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The omnibus pension bill that’s beginning its path through the Legislature puts the state’s ailing pension funds for police and firefighters back on the path to solvency.

Another year, another pension problem

Rep. Michael Nelson sponsors a bill that would raise $64 million through changes affecting retirees and current employees.One component limits annual benefit increases to 1 percent until the plan is 90 percent funded. (Staff photo: Peter Bartz-Gallagher)

Omnibus legislation seeks to shore up police, fire fund

The omnibus pension bill that’s beginning its path through the Legislature puts the state’s ailing pension funds for police and firefighters back on the path to solvency.

Rep. Michael Nelson, DFL-Brooklyn Park, who is carrying the pension bill, noted that the financial impact of the stock market crash and Great Recession have been so significant that the state can’t expect market returns alone to fix the unfunded liabilities.

“It’s the investment returns that dropped to the bottom that caused them to be in the shape they are in,” Nelson said. “We’re trying to fix them so in the long run they are going to be fully funded.”
The police and fire fund, which is part of the state’s Public Employees Retirement Association (PERA), faces a long-term unfunded liability of $1.6 billion. Its deficiency as a percentage of payroll is 8 percent, which is estimated to require an infusion of $64 million a year for the next 25 years to make up.

Large unfunded liabilities have been nothing new to Minnesota pensions in recent years. The three major statewide funds — PERA, Teachers Retirement Association (TRA), and Minnesota State Retirement System (MSRS) — went from being fully funded in the 1990s before the tech bubble burst to sprouting multibillion-dollar unfunded liabilities. The tumult has led state lawmakers to act repeatedly in recent sessions to improve the long-term solvency of the funds.

Most notably, in 2010, lawmakers agreed increase the share of salary that employees and employers contribute to pensions. They also reduced the annual benefit increases that retirees get. That legislation, along with improvements in the stock market, has improved the financial standing of most pensions.

Lowered projections grow shortfall

But one major change in state pension law that was enacted in 2012 is having repercussions that affect how the pensions look on paper. Believing that the state’s policy was based on unrealistic future investment returns, lawmakers reduced the assumed rate of turn of pension investments from 8.5 to 8 percent. That move has caused the unfunded liabilities for pension funds to grow, and it’s one key reason that the police and fire funds need help from lawmakers, said Brian Rice, who lobbies for police and firefighters unions.

“The markets haven’t come back, and last year they lowered the assumed rate of return by a half percent, which is pretty significant,” Rice said. “So when the Legislature changed the assumptions, combined with a flat market for the year-end in January 30, 2012, that compounded the situation.”
The Legislative Commission on Pensions and Retirement (LCPR) has approved a bill sponsored by Nelson and Sen. Sandy Pappas, DFL-St. Paul, that would raise $64 million through changes to retirees and current employees.

The bill generates a significant amount of money from changes in benefits. One component involves limiting annual benefit increases to 1 percent until the plan is 90 percent funded. (The annual increase is currently fixed at 1.5 percent.) A reduction in retiree benefits that was part of the 2010 legislation prompted a lawsuit from former state workers, but the state prevailed in the court action. At the present moment, a group of retirees has floated an alternative that would leave unchanged the current rate of increase.

Another of the bill’s suggested benefit changes would increase the amount of time it takes for workers’ pensions to vest by moving it up to 20 years.

The bill also makes it more difficult for police and firefighters to retire early. The early retirement provisions, which were established because of the stressful nature of police and firefighters’ work, were established when the pensions were on better financial footing. Under current law, employees in the police and fire fund who retire early receive a modest 1.2 percent penalty, which isn’t much of hindrance to leaving the workforce and has added to the pension’s liabilities. The proposal would increase the early retirement penalty to 5 percent.

“You can still retire early, but the penalty is increasing from 1.2 percent per year to 5,” Rice said. “It’s not popular. But it’s either that or make people contribute more. They are already contributing at a pretty high rate.”

Part of the $64 million in the bill also comes from contribution rate increases. The bill would increase employers’ contribution over two years from 14.4 percent of pay to 16.2 percent. Employees would see their contributions increase from 9.6 percent of pay to 10.2 percent.

Insurance surcharge proposed

Nelson’s bill is supported by PERA’s board of trustees, the LCPR and a bipartisan group of legislators. But there is a related bill that is raising more controversy. A proposal by Rep. Joe Atkins, DFL-Inver Grove Heights, and Pappas would place a $5 surcharge on automobile and homeowner insurance policies. That surcharge would raise $23 million a year, with a portion of it going to support police and fire pensions. While Nelson’s omnibus pension bill brings the police and fire fund into balance, Atkins’ bill would give the fund a roughly 1 percent cushion against further market downturns.

“This is to create a sufficiency in these funds,” Rice said. “If the markets crash again or we don’t make 8 percent or some other demographic thing happens, we’re not just sitting there thinking we had the problem fixed.”

Taxing insurance policies to pay for police and fire pensions is nothing new in Minnesota. The state imposed a gross earnings tax on fire insurance in the 1870s that is dedicated to fire pensions. In 1971, the state imposed a similar tax on automobile policies to support police pensions on the grounds that police services assist insurance companies in investigating and establishing liability for car crashes. In both cases, the amount of state aid to police and fire from the tax has declined considerably since the middle of the last decade. Rice said the decline in funding, which has occurred for a number of different reasons, is resulting in increased property tax levies by local governments.

The Atkins bill passed the LCPR and has been working its way through the Legislature. On Tuesday it passed the House Government Operations Committee. It is currently in the tax committees in the House and Senate. It’s uncertain whether it will be amended into the omnibus pension bill or travel separately.

The surcharge has support from some Republicans, with Reps. Greg Davids, R-Preston, and Tony Cornish, R-Vernon Center, and Sen. Julie Rosen, R-Fairmont, signing on as co-authors. Other Republicans have dissented. Sen. Mary Kiffmeyer, R-Big Lake, said pensions should be financed through employers and employees.

“This is a bad road to go down,” Kiffmeyer said. “It’s really the responsibility of the employee and the employer to take care of the pension situation. There are things they can do to alleviate the pressure on the pension system without going to [the insurance surcharge].”

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