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The effect of police and fire pension investment losses on the Minneapolis city budget has grown exponentially worse, meaning even deeper city budget cuts for 2010.
Last fall, the City Council was told that a 10 percent investment loss in the city's two closed pension funds would add $38 million in costs for the city over the next five years. Now tack on another $116.7 million.
That's the extra hit the city will feel over the next five years because investment losses reached about 30 percent for the year. Although that has happened to pension funds across the nation, the effects are far worse in Minneapolis, because its long-closed police and fire pension funds have few working employees generating income for the two closed funds, and almost all members are drawing pensions.
"It is breathtakingly bad," said Council Member Betsy Hodges, who is trying to sell the Legislature on the city's position that its police, fire and general employee pension funds should be merged into larger statewide funds. That would give the city more time to meet its pension bills, mitigating the annual impact on the city budget.
But a merger will be fought at the State Capitol by the city pension funds for police and firefighters, closed to new employees for nearly 30 years. A merger means they would have to give up control of their respective funds.
No bill has yet been introduced. Brian Rice, lobbyist for the funds, said that the city is trying to circumvent requirements of state law for such mergers that require approval of the members, the city, the state fund and the state's investment board.
But a merger with a state pension fund is being supported by the Minneapolis Employees Retirement Fund, which represents general city employees who were hired decades ago. The city is not on the hook for that fund's investment losses.
The extra $116.7 million from police and fire fund investment losses represents a five-year hit on the city budget that the city will begin to absorb next year, when the pension tab rises by $12.8 million. That hits just as the city is facing an added $16.1 million state aid cut proposed by Gov. Tim Pawlenty. In trying to fill this $28.9 million hole, the city expects roughly $18 million in new property tax revenue, which means budget crafters will probably be looking elsewhere in the city budget for cuts.
One alternative would be to sell bonds to finance pension costs, as the city did between 2002 and 2004. That has the advantage of giving the city cash immediately while deferring payments over a longer period. But interest on the bonds increases the ultimate cost.
Paul Ostrow, the City Council's budget chair, said he thinks the city needs to revisit the allocation of $24 million to be reaped annually starting in 2011 from expiring tax-increment districts that the city was given authority to reestablish.
Much of that money has been earmarked for faster payment of the city's debt on the Target Center and for funding neighborhood programs. But the City Council doesn't plan to make firm decisions on those plans until later this year.
Ostrow, who is leaving the council after this year, is exploring the possibility of reserving $6 million of that money to offset higher pension costs. That would probably rile neighborhood activists, some of whom already are challenging Mayor R.T. Rybak or seeking council seats.
"The message has got to be that the world has changed in profound ways," said Ostrow, referring to state aid cuts in the midst of a contracting economy. His committee is scheduled today to mark up Rybak's revised budget for 2009 that reacts to Pawlenty's cuts for 2008 and 2009.
Said Rybak: "This new estimate of the impact of our pension obligation simply reinforces the need for the state to deliver needed pension reform. We have been urging the Legislature and governor to help us fix this broken system and their inaction is costing the taxpayers of Minneapolis millions."
Steve Brandt • 612-673-4438