Faced with a growing gap between what it takes in and what it pays out, Minnesota's largest pension fund might ask members to pay more and retire later.
The recession coupled with early retirements have left the pension fund that serves 250,000 of the state's firefighters, police and other state workers straining to provide benefits to its 80,000 current retirees and prepare for the wave of retirements to come.
To keep the Public Employees Retirement Association (PERA) fund solvent, its staff worked with police and fire representatives to hammer out a plan. The compromise would require members -- and the local governments that employ them -- to increase their contributions to it. It would also cut some benefits and reduce incentives for participants to retire before age 55.
"Obviously, it's never pleasant when you have to make certain cuts," said Dennis Flaherty, executive director of the Minnesota Police and Peace Officers Association. "We tried to design a package that would be the least oppressive to our members."
The proposal will have to be approved by the PERA board, which oversees the fund, and by the Legislature next year.
The goal of the proposal is not to have a 65-year-old out responding to a 911 call or running into a burning building. But Mary Vanek, the pension system's executive director, said the fund is buckling under the strain of members who are retiring around age 50.
The result, she said, is that some retirees would end up drawing more in benefits than they paid into the system during their careers. In 2011, the fund had 83 percent of the money it needed. By summer 2012, its funds were down another 5 percent and slipping even further behind the 2038 target the Legislature had set for the system to be fully funded.
More paid in, benefit cuts
It wouldn't be enough, the task force concluded, to simply ask police, firefighters and local governments to pay more into the pension fund. It would take an 8 percent increase in contributions to close the gap, and employees were already paying 9.6 percent of their paychecks while their employers paid another 14.4 percent into the fund.
The compromise would increase employee contributions by 1.2 percent over two years, starting in 2014, and increase employer contributions by 1.8 percent over the same period. The rest of the money would come from reductions in benefits, many of them aimed at make it less financially attractive for workers to retire and start drawing pensions before age 55.
A temporary fix?
The increase in contributions would still cost local governments millions, but Gary Carlson, a lobbyist for the League of Minnesota Cities, said member cities noted that a majority of the belt-tightening is falling on the workers in the form of reduced benefits. League members will review the proposal at their Dec. 20 meeting, after the pension board holds its own review Dec. 13.
For Mark Haveman at the Minnesota Taxpayer's Association, the proposal is, at best, a Band-Aid. Most private employers have done away with pensions for their employees in favor of 401(k)s, Social Security and individual retirement planning. At the very least, Haveman said, the state should consider moving to a hybrid pension system that includes outside retirement savings accounts.
"We went from a surplus to a deficit [in the pension fund] in a very short period of time," he said. "All of this has happened before [and] it can happen again."
Vanek said it would cost the system an estimated $1.6 billion to set up a plan that would move new hires into a retirement plan based on 401(k)s and Social Security checks. Right now, most police and firefighters in Minnesota are not eligible to collect Social Security.
It would be up to next year's DFL-controlled Legislature to enact the proposed pension reforms into law. To read the full proposal, visit www.mnpera.org.
Jennifer Brooks • 651-925-5049