Closed-pensions merger may have big impact on property taxes

Last week, Governor Dayton and the Legislature took a step that could have a big impact on property taxes in Minneapolis. They passed into law a merger of two closed pension funds — the Minneapolis Police Relief Association (MPRA) and the Minneapolis Fire Relief Association (MFRA) — with the State’s professionally-run Public Employees Retirement Association (PERA).

The merger is not complete: all the other parties to the agreement that we have reached must ratify it. But as long as they do so and abide by the agreement, we will have solved a 30-year problem that has led to unnecessary, skyrocketing costs that have been passed on to taxpayers.

I’d like to give you some background on the current problem, explain the solution and tell you what comes next.

Problem: a system that serves nobody well

As I explained in my budget address last year and several times since then, the MPRA and the MFRA have been a principal cause of recent property-tax increases on Minneapolis homeowners and businesses.

In its current form, I don’t think the closed-pension system serves anybody well: it maximizes risk, volatility and administrative expenses that benefit neither pensioners nor taxpayers. As a result, the system also maximizes litigation, and the court has agreed with us that taxpayers have overpaid tens of millions of dollars in the last decade.

Solution: a merger

The new law that authorizes a merger of the closed funds into the State fund is part of a compromise agreement. Because it is a compromise, by definition it does not represent everything that the City Council and I wanted. But if honored by all sides, both pensioners and taxpayers will benefit from it. Here’s how.

The benefit to pensioners is obvious: police pensioners will get a 43% increase in their benefits in just four years, while fire pensioners will see a 50% increase. By any stretch of the imagination, this is a good deal for them. So how can it be a good deal for taxpayers?

Think of this merger like refinancing a mortgage, but no ordinary re-fi: instead, imagine getting out of the worst mortgage ever invented. Imagine getting out of an adjustable-rate mortgage with interest rates well into double digits into a fixed, long-term, low-interest mortgage. A lot of value is created when you do that, and that’s what this merger does: it gets us out of a system of damaging volatility and into one of lower-cost stability while still dramatically increasing benefits for pensioners.

Without a merger, this volatility would have continued: in fact, without a merger, the impact on your property taxes in the next two years would have been just as large as it was last year. That’s why finally solving this problem has been one of my highest priorities.

What’s next

The merger is not complete. Before it can take effect, it has to be ratified six times: by the boards and the membership of the police and fire pension funds, by the State PERA board and by the City Council.

Although the agreement benefits both sides, the horizon is not entirely clear. Some members of the police fund oppose the agreement that their leaders negotiated. They argue that a 43% increase in four years is not enough.

As Mayor, I have signed the merger agreement with the leaders of the police fund and will encourage the City Council to honor it as well. I did so even though this merger does not represent everything that I felt taxpayers deserved, but I did so because it will stop unwarranted tax increases on property-tax payers and is very fair to pensioners.

As long as those who would seek to derail this agreement do not succeed, I hope to be able to share with you soon that we have finally, permanently fixed a problem that has vexed Minneapolis for 30 years.

 

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