(00:00:00) The league is they like to call themselves kind of a non invited consultant on public affairs in Minnesota and every year they pick out 45 issue areas that they're going to look into pensions. Just I think what their program committee looked at when they were when they were looking at issue areas for the year that we got started was just really a lot of the questions that people are asking they don't know a lot about pensions pensions cost a lot of money kind of a general fear. I think that costs are out of hand and they're going they're going to be rising almost geometrically in the future a lot of this is of course based on what's Happening nationally Social Security that whole issue when it came up a year or two ago probably had some impact on their thinking in this area. But really I think it was more kind of a question that they didn't know what was going on in the area and they felt that this would be a good area for the public to know some more (00:01:10) about why should I as a non Public Employee but a taxpayer in Minnesota? Why should I be concerned about how public Pension funds are are gathered and administered in the state of Minnesota. (00:01:23) Well, I think it's pretty much the same reason that you'd be interested in most any of the other functions of government. It's a lot of money cost of Pensions in the state 1975 was almost a half a billion dollars and that is a lot of money you may not also be interested in how the streets are clean for example, but you will want to know when you when your tax money is going for that. Same as labor costs or really any other thing that government does (00:02:01) what kind of condition would you say? The Public Employee Pension funds in the state of Minnesota are in are they in good Financial condition overall, or are they getting close to the way the Social Security System nationally is said by some to be (00:02:18) none of the systems in the state or anywhere near the condition that Social Security is in at the national level by and large. The so the pension system in this state is in far better condition than most other states certainly heads above what the federal government is doing and probably a great deal better funded than most private plans are which is interesting because most people feel it's the other way around the state since like I'd say the date is 1957 has had a policy for again for most of its funds of doing a great deal of pre-funding which is what the the erisa law the employee retirement income Security Act Now requires for private plans and which most other states are going to but I think Minnesota was was definitely one of the first States first governmental units to move into this hmm. (00:03:19) The leak had a number of recommendations for how the State Pension funds should be run in administered and I'd like you to go over some of Those now in the those recommendations and suggestions that appeared in this report that that we're talking about. (00:03:36) Okay, the major controversial one at least as far as funding is concerned is that we recommended moving away from something that is called 100% funding what 100% funding means is that I'm afraid I'm going to have to step back a few other few more pieces to hell for you. Why don't we why don't we just kind of describe how the costs or what the cost of a pension fund our and then maybe we can get into some of these more esoteric (00:04:09) terms. That would be helpful for me under (00:04:11) percent funding and whatnot. When you set up a pension plan, so you're setting it up for the first time. Maybe you're setting up one here at the radio station. You would say well we're going to give you maybe 1% credit for every year that you've been here working at the radio station. Now, if you've been here five years and the plan is set up today. Usually the the body setting up the plan in this case. The radio station would give you credit for those five years that you've already worked here at the station. In Actuarial terms, then the station would have been said to have incurred a liability. For the at those five years of service that they are crediting for you and because the plan is just set up today. They don't have any money set aside to cover those liabilities. So that would be common in unfunded liability. If the station was to 100% their plan immediately, they would have to put in the total costs that you would have incurred for those pension benefits in those five years immediately. Now what generally happens is that The radio station or the government unit or whatever will say well we're going to we're going to fund those things but we're not going to do it immediately. We're not going to do it today. We'll do it over a period of 30 or 40 years (00:05:41) perhaps and that would be at least in part because there might not be an immediate demand say for those funds people might not be retiring at least on Moss. (00:05:51) Well, that's right. There there probably isn't going to be any situation where everybody is going to be coming in asking for their money at one point. One point in time that situation would be somewhat more likely in the private sector where a business could go out of business than it would be in the governmental sector where we really cannot see any situation where the state of Minnesota is going to go out of business. so what what the government unit or what the radio station or the private business has to do is figure out how they are going to pay the pensions when those pensions come due. One way of looking at it is to say well we're going to we're going to wait until people start coming in and asking for money. That's essentially the Social Security System a pay-as-you-go system every year you appropriate enough money to pay the to pay the checks that are going to come do this year the Other Extreme you'd have pretty much the system that the state of Minnesota is working under which is to say Well, we are going to try and set aside enough money. Now. We're going to collect enough money from the taxpayers and put it into a pot and invested so that we will have that money available. For these people when they when they retire. And what we're what we recommended was that something really in the in the middle needs to be done where the government unit would be setting aside enough money each year to incur the benefits that people accrue during that year, but that really the government unit did not necessarily have to go back the past service that I was talking about here the five years that you might have incurred at the radio station and set aside a lump of money to pay for those things when they came to (00:07:56) do they do that now, (00:07:58) in fact they are they are trying to do it in most of the systems in the state with the exception of some of the local police and fire are all of the local police and fire funds the AIM. Of the state right now is to have most of the major funds fully funded by 1997 and they're aiming for that Target date Minneapolis has a waiver from that and they're shooting for 2017. What putting a specific date in their does is really? The closer you get to that date the more sensitive any your the greater impact on taxes any changes in for example your assumptions about interest rates that the funds set aside are going to earn or turnover of employees or wage increases or even small benefit increases are going to show up disproportionately we feel as you get closer to that 1997 (00:08:59) date in other words, if the money isn't making as much interest as had been hoped for and taxpayers and the employees are going to have to make up that difference if the promised amount is to be achieved. Is that correct? (00:09:11) Right. Well as you get closer to 1997 1957 if you're if you were off on your interest to sumption say you were only earning 3% instead of 5% Well, then you'd have 39 years to spread that deficit over that that short coming over as you get closer to 1997. We're looking at 18 years approximately now as we move into the 80s, it will be down to 10 years so that you've got to be much closer to the all your assumptions As you move closer to that date and really that that causes are we feel that it will cause increasingly in a Radix sort of behavior as far as payments to the funds. (00:10:01) And so that's why the league suggest putting that date of 1997 farther off in the future. (00:10:07) Well, I think that's that's the reason we say do away with the 1997 date our reason for Doing away with any kind of amortization date at all. What we said was that there we didn't particularly feel that it was necessary to go to 100% funding or even to have that as a goal. And really what we were the question we were asking is what are what are you buying with that extra money that you're contributing to pensions today? One thing. It's clear that you're buying would be lesser taxes in the future whenever that date is reached but we were not able to to say that that would be better for the economy overall. Some people would argue that the lower taxes mean really lower costs in the future others would argue that if you leave the money out in the economy. That the economy will grow more so that in fact, even if your tax rates were proportionally higher in the future, they don't actually be less because the economy would be bigger. I don't know if you can follow that argument all the way but really what it what it led our committee to say was that we didn't know which one to pick and we said you looked to us like it was kind of a draw that you really couldn't tell which way total cost to the public would be less either by pre-funding or or not a hundred percent funding. So then we look to see what else the hundred percent funding was buying us and we really couldn't couldn't find a lot. And in fact, we could see that at some time in the future maybe 1997 or 1998 as we as we got to this drop-off point where the cost for pensions got less that we might and this is just speculation on our part. We might be seeing some type of pressure for increased benefits that really would not receive the type of governmental oversight that we feel they would simply because the rates have dropped so precipitously precipitously. You've got all that money there and it's almost a question of of what do you do with it how we certainly can't say that that's what would happen, but we could see situations under which it might so we felt that on balance moving to Thing where you pay the cost of benefits accruing today and that is the big part of any of your pension payments really the benefits that are accruing today plus what they call interest on the unfunded liability, which is really just an indication of how much your unfunded liability is plus a little something else to insulate you a little bit from any type of fluctuations that might occur because some of your guesses as to what's going to happen in the future might be wrong something like that would be appropriate. (00:13:27) Okay police and firefighters are on a different sort of pension plan than most are all other public employees in this state and the league had some suggestions about changing that and I wonder if you would describe first the situation the business of something called an escalator Clause with regard to pensions and then how it applies to the police officers and firefighters and what the league would do if it could or the suggestions at that it made to change (00:13:55) that. Well the police and fire and is this is only what they call the local police and fire funds which would be Minneapolis st. Paul and some of the other larger communities. Have really a it's not just unusual here. But it did so unusual everywhere. They have what would be called less of a cost of living increase and more of a salary continuation sort of plan your normal your normal cost of living escalator is similar to what social security has where every year every two years or something. The pension would be increased for increases in the cost of living what the the police and firemen in the local police and fire funds do is retire at a specified percentage of their of their salary. It's from 40 to 50% depending on their their term of service. And then after they retire they re really what they do is they they get all the wage increases that a policemen and firemen would receive they I should restate that they retire at 40 or 50 percent of well for the policeman. I thought I believe it's a patrolman salary or for a fireman. It's a first-grade firefighter. I'm not sure of the exact terms there but it's one specified specified rank within the police and fire force. So that a fire chief would not be going out at 50 percent of his salary. He would be going out at 50% of some significantly lesser (00:15:36) salary and then whenever there's an increase for that particular grade for the active duty person the person who has retired also receives an increase in his salary or in his benefits, right? Okay, right and the league suggest changing (00:15:56) We well we we looked at in the first thing we found was that these people were easy to sieving. Increases even above cost of living increases simply because wages have gone up faster than the cost of living it and I clearly this is the only group that we're aware of that that has that type of an increase in their pensions. What we said was simply we did not see a reason for treating policemen and firemen differently for pension purposes than any other Public Employee other than the retirement age which we felt the good case could be made for leaving that at 55 because you want a younger Force but really the reason that the higher pensions are often Justified is that there's an element of danger in the police and fire service and we agree there probably is but it didn't seem to us that that implied a higher pension benefit and imply implied hire more money now for those people because If there's any risk that you're going to lose your life (00:17:04) twice pension (00:17:04) benefit isn't a good way to compensate you for that. And in fact the cost of these police and fire pensions, which is somewhere up in the range of 25 to 40 percent of salary compared to Something in the range of 10 percent for a normal employee. If that were changed from a pension cost into direct compensation would be a sizable increase in the salaries of policemen and firemen. (00:17:33) So you have suggested that that be done away with and that if any benefits the rechannel those benefits so to speak into the active duty or currently working. (00:17:45) Well, we didn't suggest really what what to do with the money. But we're what we said was that that the pension benefits are for people that are retired and we couldn't see any reason for treating a retired policemen and firemen differently than a retire any other retired civil servant their situations and retirement are not that different. (00:18:06) Okay another group, which you took a special look at it seemed to me in the report was elected officials and you had some recommendations for how their pension plans should be handled and I'd like you to talk about that. (00:18:21) Elected officials were one of the groups that we did think should be treated differently from from other people in government service. And the reason primarily is the different terms under which elected officials serve then then other civil servants. They can lose their jobs. Every two years really through no fault of their own. Maybe maybe the electorate is changing or maybe they're changing your something doesn't indicate particularly that they're doing a bad job, but they're just no longer in tune with what the general populace is thinking. So they they have a somewhat more tenuous grip on their job than a normal civil servant or even a normal person out in private Enterprise. We thought that because of that and it certainly has been recognized by the by the legislators themselves. And what they have done is to reduce the number of years that they need to qualify for a pension from eight years to six years last session. They also reduce their benefits so that the cost of the plan were less but but what will you said was that? In general and in the state of Minnesota and particularly, there are very few people that make a career out of being an elected official. I guess there would be some exceptions to this. But where it's exist in the past most of these people have been part-time elected officials also. So what we said was that these people should be receiving what is what's called a money purchased plan where this state where the where the government body would be putting into a fund for each for each individual legislator or elected official certain amount of money each year. And then that would be matched by the legislator or other elected official it gets around a lot of your problems with with vesting how to integrate it with other pensions that you might be receiving from other service a whole lot of questions and we feel that it's it's gonna if something like that were instituted it would it would give the public something that they could clearly just take a look at and say there's the pension it's four percent of their salary and that's all we're contributing and that's it would clearly give the public something to judge the adequacy of the like to officials pensioner rather than Lot of lot of questioning of elected officials pensions at the present time whether they're overly generous or not generous enough and a lot of it involves as I've indicated discussions of what the vesting period is and who contributes what and what percent of final salary and do you include per diems and all kinds of stuff like this we feel our method is a lot simpler which makes it better for elected officials who are very high visibility and subject to a lot of criticism and is more appropriate for their type of short-term or I guess tenuous job security (00:21:47) another recommendation that you had dealt with a recent pension proposal made in Minneapolis for the City of Minneapolis. And I believe that proposal had something to do with putting about a hundred and seventy five million dollars of Of liability of transferring that to the state and you spoke to that in your report to I believe (00:22:11) we did great. We we did talk about that situation in our report. We didn't specifically talk about the the recommendation that you were noting which I'm I don't believe there is yet an official position of that mayor's task force. But what we said was simply that the state should not be assuming any of these unfunded liabilities from any of the jurisdictions that have maintained their own pension plans in the past. And I guess that's just kind of based on a feeling that the Minneapolis decided to go it on its own back 20 30 years ago and if kind of stuck by that and now they should take the opportunity to they're reforming their system. We should give them an opportunity to work on it themselves for a while. I guess the real reason is a not to burden the rest of the state with with those liabilities, of course our recommendation as far as funding would have a substantial impact on the way, Minneapolis. Funds for those unfunded liabilities so that they quite possibly would be looking at a lesser tax rate for them. If our recommendations were adopted by the legislature. (00:23:33) Let's go back to where we were about 10 minutes or so going that is the general condition of the Public Employee Pension funds in the state. How do they compare with private Pension (00:23:43) funds? How well-funded are they that (00:23:50) how well funded and how what kind of benefits more in terms of benefits would I do better after 20 years of service and as a Public Employee or perhaps better with one of the larger corporations here in town and I realized that what I did would probably have something to do with the to but if you can strike a sort of a an average situation to compare with (00:24:12) okay first, let me say on funding that I really don't know the answer private private pension systems are really up and down the ladder all over as I understand it. Some are very well funded. Some aren't on balance. I'd say the state's probably doing very well in better financial situation a lot of (00:24:30) private pension and there we should make that clear that there are a number of pension plans one for teachers and other public employees. It's not just one Pension Plan labeled the state of Minnesota as pension (00:24:44) plan or Major systems in the state msrs, for state employees tra the teachers retirement Association for most teachers in the state and PE ra public employees retirement Association, which takes in most of your local government City and County government employees. And then there are also a lot of other smaller funds around as well. Those are the three major ones and those three major ones have very very similar types of benefits they differ in a few respects. But but overall, I think you can talk about the three of them is almost being one pension plan as far as benefits are concerned the benefits under those three plans. We found to be very comparable to larger private Enterprises in this area your General Mills your honeywell's for example, we looked at and found that they were very similar to the benefits that were being offered through PE ra Airing and msrs. (00:25:49) How the Social Security figure in to all of this with regard to a public employees pension fund. And what does the Citizens League have to say about (00:25:57) that? Again, most public employees in the state are covered by Social Security. There are a few that are left out. Primarily Public Safety employees policemen firemen, and there are people in some of the older what are known as basic funds basic means that they are not coordinated with Social Security. The people don't receive Social Security from their employment at the whatever governmental unit. They're working for there are a few of those people still around at the state level great number of them in Minneapolis, which just came onto a coordinated system this year, but by and large policemen and firemen are the major group, That does not have social security coverage. We say they should be again because of the comparability factor. We feel that that in retirement. There's no difference between a policemen and firemen than any other public servant a lot of good things about social security. A lot of reasons to be covered medical benefits the cost-of-living increase that Social Security recipients receive every year and and in fact, a lot of those things have led to a lot of the people that don't get Social Security coverage at their place of employment to get it someplace else either through a part-time job or spouses and point ployment is often enabled a lot of people to be covered and they And in that situation where it has been through a lesser contribution to Social Security, the people are receiving benefits based on a lower income. And the social security system is Progressive as far as benefits are concerned. You receive higher benefits at the lower income scale relative to your income. Then you do it the higher income scale. So those people who have in fact a higher income, but if only qualified small portion of their income under Social Security are considered low income people for social security purposes and receive a disproportionately high social security benefit in dollars. (00:28:08) Is that what's called double dipping? (00:28:10) Well, that's not what's called double dipping. I'm not sure exactly what the Social Security situation is called. Double dipping is the situation where a Public Employee saying I'm trying to think of a situation where this could happen now a policeman in Minneapolis works for 20-25 years for the City of Minneapolis retires at the age of 50 and he comes over to the state and works for Where we could work maybe he would get a job as a game warden or something up in the northern part of the state and receive his salary for that position and then retire from that job at the age of 65 and also receive a state of Minnesota pension. That would be what was called double dipping. What we would recommend around that is complete portability. As far as pension plans in the state of Minnesota are concerned. We're lucky here because we have a fewer number of pension plans in the halves in a lot of other places, but we'd say that when are our hypothetical person here left the Minneapolis police force that he would not receive the pension when he went to work for the state of Minnesota, but all the credits that he accrued while working for the Minneapolis Police would carry with him to the state of Minnesota pension. And in fact that situation now exists between PE ra msrs and Tra as well as the City of Minneapolis has own local pension fund. So there is a great deal of portability. We're just suggesting that it be extended wear. It does not know (00:29:49) exists. This is a very complicated report at least it seemed that way to me and we've just touched on some of some of the tried our best but the points here this morning and I wonder if there are points that we haven't touched on that you think are important that we should talk (00:30:06) about the one major thing that that we really haven't talked about that. We we on the committee felt felt was very important was was the benefit proposal that we made benefits by and large today if in the not only in the public area, but also in the private area are usually what is called a defined benefit plan. This is a kind of a it applies a formula to generally your last five years of employment your salary and your last five years of employment or your salary and your highest five of the last 10 years of employment or something like that and under a defined benefit plans such as such as the formula plan that we have in the state. The taxpayers are really assuming the risk for any types of changes in the in the many variables. It can can affect a pension if wages go up more than we expect that means the taxpayer will be paying more. For pensions or if inflation is higher or the investment counselor that the state uses make some mistakes and we can into some bad Investments. The public is assuming all those risks. And what we're saying is that it's appropriate for the taxpayers to assume the risk the entire risk for some employees of the state and we felt that up to a certain income point and we said $20,000 would be a good place to talk about the state should be assuming all the risks for those employees pensions, but above that income point we felt that the Public Employee had the capacity to assume some of the risk on on his or her own self and what we proposed above that income Point twenty thousand dollars. Was that the Public Employee go into some type of money purchase plan similar to what we described for the legislators. Where the where the governing body would contribute a set percentage of salary and we said that that should be comparable to what they are contributing below the 20 thousand dollar Mark and that the employee should have the option of also contributing a like amount of money. It does as I said it not only shifts a portion of the risk over to those public employees able to assume the risk. It also gives those employees over whatever that income cutoff is a choice as to how much of a pension do they want. We're in a changing situation as far as employment 2 or R2 wage earner families are going to have a difference on how people look at retirement the change in the mandatory retirement age from 65 to 70. A lot of people seem to be saying well, I don't intend to retire ever so why should those people be contributing to a pension plan and what we're what we're proposing is just kind of a small set to let them have a small say in determining how much of their money they want to contribute for pensions. We think it would do a lot of good things if it were instituted and we hope it gets a serious look by the legislature. (00:33:38) What did seems to say is that for Public Employee who's making under $20,000 a year that the state will assume the will make the promise of a set benefit for that person's pension. But when that person goes above $20,000 then for any further pension benefits that person wants then that person must assume the risk of the vagaries of the stock market and all as far as the the money above that point. Is that is that a simple way of explaining it (00:34:14) right? I think I think that's correct. They know the person above $20,000 may not have to assume the vagaries of the stock market he or she can put his or her money into a savings account or some type of plan that insurance. Company would offer their guaranteeing as I understand at the moment something in the range of 7 or 8% for these types of plans. So Not only for the person's above 20,000. They would also be able to pick the amount of risk that they want and get it certainly get into a some type of a speculative situation. I would imagine if they wanted to but they they don't have to if they want to also what we're saying is that that up to a certain point the guarantee is the most important thing the guarantee of that person having an adequate amount of income to live on after retirement, but that above a certain point Or that you don't have to guarantee. What would be considered more than most people are getting to live on in retirement that there there should be some limit to how much the state is guaranteeing. We think it would also be beneficial probably just from a public relations standpoint. As far as public employees are concerned. They are really suffering because of one or two isolated incidents that have occurred recently of very high paid public employees being able to leave and getting a very good pension and then going to work for somebody else and by and large we don't think most public employees deserve criticism based on those one or two instances.