Pension and Other Post-Employment Benefits

    FY2012 House 1 Budget Recommendation:
    Issues in Brief
    Deval L. Patrick, Governor
    Timothy P. Murray, Lt. Governor

Creating a Sustainable Retirement Benefit System

The Patrick-Murray administration is continuing to take a comprehensive approach to addressing the fiscal challenges associated with the Commonwealth’s pension and Other Post-Employment Benefits (or “OPEB”) liabilities. The state currently has an unfunded pension liability of $20 billion and an unfunded OPEB liability of $15 billion.  Municipal governments are also faced with significant unfunded pension and OPEB liabilities.  The Governor’s recent proposal to modernize and further reform the state’s pension systems would result in significant pension cost savings to state and local pension systems and help to ensure the long-term sustainability of these pension systems.  This proposal would also reduce future costs associated with OPEB - as a result of an expected increase in retirement ages – and build on the administration’s ongoing efforts to address unfunded OPEB liabilities.  The Governor is also proposing additional measures to increase retirement liability funding and oversight of OPEB.

Pension Reform to Ensure a Sustainable System

The Governor filed legislation on January 18, 2010 for additional pension reform and benefits modernization that builds on previous pension reform legislation enacted by the Governor and the Legislature.  The benefits modernization proposals that would impact prospective employees include: raising retirement ages, eliminating early retirement subsidies and increasing the period for average earnings used to calculate the pension benefit from three years to five years.  The legislation also includes reforms to prevent abusive practices that enhance benefits at the end of an employee’s career - including excessive salary increases or changing jobs to a group with higher benefits – and a proposal to prevent “double dipping” for certain elected officials, who could otherwise receive both a salary and a government pension. 

The benefits modernization proposals described above would generate pension cost saving for the Commonwealth in excess of $5 billion over 30 years, including an estimated $2 billion for cities and towns. These savings would allow the Commonwealth to reduce its pension funding schedule by an estimated three to five years and provide similar relief to cities and towns.  The expected increase in retirement ages would also result in additional savings for future retiree OPEB costs of approximately $1 billion for the state and $1 billion for cities and towns over 30 years.  This impact would build on previous measures to address OPEB liabilities, including the increase to the share of health care costs for new retirees from 15% to 20%, and the commitment to deposit 5% of excess capital gains revenue into the State Retiree Benefits Trust Fund. 

Long-Term Liability Task Force Recommendations

The Governor appointed a task force on long-term liabilities in connection with the budget process last year.  The task force was lead by A&F and solicited input from other government stakeholders, including the Public Employee Retiree Administration Commission (PERAC) and the State Comptroller, as well as outside experts.  This effort informed the Governor’s recommendations for pension reform as well as the additional proposals and recommendations listed below. 

• Pension Funding: – The state’s updated pension funding schedule includes a necessary extension to the full funding date, an increase in funding for fiscal year 2012, and measures to ensure that appropriations continue to increase in the future.  The Commonwealth recently extended its pension funding schedule from 2025 to 2040 to mitigate an $800-$900 million increase in the appropriation that would have been required under the previous schedule.  The extension is the result of fully recognizing investment losses that occurred during the recession, and the 30-year time horizon for full funding is similar to the length now used by most states.  The new schedule does, however, demonstrate the Administration’s commitment to fully funding pension obligations by committing $1.478 billion to the pension fund for fiscal year 2012, an increase of $36 million over fiscal year 2011.

  The new schedule also includes 5-6% increases in pension funding during fiscal years 2013 to fiscal year 2017 and would prohibit any reduction in appropriations during this time frame that would otherwise be allowed as a result of actuarial gains.  Instead, any gains could only be used to shorten the schedule and as a further measure of discipline, increased appropriations would still be required to meet the 2040 fully funding date if necessitated by actuarial losses.  This format will ensure ongoing increases in pension appropriations and mitigate the cyclical problem inherent in funding schedules where appropriations are often lowered when available resources are at their greatest. 

• Dedicated OPEB Funding – The Administration recommends that the Commonwealth dedicate funds received from the Tobacco Master Settlement Agreement (MSA) to the State Retiree Benefit Trust Fund (SRBTF), to be phased in over a ten year period.  The state receives nearly $300 million annually from the agreement.  This proposal would require that 10% of this amount be allocated to the SRBTF in fiscal year 2013 and that the amount be increased by 10% of the total funds received annually, such that 100% of the MSA funds would be dedicated to OPEB by 2022.  This proposal is based on a recommendation of the 2008 Special Commission that studied OPEB but employs a longer phase-in period in recognition that the state economy is expected to be several years from full recovery.  This proposal to dedicate MSA funds to the SRBTF has the added benefit of reducing the state’s dependency on a less predictable revenue stream, and allows these funds to accumulate investment earnings that will further mitigate the state’s OPEB liability over time.
• Increased Oversight of OPEB – The Administration recommends that the role of PERAC be expanded, subject to necessary funding, to include approval and review of the OPEB valuations that are required for cities and towns.  This process will ensure that these valuations are being performed in a reasonably consistent manner and that policymakers have comparable date to make informed recommendations to address the OPEB challenge.  The Administration is also recommending additional measures to ensure that municipalities have access to the state’s investment vehicle for retiree health care that is overseen by the Health Care Security Trust.

Prepared by Greg Mennis, Executive Office for Administration and Finance ·
www.mass.gov/budget/governor
For more information contact: contactanf@massmail.state.ma.us (617) 727-2040