Investment Success Must Be Shared
Twenty of the 104 Massachusetts public retirement systems were at least 90% fully funded as of April 1, 2024, according to the latest data from the Public Employee Retirement Administration Commission (PERAC). Of that number, four systems have achieved fully funded status and now report a surplus.
Fully funded status is reached when the retirement system has amassed enough assets to cover the cost of all accrued retirement benefits owed to all current retirees, surviving spouses, and vested employees/deferred retirees.
Pension funding comes from three sources: Employees’ share through payroll withholdings (now averaging 10% for municipal systems); employer contribution (varies depending on unfunded liability and normal cost); and investment returns.
With very few exceptions, Massachusetts public employers did not properly fund the government’s share of public pension costs until the passage of pension reform in 1988. At the time, Massachusetts had the worse funded public pension systems in the country – second only to Mississippi.
The 1988 law (which was local option) required the state and local governments to establish pension funding schedules and properly fund the employers’ share of pension costs. This included paying off decades of unfunded liabilities, as well as properly funding the employers’ share of ongoing costs, referred to as “normal post” in actuarial terms.
“In the mid-1980s the lack of proper pension system funding on the part of the government was a very big deal. After years of study by special commissions, the law was finally modernized in 1988. Back then, no one could envision a day when a single system would be near fully funded, never mind having a growing number with assets above 100%,” recalls Mass Retirees General Counsel Bill Rehrey. “Prior to 1988, most pension system assets were funded through employee contributions and limited investment returns. It is truly remarkable how far things have come. Now the question is what happens next?”
Of growing concern to the Association is the fact that state retirement law is largely silent on the question of what happens once a system is fully funded. For instance, nothing in the law requires the employer to continue appropriating funds to the system if a surplus of assets exist.
One case in point is Watertown, which was 101.30% funded as of 1/1/2023 (does not include 2023 investment gains). As a result of the surplus, Watertown’s contribution to the retirement system for FY24 is $0. Meanwhile, active employees will contribute some $3.6 million into the system during the current fiscal year. For FY25, the town is scheduled to contribute just $531,274 (1.3% of payroll), while active employees are estimated to pay more than $3.8 million into the system. The system’s long-term pension funding schedule indicates that the town’s annual appropriation will be less than 1% of payroll beginning in FY29.
Despite the success of the retirement system, Watertown’s COLA base remains at $14,000 – a $2,000 increase over the past 26 years.
Of the top 20 funded systems, 9 have a COLA base ranging from $15,000 to $20,000.
“Mass Retirees strongly believes that the success of our public pension systems must be shared with retirees,” said Association President Frank Valeri, who is also an elected member of the State Retirement Board. “When reviewing the top 20 systems, you will quickly see that the COLA base in 11 of the systems lags what should reasonably be expected in a well-funded system.
“Two of the top systems, Winthrop (102.10%) and Leominster (97.90%) each still just have a $13,000 COLA base. Increasing the base just once since 1998 is unacceptable, especially when it comes to such well-funded systems. It is simply wrong to fund the system on the backs of retirees and employees, which is what it seems some communities have done.
“On the flip side are systems like Wellesley ($20k), Cambridge ($18K), Greater Lawrence Sanitary District ($18k), Milton ($18k), and Saugus ($18k) which have done right by their local retirees and share the success through incrementally improving the COLA base. This approach is not only fair, but also the right thing to do. Afterall, the pension assets are a legal trust belonging to the members of the retirement system – not the government.”
In addition to pushing for improved COLA benefits, Mass Retirees is also leading the charge to require a minimum contribution from the employer.
Not participating in Social Security means that the state and local governments do not pay the 6.2% employer contribution required under Social Security. With employees required to contribute an average of 10% into the retirement system, it is only fair that the employer meet the same obligation that they would under Social Security and contribute not less than 6.2% of payroll into the retirement system.