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$4 billion pension fund deficit found

ST. PAUL - State and local government pension plans face $4 billion in deficits because they paid too rich benefits in good times, but did not cut them back in lean times, the Minnesota Legislative Auditor's Office reports.

While Duluth has gained the most publicity on the issue, other cities and schools face similar problems keeping enough money to pay for retirement benefits

Most of the problem is with health care provided retirees. One out of five local governments providing benefits beyond pensions faces financial problems, the audit indicates.

The major culprit is a retirement benefits fund formula, said Jody Hauer of the auditor's office.

"It will always be at risk of developing future deficits," Hauer said of the formula.

Hauer and Legislative Auditor Jim Nobles told a House committee Tuesday that the formula called for increased benefits when the stock market was doing well. However, when the market dropped, benefits remained high, they said.

Investing in the markets provides much of the money to pay retirees.

Rep. Neil Peterson, R-Bloomington, likened the formula to a virus. In the future, he said, it could become a pandemic and hurt many retirees.

While the report was about city, county and school retirement benefits, Nobles told state lawmakers that "it is already your problem" because the state sends aid to all those local governments.

Chairman Gene Pelowski of the House Governmental Operations, Reform, Technology and Elections Committee said he expects legislation this year to deal with the situation, but it has yet to be drafted.

Eleven northeast Minnesota local governments face the biggest problems, Hauer said, because they tend to offer more extensive retirement packages than other governments. They are Mesabi-East schools, Greenway schools, Duluth, Bovey, Hibbing schools, Coleraine, Nashwauk, Virginia Chisholm and Ely. All are part of a statewide fund.

The Duluth Teachers' Retirement Plan, run locally, faces a $51 million deficit, the audit shows.

The legislative auditor recommends that the Legislature should authorize local governments to establish an "irrevocable trust," a safer way to guarantee funding of benefits. Hauer said it is unclear if local governments can do that legally now.

Hauer and Nobles also suggested that the Legislature add money to the statewide retirement fund to plug the deficit and protect against future financial woes. They also want lawmakers to change the benefits formula so retirement funds keep much of the money gained in good economic times to get them through the bad times.

Directors of the state's pension funds said they generally agree with the auditor's report, but said it is not as bad as presented.

"This is not a crisis situation," said Lori Hacking of the Minnesota State Retirement System. "It is a relatively manageable problem."

Rep. Sandy Wollschlager, DFL-Cannon Falls, said the problem shows there is not the $2.2 billion state surplus some say exists.

"We don't have a surplus in that we have what appears to be a very serious problem of at least $4 billion," she said.

The full audit may be found at

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.