Pensions Walloped By Down Market
Photo/Courtesy
Kevin Blanchette, chairman and CEO of the Worcester Regional Retirement System.
Since 1987, the City of Worcester Retirement System, like the rest of the state’s municipal pension systems, has been doing its best to become self-sufficient.
The goal for the city system is to have enough money sitting in investments to pay for retiree costs, instead of seeking supplemental contributions from taxpayers to pay for each year’s expenses.
And Worcester had been making steady gains. At the start of 2007, it was 85.6 percent funded. But last year’s brutal stock market erased many hard-won gains. Today, it’s only around 57 percent funded, according to James A. DelSignore, city auditor and chairman of the retirement board.
Worcester’s is far from the only pension system facing that kind of drop in funding. And that means – barring a market rally equal to the recent drop – sooner or later, taxpayers and municipal employees will have to make up for the money that was lost in 2008.
Funding Shortfalls
The story is much the same throughout Massachusetts.
In Shrewsbury, town accountant Mary Thompson said the local pension plan’s investments fell 27 percent in 2008. She said that drop won’t make itself felt until fiscal year 2012, but when it does, the town’s contribution to public employees’ retirement “will, I’m sure, go up dramatically.”
Kevin P. Blanchette, chairman and CEO of the Worcester Regional Retirement System, said its 94 “member units,” which include many of Worcester County’s smaller cities and towns as well as some school districts, could face increases of as much as 57 percent in their annual payments to the system starting in 2011 or 2012.
“That’s when the chickens come home to roost,” he said.
Robert Dennis, investment director of the Public Employees Retirement Administration Commission, the state agency that oversees public pensions in the state, said typical systems lost 26 to 27 percent last year.
That’s in line with the hit that pensions all across the country took.
“Overall they didn’t do well, but they could have done worse,” he said.
Dennis said taxpayers won’t feel a direct impact from the funds’ drops. Like Shrewsbury, most communities won’t officially see the change on their balance sheets right away.
And even if they did, Dennis said, pension plans employ “smoothing” practices designed to spread market highs and lows out over the years.
For example, in Worcester, DelSignore said the amount that the city pays into the pension system, including both funds to cover current expenses and investments for the future, has risen gradually even during good years. It’s now more than $40 million a year.
“To avoid budget spikes and take the profits those years, you continue to gradually increase the payments so it won’t be as much of a stress on the budget in future years,” he said.
Bad Timing
In an ironic twist, some pension plans were hit especially hard last year because of a 2007 move intended to improve their performance.
At that time, many local pension systems moved all or part of their investments into the state Pension Reserves Investment Trust, either voluntarily or because of a state mandate for underperforming funds.
It seemed like a good move at the time, since PRIT’s returns had been better than most local pensions’ for years. But in 2008, Dennis said, due to its more aggressive allocation of money, PRIT lost 29.4 percent.
The Shrewsbury system is 50 percent invested in PRIT as of last year, Thompson said. Systems totally invested in PRIT include Athol, Fitchburg, Framingham, Gardner, Milford, Northbridge, Southbridge and the Worcester Regional system.
Local pension administrators may be sweating a little extra about the state of their funds because they face a deadline to get them fully funded. In 1987, the state legislature passed a law requiring pension systems to have enough money to meet their obligations by 2028.
Blanchette, who was serving in the legislature at that time, said the law was an important reform. Before that, he said, cities and towns didn’t fund their retirement systems for the future.
Instead, they built their pension funds purely with employee contributions and made up the difference in what retirees were owed each year with municipal budget allocations. Now, municipalities put money into investments each year, and employees also pay a larger chunk of their salaries into the pension funds—in many cases 12 percent of their total pay.
How much the terrible 2008 market will hurt local taxpayers depends on how conservative pension systems have been in making plans to meet the 2028 deadline.
The state retirement commission recently released a report on how flexible various systems are based on the date they plan to be fully funded and the assumptions they’ve made about funding plans for the future. If those factors aren’t already at the extreme end of state mandates, systems can adjust them to reduce the pressure on taxpayer money. (Click here for illustration of municipal pension flexibility.)
Strong And Weak
Among Central Massachusetts systems, the report says, Leominster’s pension fund is best positioned, with a conservative game plan that includes the expectation of being fully funded before 2020.
On the other hand, the Worcester Regional system has exactly zero flexibility. It anticipates reaching full funding right at the 2028 deadline and applies all the maximum assumptions allowed by the state.
To help harder-hit systems, local and state officials have floated the idea of a legislative change pushing back the deadline. The City of Worcester has also filed a petition with the state to extend it to 2038 just for the local system.
“I don’t think extending the funding schedule by 10 years is unreasonable,” DelSignore said. “I think it’s very reasonable.”
Even if the deadline were extended, he said, pension system officials would do their best to improve the system’s finances and reach full funding well before 2038.
What’s The Alternative?
With private 401(k) plans tanking and leaving workers with no recourse from their employers, it may be a politically difficult time for public pension plans.
A recent report from the Worcester Regional Research Bureau with the eye-catching subhead “Is it Time to Retire the System?” criticizes the Worcester City system – and, by extension, public pensions in general – as too expensive and prone to abuses.
Among other things it proposes tweaks to benefits calculations, the creation of a statewide pension system for employees in hazardous occupations and, most radically, the eventual switch to a defined-contribution plan like a 401(k) for public employees.
Both DelSignore and Thompson said some aspects of the study may have merit. Delsignore said the state might do well to rethink the assumption that certain cancers are job-related for firefighters.
Thompson said she questions provisions that allow public employees to count part-time work like serving on town boards toward their pensions.
But both pension administrators said it’s difficult to compare public and private retirement plans.
“How many private companies have police and firefighters?” DelSignore said. “That’s a huge expense.
They’re twice as expensive as other employees by nature of their job. They get hurt more, they get killed and they retire early because it’s a job you can’t do when you’re a senior citizen.”
Thompson said she isn’t well versed in 401(k)-style plans but she doubts they would turn paying for public workers’ retirements into a simple proposition.
“Any pension plan is expensive,” she said. “I don’t know that there’s an easy solution to the problem.”
WBJ Web Partners
Most Recent
Most Recent
0 Comments