Pensions owed to aging police and firefighters could cost taxpayers millions

In a corner booth inside Elsie's Restaurant in northeast Minneapolis, Walt Dziedzic, a retired cop and former city council member well into his golden years, pours a package of sugar into his iced tea. He stirs, takes a sip, and stares straight ahead.

"You want to talk about pension, huh? First you need to get that, to a cop, a pension is sacred."

In 1978, he and fellow council members worked to close a pension system set up in the late 1800s. Their plan was to keep the promise to cops and firefighters who were already in the system, while transferring any new hires into a state plan. For Dziedzic, the issue was simple: The pensions cost the city too much money.

The cops didn't respond well. Dziedzic recalled a meeting at which 300 police officers walked into City Hall, lined up in rows, and sat down on the old wooden benches, the noses of their holstered guns striking the wood and echoing through the chamber in unison. In the next election, they ran a candidate against Dziedzic, even though he was one of their own.

"I took some heat. But you got to realize, it was different back then," he says. "The city had way more obligations—it ran the jail, the hospital, and the workhouse. And back then the state actually had money to help us out."

Under the agreement of the closed system, the city is on the hook for any losses to the police and fire relief funds. This didn't matter much during the boom economy. But last year, the closed pension funds, like most investments, soured with the crash of the economy. Under the brokered agreement, the city has to make up the difference—to the tune of $22.7 million in 2010.

To solve this problem, the city plans to bump up property taxes in 2010 to 11.3 percent. Sixty-one percent of the new revenue will go directly to pension obligations.

"There is no way to adequately convey to you how much of a problem this is for the city," says council member Betsy Hodges. "Pension reform must happen or the city will be forced to cut services even further, including police and fire."

Peter Wagenius, the mayor's senior policy aide, has been there from the start of the Rybak administration. He refers to himself as the old man of the office, despite being the tender age of 38, and is intimate with the issue of pensions.

"In 2004, we received an auditor's report. It informed us it was time for action on this issue," says Wagenius. "But the Legislature wouldn't get involved in the detail. They said to the city and the funds, 'Work it out.' But telling two parties to 'work it out' assumes that both parties need something from the negotiations, and while the city is in desperate need of reform, the pension funds are perfectly happy with the status quo."

The city's hope was to convince the pensioners, and the Legislature, to transfer the closed system into the state's retirement plan. But the city, according to the pensioners, offered no specifics, just a blank sheet of promises.

"As the city goes through its machinations, they don't look at pensions as something that profits the community. They look at it as debt," says Wally Schirmer, executive secretary of the Minneapolis Firefighters' Relief Association. "The problem for the city is they want to transfer over the closed pensions to the state with minimal contribution. They expect and think the state is going to just take their debt as though it were a little baby in a box placed outside the steps of the Capitol."

Wagenius says the Legislature's solution was to let the two parties argue on their own, rather than acting as a moderator. The city is still working to find consensus, but not everyone believes that's still possible.

"This issue with police and fire is too late," says Rep. Phyllis Kahn. "The city negotiated a really bad contract. Just because you did a dumb contract doesn't mean you can just demand changes."

In 2006, the city sued the pension funds, accusing them of improperly calculating benefits and thus overcharging taxpayers. Most of the substantive decisions over the lawsuit came several weeks ago. In a summary decision, Judge Janet N. Poston issued two major findings: The pension funds did not follow state law and get approval from the City Council when approving certain items of compensation, and the pension funds inappropriately calculated several elements, such as overtime.

Based on the findings, the city believes the pension funds overpaid more than $50 million in benefits between 2003 and 2009.

The case went to court on Monday, which is only likely to make the contentious back-and-forth more heated.

"We're not hesitant to look at moving into the state system," says Larry Ward, president of the Police Relief Association. "But this lawsuit? It's a shame. We're talking about 70- and 80-year-old people. They should not even be put through this. They fulfilled their contract. They gave plenty. Some of these widowers lost their partners in battle."

Reached by phone days after an operation to remove polyps in his nose, Dick Nelson, an 83-year-old retired cop and WWII veteran, says the city needs to honor its obligations.

"They just don't want to help," he says. "I've been dealing with them since 1967. And it hurts to continually get this kick in the teeth. What they don't remember is this pension is a main reason why a lot of people took this job in the first place." 

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