Pension pain rises for city

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April 12, 2004 // UPDATED 1:14 pm - April 25, 2007
By: Scott Russell
Scott Russell

Paying off pension debt will take 1 of every 10 city property tax dollars by 2009, according to recently released figures by the Minneapolis Finance Department.

Thanks to early retirements and the stock market's 2000-2002 decline, the city started borrowing to pay pensions in 2003. Finance officials forecast increased borrowing each year. By 2009, the city will pay $28.6 million for pensions -- or nearly 11 percent of the projected $263 million in city property taxes. (That assumes the city raises taxes by 8 percent a year, the current cap.)

Last year, the city paid $9 million for pension debt, or slightly more than 5 percent of the $166 million in city property taxes.

The burgeoning debt has or will spring from three closed pension funds: the Minneapolis Police Relief Association (MPRA), the Minneapolis Employees Retirement Fund (MERF) and Minneapolis Firefighters Relief Association.

Each fund is more than 80 years old. The city collected what it needed to pay benefits -- but didn't save for workers who would eventually retire. By the late 1970s, the funds had amassed huge "unfunded liabilities" -- money the city should have had in the bank to cover future benefits but didn't.

New workers went into larger state funds, but the city is still paying off the three "closed" funds.

The pension hit comes just as the city is absorbing state aid cuts, service cuts and tax caps. But pensions must be paid, and Councilmembers have opted to borrow to spread out costs.

The result is that pension cost increases will use 20 percent, or $17 million, of the $84 million in projected property tax increases from 2005 to 2009.

The City Council passed a resolution April 2 generally supporting legislation that would lower the city's cost and improve the funds' management. It also wants to be able to opt out of the bill if it proves not to be helpful.

Rep. Phyllis Kahn (DFL-Minneapolis) has legislation moving through the state House of Representatives that would extend city deadlines to fully fund the police pension.

That bill, like borrowing, would spread out the city's obligation over a longer period of time. Kahn said it would also save the city $45 million in the long run.

However, the bill also includes a pension hike for those with 20 years or more of service, she said. It amounts to $800-plus a year. The raise offsets some lost bonus payments, called 13th checks, that retirees would lose because of the changes.

Pat Born, the city's finance director, said he has some concerns with the bill and the assumptions behind it. For one, he said some cost-saving estimates were based on a 9 percent annual investment growth, which he said is too optimistic.

The city is spending $40,000 to $50,000 to hire its own actuary to go over all three closed funds to make recommendations, he said. Even though the city is obligated to pay the pensions, it does not control the pension's board.

Long term, the city faces unfunded pension liabilities of $350 million. "We wanted to have somebody on our side of the table advising us, who is solely working for us rather than working for the pension associations," Born said.

New wiggle room

In other financial news, the city's new five-year financial projections show some wiggle room -- either for new programs, higher wages or property tax cuts.

The city has given each department spending targets for the next five years, Born said. It restrains spending, keeps the 2 percent wage increase cap and would require more service cuts.

Under the city's planning targets, departments would need to increase property taxes by $47 million in the next five years, or $37 million under the $84 million in new property taxes produced by the 8 percent cap.

The city still has some significant financial challenges, including a parking fund deficit and underfunded road maintenance, Born said. The mayor and City Council will make tax and spending decisions during the budget process later this year.

Unions would also have to agree to work under the 2 percent cap for five more years.