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City looks to Legislature for pension funds help

By Brady Gervais

The City Council is increasing its efforts at the state Capitol this year to change the managing structure of the city's closed police and firefighters' pension funds.

Chief among the city's concerns is that it's financially obligated to cover costs and make up for investment shortfalls of its closed pension funds, but it plays a limited role in investment decisions. The funds' boards, which include two city appointees, manage the investments and administer the benefits.

Officials are also worried about growing costs to the pension funds. The city estimates it will owe $255.8 million — roughly the equivalent of what it spent on five services in 2007 — over the next 20 years. During the next two years, the city's contribution to the closed funds is expected to increase by $14.2 million, not including debt service.

"We have to write these blank checks, and yet we don't have any way of controlling what those checks are," said Patrick Born, the city's chief financial officer.

That's why the city wants the Minneapolis Police Relief Association (MPRA) and the Minneapolis Firefighters' Relief Association (MFRA) funds to be transferred to the state-run Public Employees Retirement Association (PERA) and to be managed by the State Board of Investment (SBI). The city believes the state board can better manage the funds and that the administrative costs will decrease if the two funds are merged with the larger, single-fund PERA.

Not so fast, say pension fund leaders. They don't want to give up their independence. They argue that they can make better investment decisions than SBI and, because they're small funds, pay closer attention to details. As of June 2007, SBI's assets had a market value of $63 billion. In 2006, the MPRA and MFRA handled $405 million and $271 million in assets, respectively.

When asked why SBI would do a better job, Council Member Betsy Hodges (13th Ward), said she sees a problem with the closed pension funds because those who administer the benefits also receive them. "To me, that represents a conflict of interest if the people who are receiving the benefits are also making decisions about what those benefits should be," said Hodges, who chairs the Council's Intergovernmental Relations Committee.

Larry Ward, president of the MPRA, believes the pension sustainability plan was prompted by the association's interest in changing the mortality assumption for its members because they are living longer. He said the association went to the city in 2003, but officials "rebuffed" the board. The association plans to ask the Legislature for an adjustment this February, and the MPRA is the last public safety relief association to do so, he said.

Walter Schirmer, MFRA executive secretary, said that the city isn't trying to save money for taxpayers but instead wants to get out of the pension business. He and Ward said the city is trying to wash its hands of pensions instead of respecting those who put their lives on the line to protect and serve Minneapolis.

"The city made promises. They should be held to those promises," Ward said.

A history lesson

The history of the two closed pension funds has been rife with conflict.

Ward described the relationship between the city and associations as "adversarial at best." Legal disputes between them have contributed to the animosity. During the mid-'90s and again in 2005, the city sued the funds over how they calculated benefit amounts.

In 2004, Mayor R.T. Rybak organized the Blue Ribbon Commission on Pensions, which was charged with analyzing the closed pension funds, including the Minneapolis Employees Retirement Fund (MERF), and coming up with solutions to the city's pension problem.

The funds enjoyed the economic boom of the '90s but suffered stock market losses shortly thereafter. The losses, along with earlier-than-expected retirements and state funding formulas contributed a rise in city contributions, according to the Blue Ribbon Commission report. The city, which uses property taxes to pay for the pension funds out of its General Fund, started issuing bonds in 2002 to pay for its pension obligations.

The commission recommended merging the pension funds, along with MERF, into PERA as a way to address long-term issues. Jay Kiedrowski, the commission's chairman and a former Minneapolis budget director, said he still stands behind the recommendation. SBI has an excellent track record, and because it has billions worth of assets under management, it is able to bargain for the lowest possible price to manage those assets, said Kiedrowski, who is currently a senior fellow at the Public and Nonprofit Leadership Center at the Hubert H. Humphrey Institute of Public Affairs.

A look ahead

It's unforeseen what the Legislature will do given that it's a bonding year and a short session, said Gene Ranieri, the city's director of governmental relations. "Sometimes legislation takes a while to go," he said.

But Rep. Phyllis Kahn, (DFL-59B), who sits on the Legislative Commission on Pensions and Retirement, said there will likely be a pension bill this year. The Legislature usually acts on several pension issues through one bill, and she's aware of another pension fund that needs addressing.

"So I know there's going to be a pension bill. The question is, is this something that should be part of it," she said.

Brian Rice, legal counsel for the police and firefighter associations, said he would be surprised if state lawmakers did not tell the city to follow a process for consolidation that's been in place for years. In 1987, the Legislature passed a law allowing for public safety relief associations to consolidate with PERA. It is a voluntary, elective process, and most have consolidated, he said.

Kahn used to belong to the camp that believed MPRA and MFRA should be managed by SBI. She no longer believes that is the best option. She said that having smaller, independent funds allows for competition and keeps SBI on its toes.

She also doesn't trust the city to make sound pension decisions. She said the idea that anyone would issue bonds for pension payments is "fiscal outrage."

"I have to be convinced that it's both a good idea and that it's the necessary thing to do," she said.

Brady Gervais can be reached at bgervais@mnpubs.com or 436-4373.