Push On For New COLA Base

MAY 2006 - Schedule Adjustment Can Absorb $16,000 Level - Nearly a decade after landmark legislation established the current law governing the cost-of-living adjustment (COLA), Association leaders are urging the Legislature to move forward with a plan to increase the COLA base to $16,000.

The call for a higher base follows on the heels of two reports issued by the Public Employee Retirement Administration Commission (PERAC). Last October, the Commission issued a report calling for an increase in the base to which the COLA percentage is applied. Established in 1997, the current base remains at $12,000.

Beyond the initial report calling for a new base of $16,000, PERAC has recently issued a second report detailing how the costs brought on by a new base can be incorporated into the Commonwealth's pension funding schedule.

While the increased state appropriation of a new $16,000 base, if applied to the current 2023 schedule, would be nearly $100 million a year, a change in the funding date of two-three years would absorb the increase liability without any additional funds being required at this time.

"Although PERAC showed how a change in the funding schedule would help us, the Commission, unfortunately, did not endorse such a change," said Association President Ralph White, "Their actuary, Jim Lamenzo, recommended that the state stay with the 2023 funding schedule and pay for the increased base with an additional appropriation. This recommendation is a conservative fiscal approach; however, it won't work for us. An increased budget appropriation of $100 million just won't fly.

"For nearly twenty years our Association has been right there with the Legislature as the staunchest defender of our pension funding schedule. Now the time has come to make some adjustments to the state's funding schedule that will give retirees a critical benefit increase. Absent an increased appropriation, we are calling for the schedule to be extended two to three years to accommodate the new COLA base."

Full Funding Adopted in 1988

When the modern era of pension funding was ushered in back in 1988, a forty-year pension funding schedule was established by the Legislature, carrying the date of a fully funded pension system out to 2028 at the latest.

In practice, the funding date serves as a deadline of sorts for when a system must be 100% funded. By definition, a fully funded system has enough assets to fully cover accrued pension benefits for all retirees, employees, and survivors, meaning there would be no debt for future taxpayers.

As a result of extraordinary investment returns and the Legislature's commitment to making its full appropriation each year, the state was able to reduce its scheduled date for full funding from the original date of 2028 to 2018 in 1997. In 2002, at the height of the recession, the funding date for the state/teachers system was again adjusted to 2023.

The move from 2018 to 2023 saved the Commonwealth approximately $180 million a year off the appropriation - funds that were used elsewhere as the Legislature and governor struggled to balance the budget. Now it's time for the state to give the same consideration for its retirees.

Locally, the same scenario as the state and teachers' systems would also apply. Retirement systems such as Boston, Worcester, Brockton, Fall River and Lowell are in a similar position as the state and could also extend their funding schedules by a few years and adopt a $16,000 base without any increased appropriation. Retirement Systems, which are currently at the Year 2028 maximum, would need an amendment to the current law in order to go beyond that date. But, it could be done.