MA Public Pension Costs Among Nation’s Highest

Saturday, December 01, 2012

Adam Joseph Drici, GoLocalWorcester Contributor

The Commonwealth's public employees contribute an average of 10 percent of their salaries to the state's pension programs, one of the highest contribution rates in the country.

While many groups feel that the Massachusetts public pension system, which includes 105 public pension funds, is well-run and well-regulated, its price tag can still be staggering. As of 2010 financial reports, the state's 105 retirement boards had combined pension liabilities of over $92 billion, nearly $31 billion of which remained unfunded, according to a study by the Pioneer Institute, an independent think tank in Massachusetts.

Employees Contributing More

Reforms have been passed to attempt to close that gap, but, said Shawn Duhamel, legislative liason for the Retired State, County and Municipal Employees Association of Massachusetts, an increased portion of the burden of pension liabilities has fallen to the employees themselves.

"Our biggest concern is the amount of money today's active employees are being required to pay into this system," he said.

According to Duhamel, public employees pay an average of 10 percent of their slary into the pension system. For teachers, the contribution is set higher at 11 percent, and State Troopers pay the highest rate at 12 percent of their salaries.

"I don't think there's anybody that's comfrotable with such a high level of contribution," he said.

In comparison, teachers in New Jersey, which also recently underwent pension reform, will see their contribution rate phased up incrementally between now and 2018 from 6.5 percent to 7.5 percent. State police in the Garden State contribute to their pensions at a rate of 9 percent. In Maryland, a state often compared to Massachusetts in terms of size and population, teachers and state employees contribute 7 percent of their salaries to pension funds, and state police contribute 8 percent.

"The problem Massachusetss had was we were late to the game," he explained. "It wasn't until the late 1980s that municipalities started to put aside their share for the pension system."

Finding the Funds for Public Pensions

Jim Stergios, executive director at the Pioneer Institute, which is in the process of releasing a 10-part series of research reports on state and local pensions in the Commonwealth, said the high contribution rates in Massachusetts are unlikely to change anytime soon.

In order to keep those rates from rising any higher and to decrease the state's unfunded liability, Stergios and his colleagues produced a number of suggestions in their most recent study to improve the investment policies for the 105 public pension funds in order to increase returns.

“Massachusetts public-employee pension funds have been chronically underfunded,” Stergios said. “There are two ways to fix that: Increase annual payments, which would eat into funding for other priorities, or improve investment returns. While improving investment returns will not address the gap between moneys going in and payments going out to pensioners, it is a critical way to reduce taxpayers’ exposure.”

The Pioneer Institute's recommendations include adopting and updating a system of benchmarks based on appropriate peer funds, moving away from volatile asset classes such as commodities and boosting transparency of the decision-making process at the Public Employee Retirement Administration Commission (PERAC), which oversees the funds.

"We haven't performed poorly in Massachusetts in local pensions overall," said Stergios, "but we're leaving quite a bit of value on the table."

Joseph Connarton, executive director at PERAC, said that a number of the changes the Pioneer Institute's report calls for have already been implemented as part of the pension reform that was recently passed in the state legislature.

"I think people are aware that benefits are expensive, there's no doubt about it," he said. "There is a tremendous effort to look at all possible cost-containment initiatives."

Connarton said that additional recommendations on pension and healthcare reform will be forthcoming sometime in 2013, and they may involve changes to the classification structure of employees and the disability structure.

Duhamel said Mass Retirees is also very concerned about the lack of an adequate cost of living adjustment (COLA) for public workers.

"It's really a struggle for retirees to keep up with inflation," he said. "That's something we're constantly working on."

For Stergios, one glaring issue is the expected return on investment for state and local pension funds. Many officials are projecting returns of around 8 percent, but Stergios said that figure may be unrealistic when private sector investment funds are projecting returns of 4 to 5 percent over the next decade.

"Let's try to find some constructive ways to bump up that investment return."