Senate GOP Thwarts Permanent Bailout of Municipal Pensions

We have some very good news regarding public pensions. You may recall that last year, Gov. Dayton and the pension commission, amidst great bipartisan fanfare, declared that they had solved the unfunded liability problem for years to come. So it was puzzling when a proposal to extend cash aid to fund municipal pensions into actuarial perpetuity was on the agenda this session. Why would you need a cash bailout from state taxpayers if you had solved the problem?

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. [LCPR Memo 2019 Omnibus]

This bailout provision did not make it into the final pension bill (other things, which I am still reviewing, did get passed but they are not major changes). A little birdie told me how this bad idea got killed in the GOP Senate, but I am sworn to secrecy as to the details (sorry). Given that it had strong DFL backing and support from the powerful senate finance chair, Sen. Julie Rosen (GOP), we can expect to see it again next year.

The state taxpayer has been propping up PERA for over 20 years with cash from the general fund. The problem with this kind of aid is that cities and counties do not have to budget to cover the costs of their employees; this leads to bad decisions about hiring, compensation and other items that probably make up a municipality’s biggest expense: personnel. Why are state taxpayers asked to fund local operations?

This is why Warren Buffett has referred to public pensions as a “financial tapeworm.”

The draft provision, extending the cash to 2048, would have effectively made the bailout permanent at about $14 million a year (or more). In theory, this aid would end when PERA hits full funding but given that its funding ratio has been around 75 percent for many years, from an actuarial standpoint, full funding may not ever be reached (absent a radical shift in policy).

In addition to cash from the general fund, local employers also make “additional contributions” over the funding requirement that totaled about $37 million in 2017. As I wrote earlier in the session, the costs of covering old pension promises that were not funded at the time the promise was made to an employee, points to why the maintenance of 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.

So enjoy the good news on the pension front. Local government did, however, get a “win” from state taxpayers.

LGA (Local Government Aid) went up this year though not enough to conclude that the pension bailout got shifted to LGA. LGA was running at about $534 million; the 2019 budget deal increased funding by $26 million in 2021 and $30 million in 2022. But all dollars are fungible, and municipalities can spend LGA bucks any way they choose, including on employer pension obligations. (Note: LGA has been a political football with the GOP dialing it back, and the DFL dialing it up, depending on how holds the purse strings. You can read about some of that history here. With divided government and a DFL governor, it is no surprise that LGA was increased.)

I will give Buffett the last word: “Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford,” Buffett said. “Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans.”