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Advocacy Executive Director's Reports Unfunded pension mandates must be rejected
One of the major issues facing local and state government over the next several years will be managing the escalating expense of fully funding the local, county and regional pension systems for current and retired employees. It is vital that these pension systems get a fresh look to make sure that the costs and funding assumptions are accurate and fully state the obligations that communities and local taxpayers will face over the next 15 to 20 years.
An article on the front page of the business section of the New York Times on May 21 sounds an alarm about lawsuits pending against actuaries and consulting firms who may have understated the true cost of pension benefits in Alaska, California, Wisconsin and Illinois. While Massachusetts is in better shape due to a requirement to update funding assumptions on a regular basis, a fresh and independent review of the entire system makes sense, especially because of the national problems that have touched other states as well, including New York and Texas. One chief concern in the above examples is that the costs of expanded and enhanced retirement benefits have been routinely undercounted and marginalized.
This is no time to expand or impose unfunded pension benefits in Massachusetts. First, we need to examine our systems to ensure that current cost and funding assumptions are accurate, in order to make sure the systems are fully funded and solvent. Only then should we consider benefit changes, and the first step in that process should be an independent, transparent and detailed analysis of the true cost of proposed benefits, on a statewide and community-by-community basis.
The MMA has serious objections to a proposal that is being pushed in the Legislature to increase the base for municipal pension cost-of-living-adjustments (COLAs) from $12,000 to $16,000. This seemingly small change would add $120 to every retiree’s annual pension each year. That may not sound like much, but it adds up exponentially. And this benefit increase has not been funded for either active employees or retirees, so the only way to fund it would be to have current or future taxpayers pay the bill.
Increasing a COLA by $120 every year adds up quickly, and after 20 years the aggregate cost would be $25,300 per retiree. There are 86,000 retirees and 141,000 active employees in municipal systems. This all adds up to an unfunded benefit cost of more than $2 BILLION over 20 years in order to pay for the benefit and fully fund the pension liability as called for in the law.
In 1988, state leaders, with strong support from local government officials, made a courageous decision to move away from a pay-as-you-go pension system to a fully funded system.
This decision had two important consequences. First, the Commonwealth and local governments began to pay down the $12 billion ($6 billion state/$6 billion local) in accumulated unfunded pension liability by adopting a 40-year funding schedule that would reduce to zero the unfunded liability by the year 2028. Second, any future benefit increase would have to be paid for in advance. These reforms brought rationality to a system that had spiraled out of control.
This municipal COLA expansion would reverse the course and impose an overall unfunded mandate of $2 billion onto cities and towns and local taxpayers with no way to pay for it under Proposition 2½ without cutting and slashing other municipal and school programs. The $2 billion estimate of the overall cost is conservative; there has been no study or analysis to quantify the exact cost that would be placed on each city and town if the COLA base increases. Before considering such a staggering unfunded mandate, this detailed information should be available to legislators, communities, taxpayers and the public.
While there are 85 local retirement systems that serve individual communities, and it is theoretically possible to make this COLA increase a local option for that group, 266 cities and towns in county and regional systems would have no effective decision-making role. Allowing the county or regional pension systems to decide on the COLA would prevent a local option for 75 percent of the localities in Massachusetts.
Providing a COLA is just one of many issues facing the Massachusetts pension system. The contribution rates for new employees are very high, the system is not portable, the system can be unfair to those employees who are not going to spend their careers in the public sector, and questions abound about funding future health care costs identified through GASB 45.
Rather than dealing with these issues piecemeal, we urge the governor and Legislature to undertake an independent, comprehensive study of the system that would address all of these problems and devise ways to appropriately, fairly and adequately pay for any changes and benefit enhancements.
No matter how you slice it, this proposed benefit expansion would cost taxpayers $2 billion over the next 20 years. Some argue that there would be no impact on the bottom line for either communities or taxpayers if the funding schedule is extended by three years. In essence, such a plan would merely dump the responsibility for paying for this new benefit on taxpayers in the future. It is no exaggeration to say that this is deeply flawed public policy.
This proposal is not a local option. It is not free. It is a huge unfunded mandate, at a time when cities and towns are already facing extreme fiscal distress and cannot absorb new costs, let alone $2 billion.
The MMA urges the Commonwealth to embark on a comprehensive study of the pension system, so that all legislators, municipal officials, taxpayers and the public can know the cost and impact of this COLA proposal on each city and town in the Commonwealth before any action is taken, and so that we don’t add our names to the list of states and localities who are in court, facing pension insolvency.
Advocacy Executive Director's Reports Unfunded pension mandates must be rejected
Unfunded pension mandates must be rejected
One of the major issues facing local and state government over the next several years will be managing the escalating expense of fully funding the local, county and regional pension systems for current and retired employees. It is vital that these pension systems get a fresh look to make sure that the costs and funding assumptions are accurate and fully state the obligations that communities and local taxpayers will face over the next 15 to 20 years.
An article on the front page of the business section of the New York Times on May 21 sounds an alarm about lawsuits pending against actuaries and consulting firms who may have understated the true cost of pension benefits in Alaska, California, Wisconsin and Illinois. While Massachusetts is in better shape due to a requirement to update funding assumptions on a regular basis, a fresh and independent review of the entire system makes sense, especially because of the national problems that have touched other states as well, including New York and Texas. One chief concern in the above examples is that the costs of expanded and enhanced retirement benefits have been routinely undercounted and marginalized.
This is no time to expand or impose unfunded pension benefits in Massachusetts. First, we need to examine our systems to ensure that current cost and funding assumptions are accurate, in order to make sure the systems are fully funded and solvent. Only then should we consider benefit changes, and the first step in that process should be an independent, transparent and detailed analysis of the true cost of proposed benefits, on a statewide and community-by-community basis.
The MMA has serious objections to a proposal that is being pushed in the Legislature to increase the base for municipal pension cost-of-living-adjustments (COLAs) from $12,000 to $16,000. This seemingly small change would add $120 to every retiree’s annual pension each year. That may not sound like much, but it adds up exponentially. And this benefit increase has not been funded for either active employees or retirees, so the only way to fund it would be to have current or future taxpayers pay the bill.
Increasing a COLA by $120 every year adds up quickly, and after 20 years the aggregate cost would be $25,300 per retiree. There are 86,000 retirees and 141,000 active employees in municipal systems. This all adds up to an unfunded benefit cost of more than $2 BILLION over 20 years in order to pay for the benefit and fully fund the pension liability as called for in the law.
In 1988, state leaders, with strong support from local government officials, made a courageous decision to move away from a pay-as-you-go pension system to a fully funded system.
This decision had two important consequences. First, the Commonwealth and local governments began to pay down the $12 billion ($6 billion state/$6 billion local) in accumulated unfunded pension liability by adopting a 40-year funding schedule that would reduce to zero the unfunded liability by the year 2028. Second, any future benefit increase would have to be paid for in advance. These reforms brought rationality to a system that had spiraled out of control.
This municipal COLA expansion would reverse the course and impose an overall unfunded mandate of $2 billion onto cities and towns and local taxpayers with no way to pay for it under Proposition 2½ without cutting and slashing other municipal and school programs. The $2 billion estimate of the overall cost is conservative; there has been no study or analysis to quantify the exact cost that would be placed on each city and town if the COLA base increases. Before considering such a staggering unfunded mandate, this detailed information should be available to legislators, communities, taxpayers and the public.
While there are 85 local retirement systems that serve individual communities, and it is theoretically possible to make this COLA increase a local option for that group, 266 cities and towns in county and regional systems would have no effective decision-making role. Allowing the county or regional pension systems to decide on the COLA would prevent a local option for 75 percent of the localities in Massachusetts.
Providing a COLA is just one of many issues facing the Massachusetts pension system. The contribution rates for new employees are very high, the system is not portable, the system can be unfair to those employees who are not going to spend their careers in the public sector, and questions abound about funding future health care costs identified through GASB 45.
Rather than dealing with these issues piecemeal, we urge the governor and Legislature to undertake an independent, comprehensive study of the system that would address all of these problems and devise ways to appropriately, fairly and adequately pay for any changes and benefit enhancements.
No matter how you slice it, this proposed benefit expansion would cost taxpayers $2 billion over the next 20 years. Some argue that there would be no impact on the bottom line for either communities or taxpayers if the funding schedule is extended by three years. In essence, such a plan would merely dump the responsibility for paying for this new benefit on taxpayers in the future. It is no exaggeration to say that this is deeply flawed public policy.
This proposal is not a local option. It is not free. It is a huge unfunded mandate, at a time when cities and towns are already facing extreme fiscal distress and cannot absorb new costs, let alone $2 billion.
The MMA urges the Commonwealth to embark on a comprehensive study of the pension system, so that all legislators, municipal officials, taxpayers and the public can know the cost and impact of this COLA proposal on each city and town in the Commonwealth before any action is taken, and so that we don’t add our names to the list of states and localities who are in court, facing pension insolvency.
Written by MMA Executive Director Geoff Beckwith
