Can the city whittle $278 million in pension debt?

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November 1, 2004 // UPDATED 4:32 pm - April 25, 2007
By: Scott Russell
Scott Russell

Minneapolis' 'largest financial issue' sparks war of words between reformers, pension reps

The city of Minneapolis is buried under pension debt -- equivalent to an entire year's spending on city services -- and financial experts have recommended a way to slice that borrowing by a third.

Former Minneapolis Budget Director Jay Kiedrowski chaired Mayor R.T. Rybak's Blue Ribbon Commission and told a key City Council Oct. 19 that the $278 million in pension debt "is probably the largest financial issue that you have facing you."

"As a taxpayer of the city of Minneapolis for the last 40 years, I would appreciate that reduction in future property taxes," he said.

Several Councilmembers praised the plan, which would save taxpayers an estimated $89 million, but it met strong and immediate opposition from pension fund leaders and a key Minneapolis state legislator.

The plan would take investment control and benefit administration away from three closed pension funds:

  • The Minneapolis Employees Retirement Fund (MERF)

  • The Minneapolis Police Relief Association (MPRA)

  • The Minneapolis Firefighters Relief Association (MFRA).

    The Intergovernmental Relations Committee will take testimony from representatives of the three funds in November or December, and decide whether or not to include the proposal in the city's 2005 legislative agenda.


    The three funds have long had shortfalls; state law closed them to new members in the late '70s and early '80s. Since then, new city employees go into the state-run Public Employees Retirement Fund (PERA).

    A booming late-'90s stock market and resulting pension investment gains earned some fire fund pensioners bonus checks as large as $10,000. But nearly as soon as those checks cleared, the market tanked, affecting police and fire fund assets in particular. (For MERF, early retirements and other factors drove the shortfalls.)

    For the police and fire funds, taxpayers legally were on the hook to fill an eight- to nine-figure crater left by falling investments.

    Overall, the city's pension problem has become so large that, in recent years, leaders have turned to borrowing, pushing costs into the future rather than make massive service cuts today.

    The Council voted Oct. 22 to issue $25 million in bonds for MPRA and $4.7 million for MFRA -- for a single year's shortfall, payable over 20 years.

    The Council faces similar borrowing in the coming years.

    If the city tried to solve its pension problem in one year, it would cost $278 million -- the size of the city's 2005 General Fund, which pays for police, fire and other city services.

    Even if the commission's three recommendations are adopted, the savings would not show up immediately.

    The city would get no break in 2005 and would save $1 million in 2006 (enough to hire a dozen police officers), according to Finance staff. By 2013, the savings would hit approximately $8 million a year.

    The plan

    The three funds currently have independent, member-elected boards each with city representatives. The commission recommended transferring those retirees to the state plan, with PERA administering benefits and the State Board of Investment managing the assets.

    Second, the commission recommended changing police and fire retirees' benefit structure, capping bonus checks and extending the police fund's full funding date from 2010 to 2020.

    Giving the city more time to pay off the pension debt saves millions of dollars. The stock market would have more time to recover, and -- if it recovers -- the taxpayers' funding obligations would drop. Further, extending the city's payoff may extend state pension aid.

    The commission promised the changes would not cut benefits, but fund leaders dispute it (see Q-and-A sidebar).

    The third and least controversial recommendation would effectively buy the city more time to pay its MERF debt. It would save the city $22 million over the long term, or 25 percent of the panel's total estimated savings.

    The reaction

    Judy Johnson, MERF's executive director, called the commission report "disappointing" and "unfortunate." Brian Rice, general counsel for the police and fire funds called it "shallow," "ridiculous" and "fantasy."

    DFL State Rep. Phyllis Kahn told the Councilmembers to take a critical look at the commission report, and focus instead on ways to stop city pension bonding.

    Johnson and Kahn said they suggested MERF-related legislative changes to the city several years ago that would have saved the city money -- the same changes the commission now seeks.

    (Finance Director Pat Born said Kahn and Johnson deserve all the credit for that particular recommendation.)

    The commission's report saves its toughest criticism for the police and fire relief funds. It said fund leaders failed to balance their members' needs with taxpayers' interests, as state law requires. The commission devoted half of the 75-page report to reprints of the State Auditor's and the city's criticisms of fund management.

    Rice said statutes and court agreements govern benefit levels, and the pension funds can't arbitrarily cut benefits to help out taxpayers.

    "Are they saying: 'We are not going to give you your pension because the city can't afford it?' It is a joke," Rice said, maintaining the commission plan amounts to a pension cut, in spite of city assurances (see sidebar).

    The antagonism has significant practical implications. The commission's recommendations require state law changes. Without support from the pension funds themselves and the city's legislative delegation, the city faces an uphill lobbying battle at the Capitol.

    Kiedrowski, who is also the former state finance commissioner, said he is ready to testify.

    "I think when the citizens of Minneapolis realize that there is a $89 million savings against a problem of $278 million, that there will be surprising support for the approach," he said.

    The Blue Ribbon Commission unanimously endorsed the recommendations, Kiedrowski said.

    Rice and Johnson criticized the process, noting they had 20 minutes each with the commission in a closed room, with little give and take. Johnson said she was asked two questions: Did MERF members expect a benefit increase, and would MERF merge into PERA?

    Kiedrowski defended the process, noting the commission only met four times. "We are all busy people," he said. "We had our staff meeting with them regularly. We understood their positions."

    Other commission members are: Lou DeMars, former City Council president and independent consultant; Kent Horsager, president and CEO of the Grain Exchange; Lisa Huey, the retired managing director of Piper Jaffrey, Inc.; Laura M. King, former state finance commissioner and chief financial officer for the Minnesota State Colleges and Universities.

    Dee Long, former Speaker of the House; Stuart Mason, chief investment officer for the University of Minnesota; and John Taft, president of Voyager Management Funds.