Minneapolis stands to save $21 million in its 2012 budget and millions more in later years after lawmakers agreed early Wednesday to a state takeover of its closed police and fire pension funds.

The pension deal in the special session was a victory for Mayor R.T. Rybak, who faced a popular uprising last year against a property tax hike that he said was necessary to pay ballooning pension costs. "Every nickel we get will be used to relieve pressure on the property taxes," Rybak said Wednesday.

But the gain from the pension merger is tempered by what Minneapolis and other Minnesota cities aren't getting from the state. Local government aid was frozen at last year's levels, meaning Minneapolis will likely have to cut back on street paving and possibly lay off police and firefighters.

"I am deeply upset about having to make these cuts," Rybak said.

Republican legislators had approved a budget that eliminated local government aid to Minneapolis, St. Paul and Duluth, but DFL Gov. Mark Dayton prevailed on his insistence that the aid stay the same.

The budget sends $64 million to Minneapolis. Rybak based his budget on receiving the $87 million called for in the state formula.

Within two weeks, St. Paul Mayor Chris Coleman will also propose adjustments to his city's budget, which was based on receiving $62 million allocated by the state formula, a Coleman spokesman said. The city got $50 million.

For Minneapolis, the Legislature's approval of the pension merger would end a five-year court fight over benefit levels that has cost the city and the pension funds more than $1 million.

The two funds were closed to new members in the mid-1980s, but they have put an increasing strain on the city budget because the city has been forced to use property taxes to make up shortfalls when the pensions' investments lose value.

The deal merges the two local funds into a statewide plan for public safety employees on Dec. 30, assuming that the deal is approved by pensioners of both funds, their boards, the board of the statewide fund and the City Council.

The pension merger helps the city in two ways. First, it will have more time to pay for any shortfalls caused by investment losses. Second, the handover of the pensions to the state will likely reduce the amount the city has to pay into the funds.

"We think this is a huge deal for residents," said Council Member Elizabeth Glidden, the council's legislative point person.

But the deal came at a cost. Because the state plan has lower cost-of-living increases than the two local funds, the city agreed to kick in some extra money to raise those monthly pension payments. The changes amount to a 50 percent benefit increase for firefighters and 43 percent increase for police. Full pensioners will be paid $64,000 annually by 2015.

The state will not contribute any additional aid toward Minneapolis police and fire pension costs. Mary Most Vanek, executive director of the statewide fund, has told its members that it won't be subsidizing the city or its pensioners as they join the state system. The city will still be required to pay off any funding shortfall.

Steve Brandt • 612-673-4438