Spectrum: Larry Martin discusses public employee pension funds

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On this regional public affairs program, MPR’s Rich Dietman interviews Larry Martin, executive secretary of the Legislative Commission on Pensions and Retirement. Martin discusses explanation of the financial health of the state pension funds and how the Citizens League study might be received by the Commission.

The League study looked at various pension plans in Minnesota and came up with some recommendations for how they might be changed to save taxpayers some money.

Read the Text Transcription of the Audio.

(00:00:00) The funds are in iron recently. Very reasonably good shape actuarially there in excess of 50% funded approaching 60 65 percent funded three major funds and and Statewide all the funds involved are are just shy of 60 percent funded. The the notion of funding is probably going to be Troublesome to people who are not used to listening to to discussions of public pension plans one if in their household, we're only 60 percent funded presumably you would be approaching bankruptcy. That's that's not the case with with public pension plans. The liability of a public pension plan is really a future debt. It's an obligation that has to be paid sometime in the future. The liability is created when the service is rendered. The the obligation is not fully paid off until the person is retired and ultimately until the person dies pain. Funds will recognize the liability during a person's active working Lifetime and fund it if they're funding on a sound basis and actuarially sound basis Social Security does not use the system Social Security is what we call it a pay-as-you-go system. They merely try and provide enough income to support the disbursements that they have to make month to month or year to year to make it as simple as possible. We're not we don't we do not run minutes the various Minnesota public pension plans that way we intend to to fund a dollar for every dollar of a liability that's created by active service. And in fact, you could view this as a sort of pre-funding funding a debt that we're going to have to someday pay but we want to accumulate the assets during the working lifetime of the public employees involved allow them to earn interest so that a certain amount of the obligation will be paid by investment income rather than tax pairing. (00:02:01) Income (00:02:02) and and then eventually pay out the benefit from the assets that are accumulated by the public pension fund roughly how much now comes from taxpayers for the Pension funds. Can you say it's hard to put a number on it? Probably 60 to 65 percent of the contributions come from employers and employees will pay something of the total contribution required to support the various Pension funds probably pay 35 or 40% of that 65 percent. It will be paid by the employer. What makes it difficult is that all these accumulated assets are earning interest over time and a substantial portion of the income to the fund will not be contributions, but will be interest from the invested assets and as a plan gets better and better funded there's more and more assets to earn income and constantly a greater amount of of income (00:03:03) and therefore (00:03:05) and therefore theoretically then less need of say taxpayers or employees to put money into it, right? Okay, I'd like you to talk a little bit about the Citizens League study what you know of it in general terms how you see it being applied to the Work that you do here and that the legislature does in determining what kinds of pension protection or coverage state employees will receive in the future. That's a fairly broad question. Maybe to start out describe our role in it as as staff members for the for the commission my predecessor and I attended a fair number of the Citizens League hearings during the course of their developing the report towards probably the last third I attended every meeting that they that they held my predecessor tended Fair number of the first two-thirds. So we've watched the report change and grow and (00:04:05) the (00:04:06) the discussion (00:04:08) develop. (00:04:11) The Citizens League report raises a number of good questions that have to be raised we've noted over the years that that the public is not terribly aware of public pensions that it's a it's an issue that the public really ought to be able to be aware of because of the size of the liabilities involved (00:04:31) the (00:04:32) potential for for future problems because very easily public pensions can be a deferred cost. You can promise a pension benefit today and really not suffer the effects of granting that pension increase until many many years in the future when the retiree in fact retires, especially if that employee happens to be aged 20 or or or or 25 40 or 45 years from retirement age. So it's good that the public is being made aware of the various problems whether or not the Citizens League had has in their nine months study uncovered all the answers. Remains to be seen the study goes a long way to identifying some of the crucial issues and it provides in many times an alternative answer to the one that the commission and it's roughly 25 year history has developed because of that. I think the commission is is going to take a look at the report somewhat skeptically or somewhat critically in many instances. It recommends things that the commission has tried or have been tried in the past and it's been rejected as not a very workable way of going about things what are some of those one of the things that they in the area of plan design the citizens lie as you probably are aware from us any mr. Lindbergh's discussion covers three things principally the plan design funding in the administration of a public pension plan in the area of the plan design. They suggest that a cap. Be placed on the defined benefit portion of a public pension right now virtually all of Minnesota public pensions are defined benefit plans. I assume mr. Lindbergh describe what that is. That's the twenty thousand dollar cap twenty thousand dollar cap. Is there suggested figure Minnesota has had some experience with with cap similar to this or somewhat similar to this during the up through 1967. There were caps on on how much salary would be included in a public Pension Plan coverage. These typically were when they were first set in the late 40s fairly reasonable caps, but they became more and more unreasonable as time went on and we're finally discarded in 1967. The commission hasn't had a real good feeling about placing caps on and recognizing less than total salary in public pensions. A lot of our problems a lot of the liabilities that have been incurred from from the change in 1973 can be traced back to the fact that we did not cover total salary prior to 1967 consequently the contributions being unless than total salary or inadequate even more inadequate than they would have been had we been a total salary the plan decisions leaked report suggests that that we go to an integrated plan as opposed to a what we call a coordinated plan where the there would be an offset against the social security benefit rather than the public Pension Plan benefits supplementing the social security benefit. This is been tried in One Fund. It's still being used by the judges retirement fund and the the commission has had some experience with it and is less than than than than satisfied with the way the plan has been operating. Principally because the Social Security maximum salary keeps changing the benefits keep keep changing and the contributions to the plan are are fairly difficult to to to determine the actuary in calculating what's required to fund. The plan has to add on an additional assumption as to what Social Security will do in the future. This is a change that doesn't have any significance other than what Congress decides the social security benefit ought to be so in putting that plan together, then it sounds as though someone has to be anticipating ahead to what is going to happen on the federal level, right? Yes very much. So and that's been the problem with the judges plan. So those are our two areas that one can point to fairly major areas what's viewed by the citizens league as a as an innovation with the cap and with the Social Security offset as being two of their main, Points for their report. Another thing that they talk about is removing doing away with the 1997 deadline for having all if I'm correct all funds paid up and and that's another point that I believe that you differ with. Right. The commission was the body that established the present 1997 844440 funding that's the point when all the liabilities that the pension fund has. These are as I explained before that the discounted value of future obligations when they're going to be fully fully funded. That's the target date for full funding. This was set in in 1957 using a 40 year period and we've held to the 1997 date fairly rigidly. It's a fairly conservative approach to funding the commission tends to be fairly conservative. Will always tend to favor funding over not funding the Citizens League recommends more than just doing away with 1997 date. They recommend that that we amortize only a portion of the present deficits in effect leaving some fragment or some portion not disclosed. They all all he would really say in the report is some small portion of the deficit ought to be amortized the balance would presumably not be amortized and would be a constant debt that would be passed on from generation to generation. This is a fairly radical departure from the current practice and it would not be viewed very favorably by the commission if one is concerned about future taxpayers and passing on burdens to to other Generations, which the Citizens League does discuss. It seems to me that that passing on a portion of the pension fund debt that's already been incurred but not paid up on. Definitely does a disservice to people many generations down the road. What about their suggestion that legislators be put on what I think is the is it the defined contribution plan rather than the other the other plan because they are in a different situation. They feel their recommendation was all elected officials should go on the defined contribution plan. This is I'm sure mr. Lindbergh explain that this is a type of plan that in effect guarant guarantee is no proof. No precise benefit amount. It's really difficult to try and determine what the commission's reaction is going to be because the committee report really is talking about all elected officials and where one can can design a plan and having in mind very short term officials. Perhaps legislators. Typically don't don't make a full career of being members of the legislature. There are many people in county and municipal government who would be elected officials who wouldn't affect be career employees and would not be adequately covered or potentially not adequately covered by a defined contribution plan. If a defined benefit plan providing the guarantee at least for a portion of their salary makes sense for other employees of municipalities. It probably makes sense for for those elected officials who are really in the same situation one could separate out legislators one could separate out separate out many. Was Alderman is as people who as groups of employees or groups of public pension fund members who have had particular problems that have been identified in the press the commission views that that these to the extent that there were problems to this point. They have largely been been been solved the Minneapolis Alderman problem was the what we call for a shorthand version the 10 and out where you get 10 years of service and can draw up a pension benefit at any age that has been removed from the plan. There's at least some argument on a staff level whether the law that Was used to support that ever really went that far ever did provided that there was no minimum retirement age, but notwithstanding that fact the commission supported legislation last session to remove that from the law prior to the Minneapolis articles the Minneapolis Tribune articles with the legislators plan the the 1977 and 1978 legislative amendments the legislative plan Amendments have have greatly reduced the cost of that plan so that it's it's actually a less costly plan than than other what we call Basic plans covering Municipal Employees or teachers. The cost of that plan is it is substantially below that and the contribution by the state legislator is greater than that being being paid by a tra basic member or a pra basic member so that the commission feels that they've largely The problems that have been identified in the press in many instances the prior to the Press identifying the problem and and consequently would look upon the Citizens League solution somewhat. Skeptically. There's another point that the league brings up and that has to do with police and firefighters. This is something that the commission has been spending a great deal of time on during the last year year and a half probably ultimately since since the year 1969 when we first got into the area of local police and fire pensions and and and viewed them with with perhaps cradle arms and because of the very very poor funding and we've made strides since then the escalation which is what you refer to wear a retirees benefit is set as a certain percentage of current pay of a top-grade firefighter attack great patrolman applies to some of the local plans, but not all of them and does not apply to the Why police and fire plan Minneapolis Police and Fire st. Paul police and fire Duluth Police and Fire and a number of other locals local police and fire finds do provide the escalation feature. It's reasonably common among local funds but not all the plans and not the Statewide plan the proposal that the state legislature has been looking at for about two years now is to provide it all new police and fire higher densities where there are local plans rather than going becoming members of the local plan with the escalation would go into what we call the PE ra police and fire fund the Statewide police and fire fund which does not have this escalation feature which provides benefit improvements from from time to time the same way all other public employees get benefit improvements, which is largely from investment gained over and above the assumed rate. The commission has passed over the past. Ten years about 20 bills that provided on a on a local on a locality by locality phase-out or placement of new officers and to pieri police and fire. They're really looking at now is extending the the this problem this this this program over the balance of the local police and fire funds the thirty-some-odd who still retain local fund membership for all new active employees being (00:16:58) hired. (00:17:02) So the Citizens League has identified the problem. The commission is not unaware of the problem the Citizens League in the Amendments that the board of the Citizens League approved which were not part of the original committee's report do recommend that all new employees be placed into the pra police and fire fund that that is essentially The Proposal that the commission is looking at and working from we're getting some some Counter proposals from the local police and fire groups involved and the commission potentially will resolve some of these questions during this coming session from the position that you're in. Where do you see or how do you see this overall report being accepted or being used now? The league says as it is with all of its reports that it does report writes. It releases it and sees steps back and sees what what happens it does not do any lobbying or anything like that from where you sit what do you expect will become of it here in at the Capitol. It depends greatly on on who picks up the Citizens League report. I think largely their strategy is to to present a soon. We well-thought-out proposal and the step back and to let interested parties pick it up if they will to the extent that it's a fairly academic Enterprise. They're not drafting a builder not drafting legislative proposals, which are the common Fair around here and we're going into a legislative session starting in about one week. It's somewhat difficult to handle the Citizens League report as a report as its drafted. There are a number of areas where where it needs a lot of specifications needs a lot of breaking out the the rather major assertion that the Citizens League makes into its component parts. It's it's it's resulting details what has to be done to clean up the report to make it. Full-fledged proposal a lot of that work still has to be done if it's going to be considered as a package. I think parts of it particularly the administration of the various public pension plans portion probably will be looked at very very seriously. It's something that the commission appears to be leaning towards any way to potentially increase the number of or at least increase the participation of those public employer or public members on the various Boards of various public pension plans to increase either the number or their participation in the process that recommendation probably will (00:19:52) find (00:19:54) some sympathy with the state legislature and with the commission since the plan design that the Citizens League proposes and the funding greatly differ from what current practices unless there's a fairly well spelled out proposal and indeed perhaps they drafted legislative bill. (00:20:12) Proposal (00:20:13) put forth. It's not real clear to me how the commission would react to it. The commission tends not to during the legislative session engage in academic Enterprises. That's something that that really is done during the interim periods, which way now concluding most of the more academic or or philosophical discussions have have already taken place where we're pursuing things like like the problem. We're having with disability benefits the problem of what's been termed double dipping and the local police and fire problem, perhaps being the three largest problems that we've been discussing for four months now during various meetings, unless the someone takes the the Citizens League report and starts boiling it down into a legislative proposal at that could be drafted into a legislative bill. It would be very very difficult to handle it as a eyetality as a whole entity.


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