On Monday, the Senate passed the Pensions Bill on a unanimous roll call vote. Dayton has vetoed pension bills in the past because he thought they made retirees or workers’ pay too big a price (as opposed to the taxpayer, both state and local).  Republicans tried in vain to produce a bill that would hold the taxpayer harmless but clearly could not work with Dayton to produce anything like that. After non-action for several years, the unfunded liability was swelling, (about $17 Billion in total) the investment assumptions were way off (there was an 8% assumption when most other states’ pensions had reduced theirs to 7% or lower). 

Why are we saving the State Pensions?  There are several arguments that have been floated:

• “It’s the right thing to do.” Government employees with many years of service have paid into these pensions. Teachers, snow plow drivers, police, and firefighters as well as paper-pushing bureaucrats.  They did not have alternative retirement plans such as a 401K and had the contributions to their pensions deducted from their paychecks as a condition of employment. Some paid in even higher contributions and did not pay into social security as per the terms of their pensions.  So this group of people is especially dependent on their pensions for their retirement.  Case law also appears to side with pensioners who have brought suits about state’s fiduciary responsibilities toward pensions, although the courts have given notice that the terms of Minnesota’s pension plans can be changed for the benefit of the plan as a whole.

• Minnesota’s financial condition will be downgraded if the pensions’ financial conditions are not shored up. The Credit rating agencies have already given notice that the public pensions are a concern. A potential downgrade mostly deals with the state’s ability to borrow but it’s also a matter of the state’s fiscal condition, that they have this looming payment out there in the form of unfunded pension responsibilities.

• This bill is a “shared sacrifice.” The bill deals with the changes to the terms of the pensions, what employees pay in (more), what employers (the state, local governments) pay in (more), what retirees get (less—in terms of scheduled Cost of Living increases). Except that taxpayers are already paying in twice—once as the employer and once more with General Fund money to shore up the pension funds from previous mistakes and mismanagement. We repeatedly hear how we can’t go back in time and fix old mistakes (maybe what pay now or pay later looks like years down the road?)

• “Pay now or pay more later.” The bill puts more money into the state’s pensions. Governor Dayton has proposed putting $27Million plus more in the "tails" (see below--columns are FY '18, '19, '20, '21, amounts in thousands so add 000).  This is in addition to the amounts that will come from higher contributions and lower payouts outlined in the bill.  More money invested means more money to make investment gains and be drawn down less quickly.  So it is true that if the state does not spend this money on pensions today, it may have to come up with more money to replace money that was not in the fund to grow. 

• We have to do this first in order to consider other alternatives like defined contribution (401K type) plans. They are two separate issues, that much is true – what to do about today’s workers and retirees, future workers and retirees and whatever group would be there during the transition. But it is also true that when the pensions aren’t “in trouble” nobody does a thing to them and the argument is not to “tamper” with them. Crisis is often the only thing that creates the pressure for change in Government and nowhere is this truer than with Public Pensions. Once the crisis has been put off for another 5-10 years, they are said to be “working.”

If you follow pensions for more than a few years what you realize is that the funds’ administrators and some legislators count on the churn in new legislators and new staff to provide a kind of collective amnesia about what’s already been done by the state to keep the pensions going. Each ask is not compared or totaled up with previous asks. (Side note: the Ways and Means Committee this year asked staff to provide a summary of all the additional funds that have been put into the pensions. That should be interesting if it ever sees the light of day.) Each time there is a crisis in funding, we hear about a “shared sacrifice” plan that is supposed to “fix” the pensions. But none of these fixes ever solve the basic issue of unsustainability. They are more accurately described as a refi with a big balloon payment at the end. But don’t worry, long before we get to that point, there will be another underfunding “crisis” and another refi with an even bigger balloon due at the end. 

Next Steps: After it passed the Senate, the bill was sent to the House which sent it to the  Government Operations Committee, where it will be scheduled for a hearing. Since there is a fiscal cost to the bill, it may go to State Government Finance, but it will go to Ways and Means before the floor. There may be some delay as the Supplemental budget is negotiated with the Governor to provide the final bottom line number that will be paid into the Pension Funds.