As an increasing share of Minneapolis property-tax dollars is dedicated to three aging pension funds, the situation is getting even worse because of losses in the financial markets.
The city already has increased its property-tax payments to the funds by $19 million since 2002. That annual contribution is expected to rise to $37 million by 2013.
But that was before the latest bad news: at least $38 million more in future pension costs because of the recent market drop.
"This is several magnitudes worse than I thought it was," said Paul Ostrow, the City Council budget chairman, after a briefing from finance officials. "This is a very significant issue that we face."
For residents who foot the bill, the burgeoning pension woes mean that some city services may have to be cut or property taxes might have to go up even more than planned.
Although investment market losses are hitting all pension funds, the impact on the Minneapolis budget is worse because its three pension funds have been closed to new employees for decades and now consist mostly of people drawing benefits. The city has less time to offset market losses before the bill comes due for the funds and has few active employees paying into them.
The city's pension bill already was hard hit by projections that police employees and their survivors are living longer, which has added a projected $137 million to city costs. Both costs hit the city budget in 2010, and the city must make all payments to the funds by 2020. This means that the cost of offsetting the investment-caused pension losses will claim a major share of the city's future property-tax increases.
Ostrow said he expects the rising cost of offsetting closed pension funds' market losses to eat up roughly half of the city's expected gain in property taxes over the next five years. The burden also could be spread out over a longer period, especially if the city again borrowed to fund pension costs, as it did in 2002-04, but Ostrow said one concern is how credit-rating agencies might react.
Besides bonding, city options for absorbing that hit include making cuts in the amounts allocated to city departments in future years for budget growth, consuming a $14 million cushion against unexpected costs that's budgeted for the next five years or raising the property levy by more than the recent policy of 8 percent annually. Or the city could dip into its share of proceeds from the sale of the Hilton hotel, a pot that Rybak wants spent on repaving roads and some council members want reserved for community development.
The city had factored the $137 million police longevity hit into its long-range budgeting, and expected to ramp up pension spending by $10 million annually by 2010 while trimming future non-pension budget growth.
An extra challenge
Most Minneapolis city employees now belong to one of two statewide pension funds, like most local government employees in Minnesota. One is for police and firefighters and the other is for city employees. The city is current on these payments, expected to be about $38 million next year. But it's also budgeting about $27 million in 2009 to finance the three closed funds. They consist of about 300 still-working employees who are nearing retirement and more than 6,200 retired or disabled workers, or their survivors. They joined the three funds decades ago before the city shifted new hires to the statewide plans.
This situation means a 20-1 ratio of people drawing checks to people contributing to the three funds. And the city has only until 2020 to make sure the money is there for all of them. Those factors make the city's job of meeting pension costs harder that those of the statewide pension fund for local government employees. Such a fund has a timeline of 30 to 40 years to recover from down markets and fully fund its costs, and many more working participants pay into the fund than draw from it.
"It really hurts closed funds badly," Howard Bicker, the state's top pension investment official, said of the current market drop. Minneapolis has three of the state's remaining six local municipal pension funds for full-time employees.
The Minneapolis funds assume a state-prescribed 6 percent return on investments in helping to determine how much is needed to pay all future pension obligations. But the city finance office budgeted for -- and Mayor R.T. Rybak signed off on -- a more conservative, even market in 2008. Now even that appears optimistic; if the market loss exceeds 10 percent for 2008 or losses continue into 2009, the city would need cough up even more than the $38 million to offset the loss.
The situation could be worse. The city deferred $41 million in pension costs when the Legislature said it could delay shifting some payments to one pension fund as its members retired. The city also is near completing a catch-up plan for several internal city revolving funds that charge departments for things such as vehicles or computers; this frees money for the rest of the budget.
Steve Brandt • 612-673-4438