Adopts Conservative Approach & Increased Funding
MARCH 2014 VOICE: Governor Deval Patrick and the state’s Legislative Leadership have agreed to significantly increase the appropriation toward funding the Commonwealth’s unfunded pension liabilities, along with shortening the pension funding schedule by four years and adopting a more conservative set of assumptions.
Adopts Conservative Approach & Increased Funding
MARCH 2014 VOICE: Governor Deval Patrick and the state’s Legislative Leadership have agreed to significantly increase the appropriation toward funding the Commonwealth’s unfunded pension liabilities, along with shortening the pension funding schedule by four years and adopting a more conservative set of assumptions.
The plan closely follows a recommendation made by the Public Employee Retirement Administration Commission (PERAC) that fully accounts for changes in state policy, new laws and market conditions impacting the massive $58 billion Pension Reserves Investment Trust (PRIT) Fund. Paramount among these changes is updated mortality tables that reflect longer life spans, as well as decreasing the annual investment return presumption from 8.25% to 8%.
While the system has beat assumptions over the past 28 years with an averaged annual return of 9.75% since 1985, state officials believe changing market conditions warrant a more cautious approach.
Starting July 1, the Commonwealth’s appropriation toward the state and teachers’ pension funds will increase by 10% or $163 million. Annual funding will then increase at 10% a year through FY17, after which annual increases are scheduled to be at 7%.
“Our state and teachers’ pension systems have weathered the 2008 fiscal storm very well and the recalculation of the Commonwealth’s pension funding schedule helps ensure that things stay on track,” says Association President Frank Valeri. “The state has been able to increase the appropriation, while shaving four years off the schedule and taking a more conservative approach. These are all positive steps that not only make our system sustainable, but also help our bond rating.”
The Commonwealth’s pension funding schedule encompasses both the State and Teachers’ Retirement Systems, along with retired and active Boston teachers. Reflecting the most recent actuarial valuation, utilizing new assumptions, the system’s unfunded liability is now $29.4 billion.
Among the contributors toward the $3.2 billion increase in unfunded liability are the changes in investment return assumption ($1.66 billion), mortality table update ($726 million) and two mergers of former independent state authorities into the state retirement system ($361 million). In addition, the state also assumed the liability associated with Boston teachers ($253 million) and increased state/teachers COLA Base ($286 million).
The long-term cost associated with the COLA base increase accounts for less than 9% of the total increase in liability. However, this fact has not stopped critics of the pension system from citing the $1,000 increase in 2011 of the Cost of Living base as having grown the unfunded pension liability.
The most recent Commonwealth valuation, which was conducted by Chief State Actuary James Lamenzo, also showed a decrease in liability attributable to experience study changes, as well as the initial savings generated by the retirement reform law (Chapter 176, Acts of 2011).
“Changing the pension fund assumptions to keep up with the times is the right thing to do. You have to have a realistic and accurate outlook, otherwise it could lead to problems down the road,” explains Valeri. “However, on paper these changes come with a high price tag, $2.38 billion to be exact.
“And the consolidation of the county sheriffs’, and the TurnPike Authority into the state system, as well as assuming the Boston Teachers’ liability, added another $614 million in liability to the Commonwealth’s unfunded liability. These might prove to be all good policies, but they came with a cost to the retirement systems.”
Aggressive Funding
For an accurate view on how far the Commonwealth’s pension funding status has come, one must look back to the mid-1980s. Then Massachusetts was 49th of fifty states in terms of pension funding – second only to West Virginia!
The state established the PRIT fund in the early 80s, then embarked on a forty-year pension funding schedule in 1988 that called for the combined state employees and teachers’ pension liabilities to be fully paid for by 2028. Local pension funding schedules were established at the same time.
During the boom years of the 1990s, the Commonwealth’s funding status soared, erasing some 80% of the liability and resulting in the funding schedule being shortened by 10 years to 2018. As the financial markets leveled off in the 2000s, leading up to the market crash in 2008, the schedule was extended to 2025, then to 2040 as a way of smoothing the losses overtime, while the markets recovered.
“There’s no question that we’ve come a long way since 1984 when PRIM was founded,” says Ralph White, who served as a founding member of the state’s Pension Reserves Investment Management (PRIM) Board. “Despite the setbacks from 2008 and these new liabilities, we’re still ahead of where we were projected to be at this time.
“PRIM has done a good job managing and growing the pension assets over the years, while the Commonwealth aggressively funded the system, and we did not allow ourselves to get caught up in the gimmicks that seem to exist in other jurisdictions around the country. We have a very stable, well -run system here in Massachusetts, at both the state and local levels. It is because we’ve been diligent and put the work into the system being a success.”
Grossman Realigns PRIT Approach
Chairing the PRIM Board is the State Treasurer and Receiver General. Since full funding began in the 1980’s, five treasurers have come and gone. Each brought his or her own style and approach to managing the multi-billion dollar PRIT Fund.
“When we first started out the PRIM meetings were held in Treasurer Bob Crane’s office at the State House, but that was many years ago. Bob quickly realized the need for professional staff to oversee the fund,” recalls White.
Over the years, PRIT’s asset allocation and approach has evolved from the restrictive and conservative approach taken before the funding schedule was adapted, to the highly diversified globally adjusted PRIT fund of today.
“Steve (Grossman) has wisely taken measure of where the financial marketplace is heading and led PRIT to adjust both the asset allocation, as well as the overall approach towards investing. Back in the 90s, we could be a little more aggressive than times now allow. He’s been a good steward during a difficult time.”
Four of the past five years (2009-2010 & 2012-2013) have brought above average returns of 17.55%, 13.55%, 13.87% and 15.20% respectively. Over the past five years, the PRIT fund has had an annualized return of 11.89%. This places the fund in the upper third of the pack in terms of Massachusetts pension systems.