These days when we think of “bailout,” we think of the federal government rushing in to save a private business from collapse.
This type of “bailout” involves a federal government appropriation of hundreds of millions of dollars to a Wall Street financial firm, a major bank or an automobile manufacturer, to save it from financial collapse or bankruptcy using taxpayer dollars.
The rationale given for these taxpayer-funded bailouts is the company is “too big to fail.” While this philosophy may hold some validity in the minds of some economists for Fortune 500 companies or major financial firms, it doesn’t hold water for city governments.
The State of Minnesota has its own bailout bill moving through the Legislature right now—H.F. 2922, authored by Rep. Paul Thissen, DFL-Minneapolis. It’s a bill that would bail out the Minneapolis Employee Retirement Fund (MERF) to the tune of $694 million over 19 years.
The question is why should the state spend $36.5 million a year for 19 years to bail out a group of former City of Minneapolis workers?
State involvement in MERF goes back to 1978 when the Legislature voted to close the fund. At that time, the fund had 6,000 active workers; today the fund has only 175 active workers and 3,468 retirees.
Last year, MERF had a funding ratio of 56 percent; anything less than 100 percent indicates an unfunded liability. Just like a homeowner who owes more on their mortgage than their house is worth, MERF is seriously under water.
Even though the state has made annual contributions to MERF for more than 30 years, totaling hundreds of millions of state taxpayer dollars, now the City of Minneapolis wants an additional $694 million bailout. It’s outrageous!
The City of Minneapolis created this retirement funding disaster, and the city should be responsible for cleaning up the mess, not state taxpayers.
While the state may have been complacent in allowing MERF to slide deeper and deeper into insolvency, it was the MERF Board and the City of Minneapolis that allowed the pension fund to reach this point of unfunded liability.
The state has made at least three attempts in the past to resolve the underfunding of this retirement plan, with no success.
This isn’t the first time the state has bailed out a city retirement fund, and it likely won’t be the last. The most recent bailout of a large local retirement fund was the Minneapolis Teachers’ Retirement Fund. In that case, the Minneapolis Teachers’ fund was moved into the State Teachers’ Retirement Fund.
Every time a local government retirement plan makes a bad investment decision or gives post-retirement benefit increases that increase the unfunded liabilities, the local unit of government comes running to the state for a bailout.
It’s time state lawmakers said NO … no to the bailout for MERF and no to picking up the tab for the mistakes of local pension funds.
What makes this bailout even worse is that Minneapolis receives state payments of millions each year, with no strings attached. These payments of state tax dollars to Minneapolis come in the form of Local Government Aid (LGA). [Editor’s note: Minneapolis was to receive $90 million in LGA; Gov. Tim Pawlenty unalloted $21 million of that last June; Minneapolis has since then lost an additional $10.9 million in LGA and market value credit.]
While payments have been reduced in the last few years to help balance the state’s budget, LGA payments are still far more than the cost of the cities’ pension obligation.
With the Legislature still working to close a billion-dollar budget gap in their own budget, this is not the time to continue to bail out cities for their loose spending habits.
While the $36.5 million a year may be viewed by some as a small amount of money in relationship to the total state budget, the larger issue is that all of the state pension funds are currently underfunded.
Underfunding of state pensions is a problem that state lawmakers must address; however, fixing local pension underfunding should not involve state tax dollars. At the very least, if legislators just can’t say no to bailing out MERF, whatever state tax dollars are used to address the underfunding of MERF should be offset by a direct and equal reduction in Minneapolis’ LGA—a dollar-for-dollar LGA swap for any MERF bailout.
Minneapolis should not be allowed to make two trips to the state trough.
Phil Krinkie is a former Republican state representative from Lino Lakes and president of the Taxpayers League of Minnesota. The eight-term lawmaker chaired the House Tax Committee and two other House panels. You can contact Krinkie via e-mail at: [email protected].