Governor Deval Patrick's Budget Recommendation - House 2 Fiscal Year 2011

Governor's Budget Recommendation FY 2011

Long-Term Retirement Liabilities

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Governor Patrick    FY2011 House 2 Budget Recommendation:
    Issues in Brief

    Deval L. Patrick, Governor
    Timothy P. Murray, Lt. Governor


Creating a Sustainable Retirement Benefit System

The Patrick-Murray administration has taken a proactive and comprehensive approach to addressing the funding challenges associated with the Commonwealth’s pension and Other Post-Employment Benefits (or “OPEB”) liabilities.  The Governor’s proposals to modernize and end abuse of the state’s pension system will ensure its sustainability in the wake of recent declines in pension assets. The Governor has also taken steps to fund and reduce the costs of retiree health benefits that compose the OPEB liability. Finally, the administration has directed the Secretary of Administration and Finance to establish an internal task force to further study the ongoing challenge of funding these liabilities with limited government resources.

Pension Reform to ensure a Sustainable System

The administration recently proposed legislation to ensure a fair, credible and fiscally sustainable pension system for public employees.  Phase 1 pension reform addressed long-standing abuses and loopholes, including:

  • Removing the "one day, one year" provision that allowed elected officials to claim a year of creditable service for working one day in the calendar year;
  • Removing the "king for a day" practice of paying exaggerated future benefits on the basis of a short-term temporary assignment to a higher salaried supervisory position and;
  • Removing a provision that allows elected officials to claim a "termination allowance" based on the failure to be nominated or re-elected.

The Administration’s recent Phase 2 pension reform initiatives protect the long-term health of the system by capping benefits and modernizing the retirement ages for state employees.  Proposed changes to the retirement ages, which have not been updated since the 1950’s and 1960’s, include raising the minimum retirement age and aligning the full retirement age for Group 1 employees with that used for Social Security. A separate budget brief describes these pension reform proposals in more detail. These initiatives will reduce the cost of the pension system by $2 billion over the next 30 years and ensure that the system can continue to provide fair and reasonable retirement benefits to the employees who work in the service of Commonwealth taxpayers.

Disciplined Pension Funding

The Commonwealth has maintained a disciplined approach to funding pension liabilities during challenging economic conditions.  This is reflected in the administration’s decision to maintain the existing funding schedule for the state’s pension system in fiscal year 2011.  There will, however, continue to be challenges to address the state’s unfunded liability, which increased by 82% to $22B during 2008 as a result of investment losses in the pension fund. These issues prompted the formation of a Retirement Liability Funding task force as further described below.

Proactively Addressing OPEB

The challenge of funding the state’s OPEB liability is being addressed through several initiatives which include steps to reduce the liability and to provide additional funding on top of the $397 million deposited into the State Retirees Benefits Trust Fund.  The estimate of this liability as of January 1, 2009 was $15 billion, as calculated in compliance with the accounting standards promulgated in 2004 by the Governmental Accounting Standard Board (GASB).  The Governor has taken steps to reduce this liability by seeking and obtaining legislation to reduce the state’s share of the cost of health insurance benefits for employees and future retirees by increasing co-pays and deductibles paid by employees and retirees. In addition. in the Governor’s proposal to limit the state’s reliance on capital gains he proposed depositing 5% of any capital gains tax revenue over $1 billion into the State Retirees Benefits Trust Fund to help fund the OPEB liability. 

Maintaining Focus: the Retirement Liability Funding Task Force

The administration’s ongoing commitment to addressing these liabilities is further demonstrated by the Governor’s decision to form a Retirement Liability Funding Task Force.  The task force will be lead by A&F and charged with recommending solutions to the ongoing challenge of funding the Commonwealth’s unfunded retirement liabilities and the cyclical problem of funding schedules that require higher appropriations when resources are most constrained.  This working group would be comprised of representatives from A&F, PERAC, the state Comptroller and outside experts, and will be charged with exploring thoughtful solutions to these long-term challenges. Concepts for consideration include the use of special actuarial techniques to accommodate extreme market volatility, funding schedules modified to address the economic cycle, and the use of more flexible schedules for poorly funded municipalities. The goal of the task force would be to make specific recommendations by the end of 2010 for consideration in the fiscal 2012 budget.

Prepared by Greg Mennis, Executive Office for Administration and Finance ·
For more information contact: (617) 727-2040

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