slides: Could Retiree Benefits Bankrupt Worcester?

Tuesday, November 05, 2013

David Fisher, GoLocalWorcester Contributor

In April, the Worcester Regional Research Bureau issued a report that painted an admittedly grim picture for Worcester’s future retirees and budgets. Even on the heels of recent reform, the city’s current retiree benefit liabilities stand at $656 million, and it is estimated in the report that nearly one-third of Worcester’s annual budget will be consumed by retiree benefit commitments in a decade . The report also found that as of 2011, the city’s retirees (4,873) outnumbered the active workforce (4,154), and the trend is expected to continue.

Shrewsbury Town Manager, Daniel Morgado, who has been working to address the inflation of retiree benefit costs at the municipal level, said “These pension and benefit shortfalls are, more often than not, due to an unwillingness to address the problem on the part of many elected and appointed officials,” he says, “You’ve heard of NIMBY. Not-in-my-backyard, right? NIMTOO is Not-in-my-term-of-office.”

The Research Bureau will be offering a seminar on Wednesday for elected officials, community leaders, and the general public to highlight the ways that Massachusetts municipalities can keep their commitments to current and former employees – specifically non-pension post-employment benefits — without careening toward fiscal receivership or municipal bankruptcy.

The panel discussion will feature Morgado, Henry Dormitzer, Chairman of the Massachusetts Commission to Study OPEB, Stephen D. Eide, Ph.D., a Senior Fellow at the Manhattan Institute, Dean Mead, Research Manager for the Government Accounting Standards Board (GASB).

Worcester City Manager Michael O’Brien will moderate the event, which will take place from 7:45 AM to 9:15 AM in the Levi Lincoln Room at Worcester City Hall on Wednesday.

Research Bureau Leading Charge on Retiree Benefits

The Research Bureau, which has been researching, critiquing, and reporting on public policy and legislation affecting Worcester County since the early 1980’s, and has in recent months taken on the task of examining the ballooning cost of non-pension post-employment benefits for public sector workers

In March of this year, GoLocal reported that Worcester’s estimated budget gap for fiscal 2014 stood at $5.8 million including an 8 to 10 percent increase in employee and retiree healthcare costs and a $2 million increase in the City's pension assessment. At the time these numbers were not certain, due to the state budget not being finalized, leaving the city wondering what the state aid picture would look like, and how that would affect the FY 14 budget.

Since then, City Manager Michael O’Brien has closed the budget gap through a combination of cuts, deferments, and modest increases in state aid and growth in local tax revenue. Unfortunately, one of those measures was the deferment of the first $1.8 million payment to the city’s newly formed OPEB Trust Fund.

The Research Bureau’s comprehensive report on the skyrocketing cost of Worcester’s retiree health-care benefits titled, “A Prescription for Retiree Health Care: How Worcester can vanquish its OPEB liability while keeping its workforce happy and health.”

Roberta Schaefer, the Research Bureau’s outgoing Executive Director, told GoLocal that until 2007, neither municipalities in Massachusetts nor the state itself, were required to show any accounting on pension or retiree benefit liabilities in their budgets.

“It was a pay-as-you-go system,” said Schaefer. “The statewide report on unfunded liabilities showed that, given the growth in numbers of retirees, the fact that people are living longer, and the extremely short (10 years) length of employment provisions in Massachusetts, made the pay-as-you-go model outmoded and unsustainable on the state level. Our report for the city of Worcester showed pretty much the same.”

The Massachusetts state legislature is currently hearing House Bill 59. The bill would enact many of the recommendations put forth by the Massachusetts Commission to Study OPEB. The bill serves to address many of the future structural funding issues regarding public employee pensions and benefits including lengthening that 10 year provision to 20 years and upping the retirement age from 55 to 65, among other things, but Schaefer worries that one issue, in particular, is not addressed by the bill.

Looking Forward on Retiree Benefits

“The legislation still does not address the difference between the state or municipality continuing to define long term employee benefits, and moving to more of a 401(k) style retirement and healthcare savings plan,” said Schaefer. Proponents of moving public employee benefits to these types of accounts tout the flexibility of the savings plans, and the added bonus of removing these costs either partially or completely from the state and local budgets.

Schaefer continued, “In Worcester, OPEB obligations are actually greater than pension obligations.” If these obligations continue to balloon, cuts to public staff and services are all but inevitable, which would reinforce the cycle of declining property values, rising tax rates, and diminished revenue for individual municipalities, all of which contribute to a decrease in quality of life for Massachusetts residents.

Shrewsbury Town Manager Morgado chalks much of the now current urgency for pension and retiree benefit reform up to a lack of urgency regarding the issues from past administrations throughout the state.

Morgado said that the situation in Shrewsbury is a bit more tenable, largely due the fact that the town has a relatively young workforce, has already created a retiree benefit trust fund, and has always had a benefit structure that he says, “is not outlandish.” Town retiree benefits are subject to a sliding scale from a 50-to 75 percent individual contribution. Morgado also credits the foresight of his predecessor, Richard Carney, but admits that Carney was the exception, not the rule.

Morgado indicated that the biggest chunk of retiree benefit payouts lie in the years between retirement and Medicare eligibility which, given Massachusetts’ current 10-year work requirement, can be two or three decades, sometimes more.

Related Slideshow: The Worcester Research Bureau To Host Seminar With Retiree Benefit Experts

Reports on Massachusetts' and Worcester's post-employment liabilities for public employees paint a stark picture of future state and municipal budgets. Researchers and experts agree, though, that reform and prudent investment could very well pave the road to solvency.

The Worcester Research Bureau will hold a seminar on November 6th for elected officials, community leaders, and the general public to highlight the ways that Massachusetts municipalities can keep their commitments to current and former employees – specifically non-pension post-employment benefits — without careening toward fiscal receivership or municipal bankruptcy.

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State Issues Report on OPEB

In January of 2011, the Massachusetts Commission to Study OPEB issues a report detailing the unfunded benefit obligations on a state level. The report projects a combined municipal and state savings of $15-20 billion over 30 years if recommended reforms are enacted. View full report.

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WRRB Report Confirms, Enhances State Report

In April of this year, the Worcester Regional Research Bureau issued its own report which confirmed and enhanced the findings of the state report. Recommendations in the report included reform of existing benefit packages, forming a city managed trust to defray future costs, and the establishment of retiree management trusts – 401(k)-style savings accounts designed to allow retirees more control and flexibility in benefit spending. View full report.

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Dissemination and Education

WRRB will hold a seminar tomorrow for elected and appointed officials to discuss strategies that will allow municipalities to bear the costs of long-term benefit payouts, while still honoring their commitments to former and current public employees. Speakers from the State Commission on OPEB, the Manhattan Institute, the Government Accounting Standards Board, and the Town of Shrewsbury are on the schedule. Worcester City Manager Michael O’Brien will moderate.

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Henry Dormitzer

In addition to serving as the Chairman of the Massachusetts Commission to Study OPEB, Dormitzer is president, chief executive officer and a board member of Free Flow Power Corporation, a hydroelectric development company. He was an investment banker for 15 years, most recently as a managing director at UBS, where he managed the firm’s Massachusetts public finance investment banking office.

Dormitzer previously served as commissioner of the Massachusetts Department of Revenue and as undersecretary for administration and finance under Governor Deval Patrick. He has served on the boards of the Massachusetts Educational Financing Authority and MassDevelopment, and is president of the board of trustees of Worcester Academy, an independent school in Massachusetts. He is a graduate of Harvard College.

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Stephen D. Eide, Ph.D.

A former senior research associate at the WRRB, Eide currently serves as a senior fellow at the Manhattan Institute's Center for State and Local Leadership. He edits PublicSectorInc.org, a project of the Manhattan Institute, and is also a contributor to the site. His work focuses on public administration, public finance, political theory, and urban policy. His writings have been published in the Worcester Telegram and Gazette, Orange County Register, the New York Post, Interpretation: A Journal of Political Philosophy, and City Journal.

Eide holds a bachelor's degree from St. John's College in Santa Fe, NM, and a Ph.D. in political philosophy from Boston College.

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Dean Mead

Mead is Research Manager at the Governmental Accounting Standards Board. Dean is lead methodologist for the GASB, responsible for overseeing project managers in the planning, design, and administration of the GASB’s research agenda, managing external research, and interfacing with the academic community. Dean also coordinates the GASB’s constituent outreach and communication efforts and is staff liaison to the Governmental Accounting Standards Advisory Council. Dean is a lecturer at Rutgers Business School, Rutgers University. Prior to joining the GASB, Dean was the Deputy Research Director at the Citizens Budget Commission in New York City. At that time he was an adjunct member of the finance faculty at the Robert F. Wagner Graduate School of Public Service, New York University, where he pursued his doctoral studies in public finance, public policy, and management. He holds an undergraduate degree in public policy from Cornell University.

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Daniel Morgado

Morgado is the current Town Manager of Shewsbury, and has formerly held town manager and administrator positions in Swansea, Blackstone, Easton, and Grafton. He is also a Massachusetts Municipal Association Committee member. He holds a Master’s degree in Public Administration from Clark University, and has served as an adjunct professor of Public Administration studies there for over twenty years.