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Pension Omnibus Bill Increases General Fund Contributions to City of Minneapolis; Makes Bailout to Local Government Fund Permanent

Pension followers will recall that last year, one of the only bills that Gov. Dayton signed, with great fanfare in the Rotunda at the Capitol, was the Pension Omnibus bill (see, KSTP coverage that includes my comment at the end, calling the bill a “bailout” because the state is propping up the teacher and local government funds with tens of millions in cash from the general fund).

Lawmakers had worked hard for years to reach agreement with a governor who would not come to terms without a thumbs up from the DFL’s most stalwart political backers, the government labor unions that run pension and other state policies with an iron fist (Education Minnesota, AFSCME, SEIU, et. al.).

Note that in the picture, Gov. Dayton is surrounded not only by lawmakers, but government union leaders. (Pensions are not supposed to be the subject of collective bargaining in Minnesota but unions are very much on both sides of the bargaining table.)

Rather than let the funds slip into even more ruinous territory, the GOP came to the table and cut the best deal they could get. (The other option was to wait and let the pressure mount for fundamental reform, e.g. closing the plans to new members, agreeing on a plan to pay down the debt and offering new employees defined contribution funds. To be fair, that kind of change requires the leadership of a governor.)

The 2018 bill was supposed to immediately and miraculously drop the unfunded liability by billions while lowering the assumed rate of return to 7.5 percent (we were never able to follow the math on that one because lowering the assumption on returns immediately increased the unfunded liability and requires much higher contribution rates) The bill was sold as solving the funding crisis “for the next 30 years.”

The problem is that lawmakers reached a political compromise, which is what elected officials do, but pensions are a mathematical and actuarial puzzle that is immune to political fixes. That raises the question, “Should elected officials be in charge of a defined benefit plan?” Would you want the state legislature in charge of your retirement?

As I wrote at the time, the 2018 Omnibus did not solve the problem for 30 years, or apparently even one year. The 2019 Omnibus draft bill was voted on last week. Here are some of the details (there is more but I am still doing my homework on other provisions related to TRA, the teachers fund which is the most recalcitrant fund in the bunch when it comes to proper pension funding):

The state taxpayer has been propping up PERA (city and county funds) since 1997 with cash from the general fund. The Omnibus effectively makes the aid (i.e. bailout) permanent at about $14 million a year (for now). In theory, this will end when PERA hits full funding but given that its funding ratio has been around 75 percent for years, from an actuarial standpoint, full funding may not ever be reached (absent a radical shift in policy).

Since 1997, the state has provided aid to local government to defray some of the cost of employer contributions to PERA. The authorization for the state aid expires on June 30, 2020. The bill changes the expiration date to the earlier June 30, 2048, or the year following the PERA General Employees Retirement Plan achieving full funding. The amount of state aid paid in 2019 was $13,919,000.

In addition to cash from the general fund, local employers also make “additional contributions” that totaled about $37 million in 2017. The costs of covering old pension promises that were not funded at the time the promise was made to an employee, points to why city streets and other public services are declining. They did not keep current with employee expenses and pushed the non-negotiable pension obligation off on future taxpayers. This is one reason why the state taxpayer is asked to fund more and more costs of local government.

The 2019 Omnibus also revises a deal that Rep. Paul Thissen negotiated several years ago for Minneapolis, so that state taxpayers take on an additional $10 million in annual contributions to PERA for City of Minneapolis employees starting in 2019. (The state has already been making supplemental contributions from the general fund for the city.)

The bill reduces the employer supplemental contributions paid by the City of Minneapolis and related entities to PERA on behalf of MERF. Current law provides for a 2019 contribution of $31,000,000. The new amount is $21,000,000. The bill also increases the state’s contribution to PERA on behalf of MERF from the current $6,000,000 to $16,000,000.

Again, these payments offer one reason for why city streets are falling apart, and the city cannot hire enough police officers. Minneapolis, however, has enough for elaborate bike lanes and green roofs. So why should the state taxpayer come to the rescue of local government that did not keep its promise to fund pensions and has other less pressing priorities?

The Omnibus also changes the formula used to figure out how much Minneapolis will contribute to the PERA Police & Fire funds, which merged with the old (wildly underfunded) Minneapolis pension funds several years ago. Minneapolis in general never funded pensions and so, again, today’s taxpayers at the city and state level are paying for promises made decades ago. I am trying to find out why the formula did not work, and if this raises or lowers the contribution. Stay tuned.

PERA and the City of Minneapolis agreed to a new calculation method, which fixes the amounts to be paid by the City for each relief association at $4,489,837 and $3,188,735 for MPRA and MFRA, respectively, starting in 2019, through 2031.

When our analysis of the current actuarial reports is done later this year, we will see how the funds are doing overall. Ironically, the Trump administration policies have been the biggest gift to public pension funds (and government unions) to the extent state investment strategies are capturing record market returns.

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