Understanding the pension problem

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

As the City Council, state legislators and even city residents seek to understand the city's pension problems and solutions, here are seven questions they should weigh:

Q: Are city workers in the closed pension funds receiving higher benefits than their peers?

A: According to the Blue Ribbon Commission report, the answer appears to be no.

Recent retirees in the Minneapolis Police Relief Association (MPRA) receive an annual benefit of $38,687 and recent retirees in the Minneapolis Firefighters Relief Association (MFRA) receive $37,358. Recently retirees in the state Public Employees Retirement Fund (PERA) police and fire fund receive $38,123 and state patrol retirees receive $42,295.

However, the city police- and fire-fund numbers do not include investment-related annual bonus payments called "13th checks." From 1994-2003, those checks -- paid only in good investment years -- have ranged from $1,836 in 1994 to more than $10,000. Because of poor market conditions, the police officers last received a 13th check in 2001 and firefighters in 2002.

Recent retirees in the Minneapolis Employees Retirement Fund (MERF) receive $28,879 annually; those in PERA's basic program receive $28,085. (Employees in these plans range from janitors to executives.)

Q: Who should control pension assets?

A: The Commission recommends shifting all three closed city pension funds' assets to the State Board of Investment.

The commission had particular concerns about the police and fire funds' investment practices. Chair Jay Kiedrowski said the city is responsible for paying pensions but does not control investments. He calls it "taxation with no representation."

Brian Rice, general counsel to the police and fire funds, said the city had representatives on both boards.

Rebecca Law, a city appointee on the police fund board, said the city gets two votes out of nine, and "it doesn't get you very much when it is majority rule."

Kiedrowski said the commission's investment experts were uncomfortable with police and fire investment policies.

Of particular concern are the 13th checks, the potential annual bonus based on the funds' investment performance. This differs from other public pension funds, which typically get permanent monthly benefit hikes in good investment years.

The 13th check gives the funds an incentive to "swing for the fences," taking excessive risk, with taxpayers bearing the downside, Kiedrowski said.

Rice countered that the fire fund has outperformed the State Board of Investment on a three-year, five-year and 10-year basis, saving the city millions of dollars, according to the commission's own findings.

"You have members who take a huge interest in the fund and trustees who made a decision, well over a decade ago, to reduce the risk of the fund by keeping 40 percent of the assets in bonds, which lowers volatility," Rice said.

Kiedrowski said despite the figures, the fund didn't have policies and procedures in place that gave experts confidence it could repeat the performance.

The police fund was 95 percent funded in 1999 and was 65 percent funded in 2003, commission data said. The fire fund was 109 percent funded in 1999 and 81 percent funded in 2003.

Rice said state law allows local pension funds to merge into the state fund -- if the local funds' membership approves.

As for MERF, the third fund, Executive Director Judy Johnson said she could support the state investing its assets, but not a full merger with state PERA pensioners.

Q: Does the Blue Ribbon Commission proposal cut police and fire retiree benefits?

A: The commission's report said it started with the premise that it would not cut benefits.

However, its proposal does cap the 13th check at one month's pension payment. Rice said that clearly cuts benefits.

The way the current formula works, fund members split a half-percent of the fund's assets if investments do well on a five-year average; in the 1990s, that meant annual bonus check of approximately $2,000. However, if the funds hit 102 percent of full funding, then fund members split 1.5 percent of assets. (That is how the firefighters received a 13th check of $10,195 in 2000, at the end of the stock market boom.)

Today, the cap would be approximately $3,100, although the current stagnant market makes a bonus check moot.

The city did not have a dollar estimate on how much it would save if it could get the State Legislature to approve a cap. Rice said pensions would lose $55 million.

Rice said the city explicitly agreed to legislation that created and expanded the 13th check over the years -- and it did not have the right to unilaterally cap it.

Pat Born, city finance director, said the commission recommendation did not affect pensioners' monthly checks. He called the 13th check cap "a possible change" to "future investment-related bonuses."

Q: Does the police fund have a better plan?

A: The police fund has its own plan that Rice said would save the city money. Rep. Phyllis Kahn passed it last session, and it would become law if the City Council approved it.

Similar to the Blue Ribbon Commission plan, the police plan extends the city's timeline to pay off police pension shortfalls.

Rice said a longer funding period gives the city more time to close its funding gap, reducing its annual contribution. A smaller city contribution makes it less likely the funds will hit the 102 percent full-funding trigger for an enhanced 13th check.

To offset that loss, the police propose an average $83 a month increase in pension benefits and other changes, Rice said.

Numbers are in dispute, and depend on assumptions.

Rice said police-fund members would still take a multi-million dollar cut. Members accepted the idea because it evens out benefits -- instead of the fund's last members getting very large 13th checks in later years, more members would get smaller increases today.

Kiedrowski said the commission's plan would save the city $38 million over the long term, while the police fund's plan saves the city $22 million -- still a savings, but $16 million less than it should be.

Kiedrowski said it is unfair when current city employees face layoffs and a 2 percent wage cap, to give a $16 million raise to one group of retirees.

City officials face a conundrum. The police fund bill expires as soon as the Legislature goes into session early next year. They have to decide if they want to take the savings on the table, or go to the Legislature with the commission's proposal and risk getting nothing.

Q: Could the state decline to extend aid payments?

A: The state has helped pay Minneapolis' pension debt through various aid programs. One reason the city wants to extend the timetable for paying off pension debt is to also extend state aid payments.

The state could decide not to extend police pension aid payments beyond 2010, though Kiedrowski said the state has made accommodations for other funds in the past.

If the state refuses to extend aid, the financial benefit from adopting the commission's plan would be cut in half, from a maximum of $89 million to $44 million, its report said.

Q: How would the merger work?

A: The Public Employees Retirement Association (PERA) would manage benefit payments and the State Board of Investment, guided by the state's constitutional officers, would direct investments.

MERF, police and fire members could chose to stay with their current benefit structure or go into the equivalent PERA fund, whichever is more advantageous. (The change for police and fire is the cap on the 13th check.)

Q: Why merge MERF into the state fund if it costs more money?

A: MERF's Johnson said the Blue Ribbon Commission's own analysis shows the city would save an extra $7 million if it did not merge MERF into PERA.

Finance's Born said Johnson had a good point and the City Council would consider it.

The Blue Ribbon Commission had a very strong desire to treat all three funds similarly, he said. Further, as the three city funds get smaller, the commission felt state management was a better long-term solution.