For more information contact: Christina Gosack 651-296-5524

NEWS COLUMN

$500 PER YEAR INCREASE IN YOUR PROPERTY TAX TO SOLVE THE MINNEAPOLIS TEACHERS' PENSION SHORTAGES. IS THAT FAIR?

If the amount of assets in the Minneapolis teachers' pension fund is compared to the accrued liabilities, there is a shortage of nearly $1 billion. Under the present circumstances, there won't be enough money to pay active teachers a large portion of their pensions when they retire, and current retirees will only receive a portion of their pensions.

Teachers believed they would get their pensions as set forth in Minnesota Statutes, and they taught in Minneapolis schools not just for their salary, but because they believed they would receive a pension upon retirement.

The reason there is a shortage in the pension fund is almost entirely the fault of state government and the pension fund itself. Since the state set the amount of their pensions in statute, it seems to me that the state needs to make sure the teachers will get all or most of their scheduled pensions. I think it is clear that the shortfall was caused by the actions of the state government and the fund's management, as is shown later in this memo.

However, many people in state government want to shift all, or two-thirds, of the cost to make up this shortfall onto the local Minneapolis property taxes. This would cause an increase in property taxes of more than $500 per year on a $160,000 home. Of course, higher priced homes will have to pay much more than $500 per year. The amount of this tax will continue for the next 20 to 25 years, and will double each 8 to 10 year period.

I believe state government, not Minneapolis property taxpayers, should have to pay the money needed to fill the shortfall (technically called the "unfunded actuarial accrued liability") in the teachers' pension fund, the MTRFA (Minneapolis Teachers' Retirement Fund Association).

My analysis of responsibility for the Fund's shortfall (with regard to state and local government) is set forth as follows:


ANALYSIS

PART I – LEGAL IMPLICATIONS

Legally, it's an open-and-shut case. The State legally took over liability of any deficit in the MTRFA in 1975 and since that time has had total control over MTRFA, including what monies went into MTRFA, what monies were paid out, what benefits would be increased, and what parts of its operations would be regulated. The City and School District had no say. Therefore, the City and/or School district couldn't legally be held liable; only the State is liable.

The 1975 law stated, "The state shall assume the total employer obligation" and took away MTRFA's ability to receive local property tax (about 90 percent of the legislators voted in support of this law). Since 1975, the State has set, by law, how much money is contributed by the State, by the School District, and by employers. (In 1993, the State allowed the City and the School District to each put in $1.25 million extra per year, and they have both done that.) The School District has always contributed the maximum amount allowed. The employees have contributed the amount set; in fact, for many years they have been contributing one-half percent more than TRA employees. The State set all benefit changes and post-retirement increase formulae. The amount of administrative and investment expenses, the assumed earnings for formulae, the mix of investment types, the full funding (amortization) date, where the funds could be invested, etc. were all subject to control by the State. The City and School District had no say – in fact, the State forbade the District from negotiating anything about pensions. Moreover, the City and School District never had control of the governing board of MTRFA. The State set up MTRFA in 1910. At least back to the 1950s, a majority of the MTRFA board was teachers. Since 1975, the board has been composed of six teachers and one school board representative.

PART II - FAIRNESS

From a pure fairness standpoint, it's an open-and-shut case. Punishing only Minneapolis taxpayers when taxpayers throughout the state did the same thing is completely unfair.

Since all school districts in the state grossly underfunded their pensions before the State took them off the property tax in the 1960s and 1970s, Minneapolis residents should not be the only ones in the state who have to now pay property tax because the pension was underfunded at a time more than 30 years ago, while the State "bailed out" the other districts.

When the state put a lot of money into "bailing out" TRA in the 1960s, 1970s, and 1980s, the State didn't go back to the districts with TRA teachers and make them levy property taxes to make up the deficit. The State instead put roughly $1.5 billion of extra funds into TRA to make up the deficit (more properly termed "unfunded actuarial accrued liability).

The State took TRA off property taxes in 1967 and took Minneapolis off in 1975. (TRA is made up of all districts except Minneapolis, St. Paul, and Duluth.) All teacher funds, except Duluth, had fluctuated between 35 percent and 75 percent funded for decades. For instance, in 1974 (the year before the State took over MTRFA, the Minneapolis teachers fund), MTRFA was 57 percent funded while TRA was only 50 percent funded. That same year, Minneapolis had a .82 percent sufficiency, whereas TRA had a 5.33 percent deficiency. Some other years, TRA had a higher funding ratio than MTRFA.

Even within TRA, school districts that had higher salaries and lower property valuations than average took advantage of the property taxpayers in lower salary and higher property valuation districts.

Moreover, when the State decided to help TRA toward full funding and put a huge amount of extra money into TRA (from income and sales tax revenue) because the property taxpayers all over the state had not been paying enough to fund their teachers' pensions, the State gave those additional payments based on every teacher in TRA. However, when they gave additional payments to MTRFA, they didn't give any money for Minneapolis teachers hired after 1978. Not until 1993 did the State give any help to MTRFA for teachers hired after 1978. This is just another unfair action by the State towards Minneapolis.


PART III - HISTORY

The small deficit in MTRFA exploded when the State took over in 1975.

When the State took over there was a deficit of only $76 million. (Even before 1975, the City had been levying as much as requested by the MTRFA, which determined the amount they needed.) Within a few years of State total control, the deficit had increased to $260 million.

Within a few more years of State control, the deficit was over $400 million. One year after the State took over, the total employer contribution of the State and City was cut 35 percent from what it had been the year before the State takeover. That cut was equal to 65 percent of the entire investment income of the MTRFA. (Remember, investment income is often planned to be 80 percent of the source for future pension payouts.)

Within two years of the State takeover, the funding ratio dropped more than 25 percent and the Fund went from roughly a one percent sufficiency to a 12 percent deficiency.

The State increased the MTRFA retiree benefits 15 times since it took control in 1975, and the State created the post-retirement earnings pension increase formula which doesn't take into account loss years and which probably prevents the Fund from ever getting out of its deficit. The only benefit from prior to 1975 that had more than an inconsequential impact was the provision whereby teachers hired before 1979 could retire after 30 years. (It is hard to determine the effect from this, and most teachers taught much longer.) However, even this provision had only a minor effect.

The small deficit in 1975 pales by comparison to everything that happened thereafter.