There’s been an intense discussion going on behind the scenes this week about merging the closed pension funds for Minneapolis police and firefighters into the state-run pension fund known as PERA. You can read the most recent news report in the Strib here.

The discussion, as we feared, has busted into the open with only a few days to go before the end of the session.

We just received notice that the Legislative Commission on Pensions and Retirement (LCPR) re-opened its agenda for this issue. Chair Morrie Lanning had declared the agenda closed for the session, with a promise to tackle major pension reform in the interim and next session. That closed agenda lasted only a few days.

Legislative Commission on Pensions and Retirement, Thursday, May 19, 2011, 12:00 p.m., Room 200 State Office Building, Chair: Rep. Morrie Lanning

Agenda:LCPR11-xxx: Minneapolis Firefighters Relief Association and Minneapolis Police Relief Association; Voluntary consolidation with PERA-P&F.

We are concerned that this will become one of those last minute deals that gets pushed through to solve the budget impasse between the GOP and Gov. Dayton. Some of Dayton’s best allies are in Minneapolis, so if they tell them they want this deal, it will be on the table .

Pension math is complex even when you have had plenty of sleep and time to think about it; this is not the kind of thing you want legislators to analyze at the end of a rough legislative session.

Minneapolis wants to off-load these funds because they are creating budgetary havoc for Mayor Rybak and the city by eating up levy increases.  PERA is proceeding cautiously as are the police and firefighter unions, albeit for different reasons.

PERA does not want any additional unfunded liabilities and the police and fire unions do not want to give up pensions that pay better than what they’d get under PERA’s current pension rules. (KSTP-5 did an investigative report on the high administrative costs of these funds, including some pretty nice travel to warm places for “educational” seminars. You can see the KSTP report by Mark Albert here. )

According to the Star Tribune, “The Minneapolis funds have resisted a merger in part because the PERA police and fire fund is capped at 1.5 percent annual cost-of-living increases until it hits full funding. City police and fire pensions rise with the increase in compensation negotiated by labor unions for cops and firefighters. They also get a lump-sum payment when investment returns exceed salary increases by 2 percentage points, and greater distributions if they exceed full funding.”  Those kinds of pay-outs that we call “eating the seed corn” have ended at the state level (though state pension law is subject to change every year).

So if they are a burden for the Minneapolis, how do the parties plan to avoid just shifting that burden onto state taxpayers?

Reducing pensions does not appear to be on the table. According to the Star Tribune, “One potential path to a deal outlined earlier would offset the lower cost-of-living feature by giving police and fire pensioners a larger salary base for calculating future pensions. That would be done by having the city give back some of the estimated $10 million in annual savings it won in a lawsuit that challenged the salary base used by the funds for calculating pensions. That ruling has been appealed and a decision is expected by mid-June.”

PERA’s current unfunded liabilities were reported most recently at less than the 80% funding recommended(with police at 67% and fire at 79%). And though these funds go up and down with the market, they took a beating just like the rest of us. The market down-turn in 2008 is what is driving the discussion in Minneapolis to shift the funds to the state where the due date can be pushed out actuarially and the State Board of  Investment’s more aggressive policies would reduce the “actuarial” amount paid by Minneapolis.

Sounds like a nice thing to do for our friends in town, yes? The problem is that it requires the state to sprinkle actuarial fairy dust on the problem—and state taxpayers will be left holding the bag. Current retirees will also enjoy significantly higher pensions than the men and women in blue serving us right now.

What if the closed pensions agreed to the same deal as current retirees and Minneapolis paid the full actuarial value—whatever that means? Would that protect future taxpayers from any unfunded liabilities?

No, for the same reasons that the current defined benefit pension system has large unfunded liabilities—and will continue to run short of its goals in the future. The frailties of the pension system are myriad and summed up so well by Girard Miller in “Poor Pension Math” as well as numerous studies (by the FedGazette, PEW, Dr. Norman Ehrentreich and so on. Join us at our pension website).

Adding these closed funds, even with a full actuarial payment from Minneapolis, leaves taxpayers exposed to even greater future shortfalls.