ST. PAUL -- State and local government pension plans face $4 billion in deficits because they paid rich benefits in good times and didn't cut them back in lean times, the Minnesota Legislative Auditor's Office reports.
While Duluth has gotten the most publicity on the issue, other cities and school districts face similar problems keeping enough money to pay for retirement benefits.
Most of the problem is with health care provided to retirees. One out of five local governments providing benefits beyond pensions faces financial problems, the audit shows.
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. But when the market dropped, benefits remained high, they said.
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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 Northeastern 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.
Late last year, Minnesota State Auditor Patricia Anderson estimated Hibbing's liability at $56 million and the Hibbing school district's liability at $32 million. At the time, her estimate put Duluth's liability at $279 million.
The Duluth Teachers' Retirement Plan, run locally, faces a $51 million deficit, the audit showed Tuesday. The Duluth school district estimates its liability is closer to $19 million.
The legislative auditor recommends that the Legislature authorize local governments to establish an "irrevocable trust," a safer way to guarantee funding of benefits. Hauer said it is unclear whether local governments can do that legally now.
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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 can be found at www.auditor.leg.state.mn.us .
Don Davis works for Forum Communications Co., which owns the News Tribune.
