After being stung by a pandemic induced decline in the financial markets in 2022, our public pension investment returns have bounced back through the first six months of 2023.
Following a down market in 2022, the Commonwealth’s PRIT Fund posted a 6.69% gain through June 30th – nearly meeting the fund’s 7% annualized assumed rate of return. These returns should be consistent with those of the 102 local retirement systems, many of which invest some if not all their assets through PRIT.
The PRIT Fund is governed by a nine-member board known as the Pension Reserves Investment Management (PRIM) Board, which is chaired by State Treasurer and Receiver General Deb Goldberg. Of the nine board members, four are elected by the members of the State and Teachers’ Retirement Systems – including Mass Retirees Executive Vice President Paul Shanley, who is a retired deputy state treasurer.
PRIT’s day-to-day operations are led by Executive Director and Chief Investment Officer Michael Trotsky, who will once again be our guest at the virtual Town Hall Meeting on Friday, September 29th.
While true that pensions paid through a defined benefit retirement plan are not tied to investment returns in the way that 401k or other private retirement accounts operate, investment returns play a key role in the overall health and long-term sustainability of the plan. Importantly, investment gains also play a critical role in paying for benefit improvements – such as the COLA.
As we have reported time and time again, the largest hurdle we face when advocating for benefit improvements is the cost. Due to the number of retirees and the overall scope of the benefits paid, even a small benefit increase will cost the system millions of dollars.
And when it comes to items like the COLA base, the numbers can be staggering. For each $1,000 increase in the COLA base, the combined cost to the State and Teachers’ Retirement Systems is roughly $500 million in unfunded liabilities and nearly $50 million in new annual costs to finance the new benefit.
The cost of the proposed State and Teacher COLA base increase was the reason why the legislature opted not to move forward with a $3,000 State and Teacher retiree COLA base increase for FY24. An 11.2% pension investment loss in 2022, coupled with concern over declining tax revenue, caused legislative leaders to forgo a base increase at this time.
After taking a deep decline in the first half of 2022, US and global financial markets have undergone roughly 12-months of what can be called a turnaround.In the first quarter of 2023, the PRIT Fund gained 3.85%. Q2 produced another 2.84%, bringing a total gain of 6.69% for the first half of 2023 (gross of fees). These numbers, when annualized, represent a gain of more than 13% for the year.
As mentioned above, PRIT assumes an average annualized return of 7% over the life of the fund. The fund’s 3, 5, and 10 year returns all exceed the assumed rate of return (10.18, 7.77, and 8.51% respectively). Since PRIT’s creation in 1988, the fund has an annualized return of 9.24%.
When the PRIT Fund and the PRIM Board were created in 1988, Massachusetts had one of the worst funded public retirement systems in the country – second only to Mississippi. Across the 102 local systems, very few had properly funded public pensions prior to 1988. The one standout exception is the Town of Wellesley, where former Town Accountant Arnold Wakeland had the foresight to begin funding the system well before the law required municipal governments to do so.
The historical underfunding of the systems is the main reason why the COLA has lagged. Starting in 1988, the 104 public retirement systems began to properly fund themselves and pay off the large multi-billion unfunded liabilities that had accumulated over the decades since World War II. Those debts were originally scheduled to be paid off by 2028, but the great recession in 2008 required the pension funding schedules to be extended to 2040.
However, many retirement systems, including the State and Teachers’ Systems, will be fully funded prior to 2040. The Commonwealth is now scheduled to be fully funded in 2036. At the local level, the City of Boston will be fully funded in 2027, Berkshire County in 2028, Cambridge in 2026, Milton in 2026, Stoneham in 2026, and Winthrop in 2026.
The following systems are either at or close to fully funded status: Leominster, Mass Housing Finance Agency, MassPort, Shrewsbury and Watertown. If the current trend continues and 2023 delivers double digit returns, a number of the systems mentioned above will draw close to fully funded status ahead of schedule.
All of this being said, it would be a mistake for me not to point out that predicting future investment returns is a nearly impossible task. As evidence by this week’s interest rate increase, the Federal Reserve remains concerned that the US economy continues to run too hot, with high prices, historically low unemployment and inflation remaining higher than our economic targets. Whether or not these measures lead to a recession remains a great unknown, which is something that gives policymakers a reason to pause when it comes to new spending.
However, we strongly believe that the success of our public pension systems must be shared with the beneficiaries. These systems exist for you. It is your money and excess gains must be shared with you. This fact is made even more important due to our public workers’ lack of participation in Social Security.
Over the past two years, our advocacy to share the success of our public pension systems with retirees has received a positive embrace across the vast majority of local retirement systems. Our hope is that a strong investment return in 2023 can be parlayed into improved COLA benefits in 2024.
Before closing, I’d like to provide two quick updates. First, the 3% State and Teacher COLA is contained within the FY24 State Budget. Reports from Beacon Hill indicate that House and Senate negotiators remain at an impasse on several issues, which are unrelated to the COLA. While we do not know how long negotiations may take, the COLA will be paid retroactive to July 1, once the budget is signed into law.
Second, our testimony on Tuesday before the Joint Committee on Public Service was well received. In addition to testifying on our own proposals, we also indicated our support for S1624. Filed by State Senator Nick Collins (D-South Boston), the bill seeks to create a line-of-duty infectious disease presumption for first responders. As I said in my testimony, we have a responsibility to protect those who protect us. And this includes protecting your families should something happen to you. Mass Retirees supported the creation of the “Heart Law” presumption, as well as the cancer presumption. We are proud to stand with our public safety allies and will continue to do so.
I hope you are enjoying summer and staying safe in this intense heat.
With great appreciation,
Shawn
Shawn Duhamel
Chief Executive Officer
Mass Retirees Association