Post in Minneapolis Pension Levies

Minneapolis Pension Levies From: Forum Manager (David Brauer) Date: Mar 27 21:13 UTC Short link

Forwarded on behalf of Phyllis Kahn:

Carol Becker has her facts wrong on several points:

MERF was closed in 1978; the police and fire plans were closed in 1980.

MERF had a requirement to fully fund their plans at the time a person retired,
the police and fire did not. The city under Sayles Belton  instituted an early
retirement program that incented city employees to retire early by giving the
employees paid health insurance until age 65. Many retirees headed for the
door.
This created a situation where the city's general fund appeared to save money,
but the city was then required to fully fund the MERF pension.
The city soon found out that it did not have enough money in the MERF active
fund to transfer to the MERF Post retirement fund. The early retirement
incentive was poorly thought out and compounded the problems the city was
having rather than solving anything. I found out early in my work on pensions
that such plans designed to save  the city's general fund dollars  take it out
on the pension funds.The MERF requirement of fully funding the pensions at the
time of retirement forced the city to use an old law that allowed the city to
bond for pension fund debt. I believe that Mpls is the only city in the state
and possibly the country using this awful economic plan.

In large part because of the early retirement scheme developed by the Belton
administration and continued by the Rybak administration, the city issued
$25,000,000 in MERF pension obligation bonds in 2002.  The city issued another
$36,000,000 in MERF pension bonds in 2003. It also issued another $8.5 million
in police pension bonds in 2003.

It took the city a long time to realize what it had done.

I tried to repeal the pension bonding law in the 2004 legislative session. The
city opposed the repeal of the pension bonding law. The city also sought in
2004 to remove the "MERF liquidity trigger".  The MERF liquidity trigger was
enacted into law in the early 1990's and was the provision that required the
city to fully fund an individual's pension.

That same year 2004, I passed a bill to restructure the payments the city was
required to make to the police pension fund. The bill would have eliminated the
need for the city to issue $25,000,000 in pension bonds to meet the city's
obligation to the police pension plan in 2005.
The city council and the mayor rejected the law, which required local approval
to take effect.  Instead they saddled the tax payers with $15,000,000 in
pension bond debt in 2004 and another
$26.7 million in pension bonded indebtedness in 2005.

In 2005, after an acrimonious city DFL convention, certain Minneapolis
legislators intervened and forged a solution to the police pension plan that
repassed the bill I had passed the year earlier with only cosmetic changes.
That legislation saved the city from issuing another $25 million in pension
bonds in 2006. The legislature led by the Republican House refused to pass two
Mpls pension bills in one year so the MERF bill was delayed.

Last year, the legislature removed the MERF liquidity trigger. Since
2005 the city has not issued pension obligation bonds. The city still has over
$100 million in pension bonds outstanding.

All of this was unnecessary.

The city should not have created an early retirement incentive to pay the
health insurance for its older workers.  It certainly shouldn't have done it
without considering the implications for the MERF pension system.  An idea  to
achieve payroll savings also resulted in massive pension bond debt.

Ms.  Becker is also wrong about the investment performance of the police and
fire pension plans. While it is true there was one failed investment over a
decade ago  the investment performance of the two plans has had a direct result
in dramatically lowering the city's pension costs.

In 1987, the police and fire pensions were costing the city taxpayers nearly
$20 million. The two funds accounted for a nearly 20% of the total property tax
levy. By the year 2001, the tax levy for the two funds was $311,000, or less
than .2% of the total property tax levy.

What happened?   The economy, stupid! In about a decade the investment
performance of the two plans wiped out nearly a century of fiscal mismanagement
by the city.  For over 80 years of the plans history the city set no money
aside for pensions.  From 1970 to 2000 the legislature made the city face up to
its obligations. Because of the stock market performance in the late 1980's and
the 1990's, the unfunded liabilities of the plans were nearly eliminated and
the city got to shed hundreds of millions of dollars of liabilities because of
the positive investment performance of both plans.

Ms.  Becker is wrong about several other points. State law did not give the
pensioners all the upside of investment performance, nor it the law encourage
the funds to take undue risk.  Quite the opposite. In 1989, I worked with other
Minneapolis legislators to craft the legislation that lead to the near full
funding of both plans. In 1989, we crafted a bill that gave a small incentive
to the members of the plan .5% of "excess investment return" in the form of a
one time lump sum 13th check if the plan had a five year history of exceeded
the state established benchmark. The legislation also gave the state .5% of
"excess investment income" in the form of reduced general fund appropriations.

That 1989 legislation resulted in over $54 million in general funding saving by
the state of Minnesota.  It also resulted in a modest increase in benefits to
retired police and firefighters and their widows who do not receive social
security and those pensions are very modest by any standard. That legislation
also paved the way for the city to have a dramatic reduction in the property
tax levy for pensions.

Ms.  Becker and others suggest that this 13th check approach is foolish.
She is wrong.  Just last year the highly respected legislative auditor in a
report on public pensions noted that the 13th check approach was a much wiser
course than the permanent benefit increase made by PERA and MERF.  In fact, had
those large funds employed the 13th check legislative mechanism that I authored
in 1989, they would have avoided the billions of dollars in short falls they
now face.

Ms.  Becker also is mistaken about what is causing the need for additional city
contributions to the plan in the coming years.
Investment return is not the problem. Both funds have met their state
established benchmarks for the last 11 years. In fact, the Minneapolis Fire
pension plan has the best return of all the major plans in the state since 1996
when the state legislature began requiring uniform reports. The fire plan has
outperformed the State SBI by a full percent point each year.  Cumulatively
that is over 11 percent in the time period and represents tens of millions of
dollars that went primarily to reducing the city's property tax levy and still
to this day does.

Since the city has stopped the insanity of bonding for pension costs in 2005,
the annual levies for the police and fire plans is as follows;

2006 $3,600,000
2007 $6,701,000
2008 $7,052,000
2009 $5,000,000 estimate based on 2007 actuarial returns.

As a percentage of the city's total property tax levy, these pension costs are
in the neighborhood of 2-3% of the city's total $250,000,000 property tax levy.
It is an even much smaller percentage of the city
$1.3 billion annual budget.

It is true that the legislative commission on pensions and retirement
(LCPR) recently approved a new mortality table for the Minneapolis police
pension fund. By prior agreement with the city, this mortality table will take
effect for the 2010 tax year. The city leadership has known about the need to
make this change for at least five years.  The fact is, people are living
longer.  The LCPR has adopted new mortality tables for every other major law
enforcement pension plan in the state.
The LCPR makes it a regular practice to up date actuarial assumptions for all
plans on a regular basis. The last time the police table was updated was the
1970's.

This updated table MAY cause the city's contributions to the police plan to
increase.  Much will depend on investment performance.  In my view over time,
the cost will not nearly be as much as the city claims.  I fully expect that
investment performance that exceeds the state benchmarks will greatly reduce
the city's ultimate costs, just as investment performance helped the city out
in the 1990's.

Curiously, the city fought this change at every step, just like they have done
other pension issues.

In my experience as a city legislator and LCPR member, it is the Minneapolis
city council and city hall leadership who mismanage pension issues. Their
inability to understand pensions, pension funding and the legislative process
is well known at the capitol.  In fact, I have found that it is good practice
to do exactly the opposite of what the city of Minneapolis suggest on pensions.

Phyllis Kahn  State Rep 59B