develop an employer-based wellness program. This program must encourage employers to adopt a board-developed wellness program by either charging extra health insurance premiums to nonparticipating employers or reducing premiums for participating employers.
All funds necessary to pay the consulting fees and health insurance benefits related to the uniform group insurance program are appropriated from insurance premiums received by the Retirement Board pursuant to NDCC Section 54-52.1-06.1.
Workplace Economics, Inc., reports that 16 states pay the full cost of health insurance coverage for an individual employee--the employee pays nothing--and in several other states the employee has the option of selecting a plan that will be fully paid by the employer. It should be noted that this statement applies to premiums and not deductibles, coinsurance payments, or other out-of-pocket expenses that the employee may pay. Six states pay the full premium for family coverage. In most states the amount paid by the employee varies by the plan and coverage option selected. In Illinois, Kansas, New Mexico, and West Virginia the portion of the premium paid by the employee also varies by salary. In the remaining states, employees share premium costs with the state. All states provide or make available health insurance for pre-Medicare retirees, and 48 states provide or make available health insurance for Medicare-eligible employees (age 65 or older). Indiana and Nebraska do not provide retiree coverage in the state health plan for retirees beyond age 65, although retirees in Indiana may now purchase a Medicare complementary plan through the state. In a number of states, the retiree's share of health insurance premiums varies by characteristics such as date hired, date retired, or years of service at retirement.
History and Costs of the Uniform Group Insurance Program
Before 1983 the Retirement Board was required by law to solicit bids and contract for the provision of insurance benefits coverage with the insurance carrier determined by the board to be best able to provide that coverage. From 1971 to 1983 Blue Cross Blue Shield of North Dakota provided and administered the health insurance benefits plan for public employees. In 1983 the board was authorized by NDCC Section 54-52.1-04.2 to establish a plan of self-insurance for providing health benefits coverage under an administrative services-only contract or a third-party administrator contract if the board determined during any biennium that a self-insured plan is less costly than the lowest bid submitted by an insurance carrier. The board exercised the option to implement a self-insurance health benefits plan and administered the program in that manner from July 1, 1983, through June 30, 1989.
Rising health care costs in the state were the primary reason for the cashflow difficulties experienced in the health benefits plan. In the 1985-87 biennium the Legislative Assembly appropriated funds for a 20 percent premium increase, and claims costs increased 42 percent.
Although the board began its administration of the self-insured health benefits plan on July 1, 1983, with reserves of $2,143,880, claim expenditures and other expenses of the program exceeded premium income and other revenue in 1984 and by June 1987, the fund balance, as indicated in audited financial statements of the plan, was a negative $4,759,963 with estimated outstanding claims payable of $4,600,000.
In 1987 the board incorporated various cost-containment components into the health benefits plan which included:
- Implementation of a program of concurrent review of inpatient hospitalizations designed to eliminate unnecessary treatment or prolonged hospital stays and to allow consideration of less expensive appropriate treatment for long-term medical care.
- Implementation of a program of mandatory second surgical opinions for certain elective surgeries. (This program did not generate anticipated results, and after a one-year trial period was discontinued.)
- Expansion of contract deductibles to include all inpatient, outpatient, and physician services.
- Increase in the coinsurance base from the first $2,000 in charges to the first