Update: Unless you are a taxpayer in Minneapolis, you probably have not paid much of any attention to this story. Minneapolis desperately needs to off-load this problem on to the state. These pensions are sucking up the city’s levy increases and citizens are in revolt. (What happened to all the obnoxious yard signs that said, “Happy to Pay for a Better Minnesota?” OK, we still see a one now and then but their popularity has sunk.)

As a state taxpayer, you should care about this. Once this deal is done, the city’s old police and fire pension become your liability. The more we learn about defined benefit systems, the less confidence we have that Minneapolis will pay enough into the PERA fund to cover these promises. This deal, along with a special law to fund an annuity for a fallen MnDot worker’s family, are thought to be things the Governor (and his Minneapolis staff) want. Let’s hope the GOP does not give these away without a serious concession on the budget deal.

Steve Brandt from the Strib continues to cover this vital issue: the merger deal is one item that could be in play during a special session (“Pension Merger Could Get 2nd Chance”) and a Minnesota Court of Appeals decision about these closed pension funds has added to the drama (“Ruling Snarls Pension Deal”).

We think that Sunday’s article in the Star Tribune by Steve Brandt “Taxpayers Hope for Pension Aid” gives a very good overview and history of the consolidation  of the closed Minneapolis police and fire pension funds into the state run pension known as PERA.

Pension reform in Minnesota

Almost all the members in these closed funds are already retired so there is almost no new money coming in and lots of money going out.  (Police and fire personnel hired after mid-1980 have paid into the PERA pension fund, which is also underfunded but that is another story.)

The consolidation is one of the final steps in the clean-up that began back in 1980. Across the state, 47 pension plans have been targeted for consolidation; Minneapolis, Fairmont and Virginia remain independent.

It looks as though the consolidation may go through this session as part of the Pension Omnibus bill despite the fact that it was introduced quite late in the session and has not been voted on by the pension commission (at least as of this afternoon on the last day of the session). Seasoned lawmakers are familiar with the issue and the fact that this has been under consideration for years. The 2008 collapse of the market along with steep increases in the city’s tax levy to pay for pensions have created the political pressure needed to get this done.

We hope that the Legislature is able to get something for taxpayers in return for this last minute deal that Dayton and his friends from Minneapolis need more than most DFLers and the GOP.

We have a few observations:

Minneapolis has escalated pension promises for decades without funding the plans. Thus, past and current city leaders gave away future city revenues and shoved off the problem on future taxpayers and city councils.

By increasing the payout under pensions that it was also not funding, the city undermined its own goal of getting these closed funds to consolidate with PERA. That is the height of fiscal irresponsibility.

The city created this mess though the police and fire unions and their members certainly get their share of the blame. And now the state has come to the rescue; in doing so, it has put the state taxpayer on the hook if the funds are not there in the future.

In order to get the police and fire members in these closed funds to agree to the deal, the city and state have to agree to give them bigger pensions than they would get under the city’s plan. Minneapolis is happy to pay an annual actuarial sum to be relieved of this budgetary nightmare because it is much less than what it would have to pay if the funds stay with the city. Why, you ask?

Through the magic of adjusted actuarial factors, the consolidation allows the members to get higher pensions guaranteed by the state taxpayers. The key is that the state has a much higher assumed rate of return for investments (the fanciful 8.5%) than Minneapolis (6.5%) and the liabilities will be pushed out to 2031(kicking the can down the road). Voila’. I call it “actuarial fairy dust.” Others have called it “Poor Pension Math.”

The state, starting with the pension commission, has promised to look at pension reform next year; one of the obvious reforms is the 8.5% assumed rate of return but so is the practice of kicking the can down the road (pushing out the liability date). At least if the state lowers this rate, then Minneapolis will have to pay more into PERA.

The state has been trying to bring pension funds under the umbrella of state control for a variety of mostly very good reasons but it has also contributed to the problem.

In addition to being guilty of the same practices (benefit increases for defined benefit plans without full funding), the State of Minnesota has been subsidizing police and fire pensions since at least 1980 (https://www.revisor.mn.gov/statutes/?id=423A.02) while at the same time attempting to bring these funds under some kind of fiscal discipline. It has been a carrot and stick approach.

So what we have is a city pension plan that has never been properly funded merging with a state pension plan that also has not been properly funded (albeit with the state getting a better grade).

Would we expect anything different from defined benefit pension plans run by politicians—especially in a state where all its cities are dominated by the DFL and their public employee unions?

The likelihood of mischief is great enough when you have elected officials (DFL and GOP) running a pension fund but when you add public employee unions with the double whammy of the right of collective bargaining and the right to strike, you have a recipe for fiscal irresponsibility.

Is it any wonder that we find ourselves with big pension promises that are both legally enforceable and not funded?