Gov. Mark Dayton did not just veto a tax bill last week that passed with an overwhelming legislative majority. He also vetoed the pension bill, which was crafted under the Pension Commission leadership of GOP Chair Rep. Tim O’Driscoll and DFL Vice Chair Sen. Sandy Pappas. It passed the House 120-3 and the Senate 61-1.

It is unusual for pension bills to be vetoed. That’s because the pension bill has to pass out of the joint commission, which works closely with the pension funds and other pension players such as school districts, state and local governments, and the public employee unions. This year was no exception, and the bill passed out of the commission on a voice vote.

Dayton said he vetoed the bill because it lacked “shared commitments among employers, current employees and retirees,” instead “placing sole responsibility for reducing plan liabilities on current retirees.”

He said: “It is not fair, and I cannot agree to it.” What did the governor find unfair?

Dayton objected to a one-year reduction in the cost of living adjustment (COLA) for retired state employees and teachers, projected to save more than $81 million over decades. Public employees get a “compound COLA,” unheard of in the private sector. Compounding increases the base benefit year after year. The reduction was not intended to hurt retirees (who would still get a COLA). On the contrary, the savings would have shored up their pensions, leaving everyone’s future more secure.

While COLAs have gone down since 2010 because of lower inflation and a funding crisis, pension contributions have been rising steadily. As a result, current employees and “employers” (i.e., taxpayers) are paying a lot more to fund both old liabilities and current pension benefits. These increases mean that schools cannot, for example, hire more teachers or increase teacher pay, because so much of their budget is going toward old pension liabilities.

This is not how pensions are supposed to work, but this is what happens when government falls seriously behind in funding future promises.

Most teachers are in the Teachers Retirement Association (TRA). They are already paying more toward pensions than most current retirees did when they were working, with a combined teacher/school district rate of over 15 percent of pay (teachers pay 7.5 percent, schools pay 7.7 percent). Plus, they each contribute 6.2 percent for Social Security. Imagine putting aside 13.7 percent from each paycheck — plus taxes, health care and union dues — especially if you are a young teacher with student loans. Yet the TRA only has 77 cents on the dollar of what it needs to pay benefits, and a whopping $5.9 billion shortfall.

It is worse in St. Paul, which has the last independent teacher pension fund in the state. The combined contribution rate is 16.85 percent of pay, with the district picking up almost 10 percent. Yet the fund is falling further behind, with only 63 cents on the dollar. The pension bill the governor vetoed actually raised the employer contribution 0.5 percent at the fund’s request. The veto means this troubled fund will be in worse fiscal shape.

State taxpayers also have been providing direct cash aid: The TRA gets over $35 million a year as the result of mergers with Minneapolis and Duluth teacher funds. St. Paul gets about $10 million a year. This cash infusion will continue until they are “fully funded,” a status that is not expected for decades, if ever.

So don’t be surprised if the St. Paul fund merges with the TRA in a few years at great expense to taxpayers and current teachers.

State employees’ retirement fund has 86 cents on the dollar of what’s needed to pay benefits, with a $1.87 billion shortfall. The state and employees split an 11 percent contribution but still fall short of covering the benefit. However optimistic, the vetoed COLA reduction was a key part of maintaining the fund’s relatively good health.

There were other good features besides a reduction in COLAs. Most important, the TRA finally agreed to reduce its assumed rate of investment return to 8 percent, something all of the other funds did last year. While that’s still much too high, the veto wipes out that hard-won agreement.

The bill also streamlined bureaucratic hassles for grieving families when a public employee is killed in the line of duty, and it extended coverage when police and firefighters die shortly after performing dangerous duties. Cities were granted greater freedom to redeploy retired firefighters, and the bill increased the lump-sum pension used to attract and retain volunteer firefighters.

Retirees may look back someday and ask why COLAs were not reduced more, or even eliminated, at least until full funding is achieved. The Teamsters’ bankrupt Central States Pension Fund and failing public funds around the nation should serve as a stark warning to those who think current employees and taxpayers can bail out all of these pensions and still fund government and their own retirement properly.

It’s not clear what more the governor wanted from the pension bill. What is clear is he let his idea of the perfect defeat the good that everyone, especially future retirees, would benefit from.

 

Kim Crockett is vice president and senior policy fellow at the Center of the American Experiment. The figures cited are from the Minnesota Legislative Commission on Pensions and Retirement 2015 Valuation Summary.