On Tuesday night, a panel of lawmakers approved a plan to fix St. Paul and Duluth teachers’ pension funds by offering them a combined $13 million more a year. Separately, a police and firefighters fund is asking lawmakers to approve a $5 surcharge on all auto and homeowners’ policies to shore up their pensions. That works out to about $23 million a year.
Gov. Mark Dayton said the requests force lawmakers into a “very tough predicament.” By the time troubled pension funds ask for additional state money, he said, they tend to be in such poor shape that “there are really no attractive options at that point.”
Even with increasing employee and employer contributions, the state has ended up as the funder of last resort when public funds fall on rough times. The alternative — just letting the pensions falter — is less attractive, DFL leaders said.
“It’s an unfortunate situation to be in, but ... there are obligations we’ve made that we have to take care of,” said House Speaker Paul Thissen, DFL-Minneapolis. Despite a $627 million projected state deficit, the House’s budget plan sets aside millions for pension funds.
In other parts of the country, pension obligations have brought governments to the brink of bankruptcy. In Minnesota, where a 2010 fix shored up pension funds in exchange for reduced benefits, most of the state’s pension funds are in decent if not perfect shape.
“I think these funds are as well positioned as [they] could be for the foreseeable future ... but they can’t be insulated from the larger economic realities,” Dayton said.
Still, requests to lawmakers from the three funds this year shows what happens when the available cash fails to keep pace with promises made.
“We’ve been responsible, but the stock market is a problem so some of these funds need a little shoring up,” said Sen. Sandy Pappas, DFL-St. Paul and the chair of the Legislative Commission on Pensions and Retirement. “We kind of learned our lesson that when times are good, it doesn’t mean you can give extra benefits.”
Providing the fixes raises some hackles. Private sector workers have seen their retirement plans washed away by the recession-battered stock market and business cutbacks, but lack the option of a state bailout, critics said.
“It is really a difficult time for these pension funds to be looking outside and saying ‘Help us fix our problem,’ ” said Sen. Dave Thompson, a Lakeville Republican who sits on the pension commission. “I don’t believe that the statewide taxpayer should be a backup plan for these programs.”
Plan backers say they are doing what they can to fix the problems on their own.
When it came to the Legislature asking for the $5 fee on homeowners and auto insurance policies, the police and firefighters fund also moved to give up some benefits and contribute more from their own take-home pay to fill the gap.
“We have employees saying it’s the opposite of Target: Pay more, get less,” said Brian Rice, a lobbyist who represents police and firefighters.
The police and firefighters fund has long received cash from a fee paid as part of home insurance and auto insurance policies. But for various reasons, including more scofflaws driving without insurance, the fees set at a percentage of premiums have not kept pace with the pension fund’s need.
So the fund’s backers are asking for a flat $5 fee on homeowner and auto insurance policies to make up the difference. The new fee would switch off once the pension fund, which helps volunteer firefighters as well as staffers, is in better financial shape. The percentage fee would remain.
Including the flat fee raises new questions.
“It is inherently regressive,” said Sen. Roger Reinert, DFL-Duluth, at a hearing last month. “It doesn’t change whether you have a million-dollar home or a $100,000 home. It doesn’t change if you have a $50,000 car or, like in my case, a $5,000 car. Everyone’s going to pay the same fee.”
Due partly to Reinert’s objections, the Senate swapped the fee for a straight appropriation, although it may change back. In the House, the fee idea is still going strong and has bipartisan support.
“Whether you have a big house or little house you are still going to get the same level of fire service or whether you have a 1973 Dodge Dart ... you still get the same level of police protection whether you drive in that car or in a Lexus,” said Rep. Joe Atkins, DFL-Inver Grove Heights, who is sponsoring the measure to charge the $5 fees.
Separately, on Tuesday night the pension commission moved to grant the St. Paul and Duluth teachers funds more help. The Legislative Commission on Pensions and Retirement voted to boost the state’s funding of the St. Paul teachers fund by $7 million a year and lift state aid to the Duluth pension fund to $6.4 million a year. The increases would still need to be approved by the Legislature and signed by the governor to become law.
“It is not the teachers’ fault that these funds are having these problems. ... It is the fault of the stock market,” said Pappas.
Last year, both funds were just a little above 60 percent funded. Pension plans funded at 80 percent or more are generally considered in good health.
Neither St. Paul nor Duluth teachers pension funds have received as much state aid as other teachers funds have.
“We haven’t asked for the help and we haven’t needed the help,” said Dave Johnson, who represents the Duluth teachers pensions. Now they need it, advocates said.
Along with being smacked by stock market downturns, Duluth faces demographic problems. Back in 2006, the number of retirees drawing from the fund surpassed the number of active members contributing. Now, it has about 1.5 retirees for each active member.
Dayton said he’d like a long-term look at the teachers funds.
“If this session doesn’t produce something successful with both of these plans, then I think we really need to use the interim to look and come back next year and say what makes sense on a long-term solution,” Dayton said. “In the short term, given our financial situation, we are looking for another Band-Aid for another couple of years.”
The two funds, unlike most teacher pension funds, remain outside the statewide system which has absorbed most teachers funds, including most recently Minneapolis’. Eventually, St. Paul and Duluth may end up going the same way, lawmakers said.
In the short term, however, that move could be costly.
“It’s probably inevitable, but it doesn’t have to happen overnight,” Pappas said.