Thursday, April 19, 2018
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Minneapolis teachers pension fund in a deep financial hole
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Sen. Larry Pogemiller is proposing a plan to merge the troubled Minneapolis teachers pension fund with a larger fund for teachers across the state. (MPR Photo/Laura McCallum)
There's been a lot of talk about the possible state government shutdown that could happen on July 1. Most people know that differences over funding for education and health care programs have led to a stalemate. But there are other issues lawmakers are considering. One you may not have heard about involves a multi-million dollar fund designed to pay pensions to retired Minneapolis teachers. The pension fund is in serious financial trouble, and lawmakers disagree over how to fix it and even what caused the problem. And the financial future of about 13,000 teachers may be at stake.

St. Paul, Minn. — Social studies teacher Joe Musich has been teaching in Minneapolis for more than three decades. He plans to retire in a few years, and is hoping that he'll have a pension to live on. He's worried about reports that the Minneapolis fund he's paid into might not be financially solvent.

"It's going to last for a few more years, but I think the last date I heard was 2014. And I might still be alive then," Musich said. "It could be gone."

Musich doesn't know who to blame for the Minneapolis fund's financial problems, but he does hope the Legislature steps in.

A plan pushed by State Sen. Larry Pogemiller, DFL-Minneapolis, would put Musich and other Minneapolis teachers into a larger pension fund for teachers across the state. Pogemiller said the Legislature can't ignore the problem.

"It's about 50 percent funded only," Pogemiller said. "And about 60 percent of these teachers don't live in Minneapolis, and so it's really a statewide issue."

Pogemiller said the Minneapolis fund, which dates back to 1909, has historically been underfunded. The problem has ballooned to what is now a projected $851 million gap between the plan's assets and the amount needed to back up its pension commitments.

If the trend continues, pension experts say the plan could default in the next 10 years. Then either retired Minneapolis teachers wouldn't get their pensions, or the government would have to fix the problem at a much higher cost than Pogemiller's proposal.

But critics say Pogemiller's plan would force the statewide Teachers Retirement Account, which is financially healthy, to absorb the problems of the Minneapolis fund.

"The fund that is well off is going to subsidize the one that's not well off," said State Rep. Marty Seifert, R-Marshall.

Seifert said teachers in his district are nervous about the possibility, because they worry it could make their pension plan more risky. He said Minnesota taxpayers already heavily subsidize the Minneapolis fund.

If the trend continues, pension experts say the plan could default in the next 10 years.

Seifert sponsored the state government budget bill that passed during the regular session, which included about $30 million for the fund over the next two years.

"Every year, the Legislature dumps in $30 to $40 million and walks away from the real issue, which is -- you are giving out more than you're bringing in," Seifert said.

Seifert said instead of asking the state to contribute more, the Minneapolis fund should cut retiree benefits, which increase automatically every year. The average Minneapolis pension is about $31,000 a year.

Pogemiller's plan wouldn't cut benefits. Instead, to make the merger more palatable, it would increase benefits for teachers in the statewide plan.

Pogemiller's plan would cost Minnesota taxpayers $2.5 million a year. That's on top of the existing state aid to the Minneapolis fund, which is about $19 million a year.

Pension expert Mike Stolte said taxpayers will end up paying for what he considers financial mismanagement of the fund.

Stolte, who has tracked pension fund performance for three decades, said over the years, numerous fund managers have tinkered with the Minneapolis fund's investment policy in an attempt to beat the stock market.

"That has been a very expensive experience for them, and it really reaches to the point that one could argue that the assets made available by the taxpayers have been mismanaged," Stolte said.

Stolte said the problem has only worsened in the last decade, as the markets plummeted.

The fund's executive director, Karen Kilberg, said the issue isn't mismanagement, but chronic underfunding almost since the plan's inception in the early 1900s.

"It really was in about the fourth year of our existance when, for the first time, we had more money going out than money coming in," said Kilberg.

Kilberg said the fund could not have invested its way out of that growing problem. Three times in the past 10 years, lawmakers have approved an ongoing infusion of money into the Minneapolis teachers retirement fund.

This year, legislative leaders in both the House and Senate say it's possible a merger of the Minneapolis fund with the statewide plan could be part of a final deal -- whenever that happens.