Just days after the city of Minneapolis proposed a hiring freeze, the City Council gathered Friday to discuss the Mayor R.T. Rybak’s 2009 recommended budget, and changes to be made because of the economic downturn.
In the face of a hurting economy and a projected $38 million in new costs for employee pensions over the next five years, the City Council proposed to increase the Mayor’s suggested 6.8 percent property tax increase for 2009 to 8 percent, the ceiling amount set in 2007.
Recent losses in the financial market cost the city at least $38 million more in pension funds.
Although Rybak planned for lower property tax increases in his proposed budget for 2009, these pension costs could mean that property taxes will hit the 8 percent ceiling increase, as they have since 2003.
First Ward Councilman Paul Ostrow, who chairs the budget committee, said the $19 million that the tax will generate over the next six years will go to the $38 million pension deficit.
Rybak said the recent months’ numbers show the city has issues with its pension funds.
“I can’t tell you how disappointed I am,” Rybak said. “We worked all summer to keep property taxes below 8 percent, but I think this is the most responsible thing to do.”
This problem has nothing to do with how the city manages its funds, Ostrow said.
“It’s because of something we have no control of and that’s what’s so frustrating,” he said.
Pension issues are not just a problem in Minneapolis. Across the United States, cities and states are dealing with similar pension deficits.
The Core Fund, managed by the State of Wisconsin Investment Board, is down 28.3 percent through November, according to preliminary figures the board released Thursday. The state may cut pension payments to its retirees by as much as 3.5 percent.
John Fossum, a professor in the Carlson School of Management at the University of Minnesota, and an expert on compensation and pension plans, said things are especially bad for cities and states right now because they are more likely to have defined pension plans.
“All of the investment risk is on the pension provider, which is the city in this case,” he said of the Minneapolis’s pension costs.
The City Council discussed other changes to the budget as well.
About $500,000 is proposed to be reallocated from a public works fuel reserve to fund Central Corridor planning and engineering.
Heather Johnston, director of management and budget for the city, said the one-time use fuel reserve was set up this year when gas was priced at about $4 per gallon.
With the drop in the cost of fuel, public works allocated the funds to the Ways and Means Committee to put toward the Central Corridor project.
Second Ward Council member Cam Gordon said funding for the Central Corridor project is needed.
“There is significant need for that line and we have made commitments as a city to work with the University on the Central Corridor,” he said.
The spending plan will be put to a full council vote on Thursday.
The City will consider the hiring freeze, urged Monday by Rybak and Council President Barbara Johnson , at a Dec. 12 meeting.