Public pension fixes headed for the floor

Education Minnesota drops its opposition to curbing benefits

An omnibus bill that proposes to shore up public pension funds by reaching into the pocketbooks of both public employees and retirees is teed up for end-of-session floor debate.

As a result, lawmakers will leave St. Paul on May 17 with either a monumental fix for Minnesota’s ailing public pensions or a fizzle that leaves retirees’ nest eggs in peril.

On Wednesday, the Senate Finance Committee sent that chamber’s omnibus pension bill to the Senate floor. The House Ways and Means Committee is expected to approve the House version soon.

In the next two weeks, legislators will weigh difficult election-year decisions over whether to cut benefit increases for retirees and raise contribution rates for current workers.

Contribution increases have been pushed through in the past in an unsuccessful effort by lawmakers to stanch the growing liabilities that have amassed since the 1990s technology stock bubble burst and reversed the gains of pension assets. But reducing the 2.5 percent annual increase for retiree benefits represents a move the Legislature has never tried before.

Although a broad group of backers — including school boards, municipalities and the boards of the pension plans themselves — started the session unified on proposals to stave off insolvency, they ran into stiff opposition from organized labor.

But unions appear to be buckling to pressure from lawmakers, some of whom are themselves members of the union that has proven most recalcitrant, the Education Minnesota teachers group.

Education Minnesota lobbyist Jan Alswager testified against the pension bill at a couple of hearings earlier in the session and called instead for an approach that wouldn’t increase teacher contributions.

Education Minnesota recently changed its tune.

That’s welcome news for Rep. Marsha Swails, DFL-Woodbury, who is an Education Minnesota member. During a March House K-12 Education Finance Committee hearing, she sharply criticized the teachers union for opposing the pension bill. Swails said she’s now hearing a different tone from Education Minnesota.

“I do think they have backed off a little bit and moderated their views,” Swails said.

Alswager declined to comment for this story.

The teacher pension plan, known as the Teachers Retirement Association (TRA), is in the worst financial shape of the three major statewide pension plans. It’s 59 percent funded on a market-value basis. The latest actuarial figures project that TRA will go broke in 2032 even if the fund garners an 8.5 percent annual rate of return.

Under the terms proposed in the omnibus bill, increases in retired teacher benefits would be suspended in 2011 and 2012. Thereafter the benefits increases would be fixed at 2 percent a year until TRA is 90 percent funded.

Education Minnesota had asked lawmakers to allow school districts to levy property tax increases to buoy pensions rather than increasing employee contributions. Swails said that proposal was one of a couple of alternatives offered by Education Minnesota that wouldn’t solve the problem.

“We really need to be responsible to the taxpayer and school districts that are in statutory operating debt and can’t go out and raise levies,” Swails said.

Besides TRA, the two other major public pension plans are the Minnesota State Retirement System (MSRS) and the Public Employees Retirement Association (PERA). MSRS is 65.6 percent funded on a market basis. PERA is 53 percent funded. (These actuarial assumptions were formulated in July 2009.)

MSRS doesn’t propose contribution increases for its 50,000 active employees. The PERA proposal does include a contribution increase. Both MSRS and PERA reduce the 2.5 percent increase in retiree benefits.

The American Federation of State, County and Municipal Employees (AFSCME) Council 5 expressed opposition to the proposal when it was unveiled by the pension boards last year. Earlier in the session, however, the union’s executive director, Elliot Seide, announced the union had dropped its opposition.

The bill’s outlook improves with the recent revelation that Education Minnesota is on the sidelines. Before Education Minnesota dropped its opposition, the union had mobilized its network of teachers to send e-mails in droves to key legislators, including the bill’s chief Senate author, Don Betzold, DFL-Fridley. Betzold said that the bill stands a better chance of passing intact if all of the major players are at least neutral on the bill.

“If Education Minnesota came in bound and determined to say, ‘We oppose this,’ individual members might have voted to take the TRA part out of the bill,” Betzold said.

Floor amendments, however, are likely.

Rep. Mary Murphy, DFL-Hermantown, the pension bill’s chief House author, expects to see a couple of amendments pertaining to less crucial matters that didn’t make it into the bill. But so far she hasn’t detected any efforts to derail the bill.

“The stabilization is so important for the future,” Murphy said. “It’s something that legislators shouldn’t want to mess around with unless they think they’re doing good.”

The state’s pension woes have prompted Republicans to call for a market-based style of pensions.

Sen. Mike Parry, R-Waseca, said he plans to hold a roundtable in May with financial advisers about the merits of so-called defined-contribution benefits. He’s hearing discontent from residents of his district about public funds being used to rescue the defined-benefit plans.

“It’s been huge,” said Parry. “They’re going, ‘How can you vote to bring into solvency these pension funds but you’re noting going to do ours in the private sector?”

The proposals to save the big three pensions won’t cost the state’s general fund any money in the 2010-2011 biennium.

But lawmakers are being asked to cough up $27.5 million in the current budget to rescue a smaller pension: the Minneapolis Employees Retirement Fund (MERF). Murphy said the House has a smaller amount for MERF, but she expects the House will match the Senate at some point. The state already pays $9 million a year to prop up MERF. But the fund, which currently pays benefits to 5,000 retirees, is nonetheless expected to run out of money in five to seven years.

“If this fund goes broke, they don’t have Social Security to fall back on. They become wards of the state,” Betzold said.