City could face more pension pain

New forecast has city’s pension obligations increasing by $38 million in coming years

On Aug. 14, Mayor R.T. Rybak unveiled a 2009 city budget that aimed at putting a dent in the city’s infrastructure needs. For a moment, City Hall was happy to put its focus on improving streets, repairing traffic lights and resurfacing bicycle trails.

Then, a month and a day later, financial services firm Lehman Brothers filed for bankruptcy, and the world changed.

In the middle of budget discussions, the City Council received a big dose of bad economic news: A potential steep increase in its obligations to three pension funds. If projections hold, the city — and thus taxpayers — could owe an additional $38 million over the coming years.

"I had no idea it was that bad, and I’ve been following this pretty closely," said Council Member Paul Ostrow (1st Ward), chairman of the Council’s budget committee.

The pension funds in question — for the Minneapolis Police Relief Association and for the Minneapolis Firefighters Relief Association — have a history of troubling the Council.

Most of the people represented by the two associations are no longer working; every one of them was hired before 1980. The associations control their investments, meaning that while the city pays, it doesn’t make a lot of the big decisions.

Troubled economic conditions have hit the funds before. The 2001–02 stock market decline sliced the pension assets needed to pay pensioners, and early retirements forced up pension costs. As a result, the city in 2003 for the first time borrowed to pay pension debt.

Finance Director Patrick Born said the city has been wanting to change the setup of the funds for years, but those reforms haven’t happened. So, as has been expected, the city is bracing for pension obligations to hit hard in 2010.

Before the markets collapsed, projections showed property tax support for the pensions increasing by at least $3 million every year through 2012, with as high an annual obligation as $37 million in 2014.

The immediate impact of the added $38 million is unclear.

Because the pension fund obligation increase won’t arrive until 2010, Budget Director Heather Johnston said it’s possible not many changes will be made to the 2009 budget before its Dec. 11 adoption.

But council members are concerned about keeping enough money in reserves. That could have an impact on how much they’re willing to spend on infrastructure next year.

Ostrow, in particular, is concerned about having to make too many changes to Rybak’s proposals.

"I don’t think there’s a lot of fat in the mayor’s budget," he said.

At the same time, he also doesn’t want to empty out certain trust funds for one-time payments. The $38 million are, after all, just a projection and therefore could increase further depending on the markets.

The state could play an influential role as well. It’s expected that 2009 will be a challenging year money-wise for Minnesota, but exactly how challenging won’t be known until early next year.

"We’re dealing with probably more uncertainty for ’09, ’10, ’11 than we normally do at this time [in the budget planning process]," Born said.

Budget timeline

The City Council is still in the process of finalizing its 2009 budget. Here are some dates to watch for.

Dec. 1: Truth in Taxation hearing. This is the public’s final opportunity to weigh in on the budget. It’s set to begin at 5:05 p.m. in Council Chambers at City Hall, 350 S. 5th St.

Dec. 5: Budget mark-up. The city’s budget committee will propose and make changes.

Dec. 11: Adoption. The City Council is expected to officially adopt the budget. If extra time is needed for public hearings, a continuation of the Truth in Taxation meeting will occur at 5:05 p.m., before adoption.