Pension veto still bugs House Republicans

By: Kevin Featherly, October 3, 2016, Politics in Minnesota Capitol Report

It may seem like old news, but House Republicans still fume that Gov. Mark Dayton last May vetoed a pension reform bill with nearly unanimous support.

“Normally a bill that has a 75 percent or bipartisan vote, the governor will not veto,” said 11-term Rep. Bob Gunther, R-Fairmont. “This one had all but four members voting for it. Yet he vetoed it. I couldn’t understand it.”

It was a little noticed in all the chaos and drama at the end of last session, but Dayton did in fact reject a widely supported omnibus pension bill, Senate File 588. In his veto letter, he explained that the bill co-authored by Legislative Commission on Pensions and Retirement chair Rep. Tim O’Driscoll, R-Sartell, and vice chair Sen. Sandy Pappas, DFL-St. Paul, failed to spread the pain of reduced benefits equitably.

The one-time, one-year fix would have lowered automatic cost of living adjustments for most retired state agency workers from 2 percent to 1.75 percent and for retired teachers from 2 percent to 1 percent. It represented a one-time savings of about $81.5 million. Of that, roughly $18 million would have come from reductions in retiree benefits managed by the Minnesota State Retirement System. It administers most state agency worker retirement plans, plus some University of Minnesota and Metropolitan Council plans. The remaining $63.5 million in savings would have come from a one-year cost of living adjustment reduction for retired teachers; the Teachers Retirement Association manages those benefits. A third major retirement plan administrator, the Public Employees Retirement Association of Minnesota, was not involved.

The deal-breaker for Dayton was that the bill required no increased pension fund contributions either from active employees or employers. “It is not fair and I cannot agree to it,” he wrote.

The veto came despite broad legislative support. In the House, only Rep. Joe Atkins, DFL-Inver Grove Heights, Rep. Linda Slocum, DFL-Richfield, and House Minority Leader Paul Thissen, DFL-Minneapolis, voted against the bill. Sen. Eric Pratt, R-Prior Lake, was the Senate’s lone no vote.

“I was really stunned,” Rep. Greg Davids, R-Preston, said of Dayton’s veto. Davids, the chair of the House Taxes Committee, said pensions are constantly monitored by the Legislature. When pension bills are brought forward, they generally are bipartisan measures that pass and are signed almost automatically. “It’s kind of a no-brainer,” Davids said.

Pappas said she expected some pushback when she co-authored the bill, but assumed everyone involved would understand that the measure was meant merely as a first step toward a more complete pension fix to be tackled in 2017.

“I wanted to get a head start on the savings from the [cost of living adjustment] cuts,” Pappas said. “I was very disappointed.”

 Newly issued actuarial tables show that Minnesotans are going to live, on average, two years longer than actuaries projected less than a decade ago. (Source: Minnesota State Retirement System)

What might have been

This might disappoint even more people: By pushing forward only the one-time fix to retirees’ cost of living adjustments, the commission responsible for vetting pension legislation passed up an opportunity to save much more money.

Executive directors for both the Minnesota State Retirement System and the Teachers Retirement Association say that earlier in the truncated 2016 regular session, they helped craft a much more comprehensive proposal that would have put pensions on a sounder long-term footing. That package was never forwarded to committee by the pensions commission.

Their plan would have reduced pension liabilities by a combined $1.5 billion over 30 years, or roughly $50 million a year. Administrators say it had buy-in not just from the funds’ boards, but also labor unions and other stakeholders.

“Non-passage of the comprehensive proposal was a big deal,” said Dave Bergstrom, executive director for the Minnesota State Retirement System. “It would have made a big funding difference, no doubt.”

As it happens, Bergstrom’s pension fund is in relatively good shape. As of June 30, 2015 (the beginning of fiscal year 2016), the Minnesota State Retirement System reported accrued liabilities of $13.1 billion against $11.6 billion in assets. In other words, it was 88.9 percent of the way toward full funding of its anticipated long-term pension payouts.

Things are a little tougher at the Teachers Retirement Association. On June 30, 2016, it reported $19.7 billion in assets against $25.6 billion in actuarial liabilities—the amount of money needed to pay benefits. So it is only 77 percent funded.

However, as often occurs in the pension world, things recently got more complicated. Newly issued actuarial tables show that Minnesotans are going to live, on average, two years longer than actuaries projected less than a decade ago.

J. Michael Stoffel, the Teachers Retirement Association’s deputy executive director, said that increased life expectancy means the fund’s $20 billion in assets must now be stacked against liabilities of $30 billion. Minnesota State Retirement System liabilities likewise ballooned, from $13.1 billion to $13.8 billion, with no corresponding increase in assets.

Making matters worse, pension funds’ ongoing investments are down from their 1990s heyday. After several consecutive years of worse-than-expected returns, pension fund earnings for fiscal year 2016 will likely be nil or even slightly negative, said Minnesota Management and Budget Commissioner Myron Frans.

Those factors are what led the two pension plans, backed by various stakeholders, to pitch their $1.5 billion pension reform package to the commission, to reduce liabilities and move toward full funding, administrators said.

Richard Kolodziejski, public affairs and communications director for the Minnesota Association of Professional Employees, said his union supported the reforms even though it would have meant workers would have to dedicate bigger chunks of their present paychecks toward future pensions.

“One of our major legislative initiatives is to maintain the sustainability of these funds,” Kolodziejski said. “We want to be a participant at the table, to make sure that these funds are healthy. That is always going to be our position.”

A case of heartburn

O’Driscoll’s 14-member commission is split evenly between Democrats and Republicans. Because the Republicans have a House majority, there are five Republican and two Democratic House members on the panel. Likewise, because DFLers own the Senate majority, the commission has five DFL senators versus two from the GOP. During the 2015-16 biennium, the panel’s chair gavel belonged to the House. Next year the Senate will have it.

O’Driscoll said the comprehensive plan he received for consideration gave several House Republicans a bad case of “heartburn.” The problem, he said, is that while the Minnesota State Retirement System fund would have increased both employee and employer contributions, the same was not true of the teachers’ pension. Only school districts’ contributions would have increased under the original plan, not teachers’.

That made it a nonstarter for O’Driscoll’s GOP colleagues, he said, and not just because teachers weren’t willing to take the same financial hit as their employers.

Perhaps the bigger reason, he said, is that the school districts themselves were unwilling to pony up without help. For the comprehensive proposal to work,  increased school district contributions would have to be offset with school aids from the state’s general fund.

In other words, the state would have been on the hook to the tune of $48 million a year, forever, O’Driscoll said, had the original plan gone forward. That would have cost Minnesota an extra $1.3 billion over 30 years in general fund revenues.

When it was obvious that idea was going nowhere, O’Driscoll said, Pappas led efforts to craft a pared-down version that included only short-term cost of living adjustment cuts for current retirees. That was the version the Legislature passed and Dayton nixed.

O’Driscoll still can’t believe it. “It was a strong, largely bipartisan piece of legislation,” he said. “I mean, it blows my mind.”

Possible revival

Tomorrow is always another day, of course, and despite the collapse of this year’s efforts, comprehensive pension reform may not be a lost cause.

Pappas said she likely will be handed the pension commission gavel in 2017 as its senior DFL senator. If so, she said she will put forward a long-term pension fix. If Dayton puts comprehensive pension reform into his budget, and Democrats advocate forcefully enough for more state aid to cover school districts’ raised contributions, she thinks it could pass as early as January 2017.

Minnesota Management and Budget’s Frans said that the time might be right. “I believe that we have got some really good information about where we are,” Frans said. “We should take this opportunity to reduce the unfunded liability and make these plans more sound.”

O’Driscoll’s feelings are less sunny. The pension veto, after all, was not the only one last session. Coupled with Dayton’s tax bill veto over what amounted to a typographical error, O’Driscoll said, the pension veto demonstrates Dayton’s lack of good faith. House Republicans will not likely soon forget that, he said.

Does that mean they would resist Dayton should he move forward on comprehensive pension reform? “I don’t know,” O’Driscoll said. “I’m just saying that some legislators are going to say, ‘We tried to do our part. Why didn’t the governor do his part?’”

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