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The End of the Line for the MBTA Retirement Fund?

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Without Taxpayer Support, MBTA Retirement Fund Would Become Insolvent Between 2024 and 2036

Current employees would have to contribute at least one quarter of their salaries to stabilize fund’s finances

BOSTON – The MBTA Retirement Fund (MBTARF) has long claimed that it is fully capable of meeting its obligations without help from the commonwealth, but a new Pioneer Institute study finds that without taxpayer support the fund will run out of money between 2024 and 2036.

Solvency and Insolvency of the MBTA Retirement Fund

“Under the current collective bargaining agreement, three quarters of contributions to the pension fund are coming from the MBTA – in other words, from taxpayers,” said Pioneer Institute’s Senior Fellow on Finance Iliya Atanasov, author of “Solvency and Insolvency of the MBTA Retirement Fund.” “In 2012, employees contributed 5.5 percent of their pay to the fund. To make the pension plan sustainable without help from the T, that would have to increase to at least 25 percent.”

As the plan’s unfunded liability grows, the MBTA and employees are contractually obliged to increase pension contributions. If more has to be contributed, the T takes on 75 percent of the added payments.

With this funding formula, the T would have to contribute $55 million more over time to make up for the $25 million MBTARF lost on a hedge-fund investment recommended by its former executive director, Karl White.

The present value of what the MBTA owes towards MBTARF’s unfunded liability was about $545 million at the end of 2011.

Unlike other public pension funds, MBTARF doesn’t make its actuarial valuation reports public. However, Pioneer Institute obtained a copy of the 2011 report, which is the last one known to have been completed.

The valuation report revealed that MBTARF increased its annual assumed rate of return (ARR) on pension investments from 7.5 percent to 8 percent without specifying the methodology behind the decision. Assuming higher returns may make the fund’s finances appear misleadingly rosy. To justify a higher return assumption, the fund would have to move into riskier investments.

The Public Employee Retirement Administration Commission, which oversees the other 105 public pension systems in Massachusetts but not MBTARF, is urging them to reduce their ARRs well below 8 percent and to avoid overly risky investments.

Atanasov also finds that, if active MBTA employees withdrew their assets from the pension fund, the $1.1 billion MBTARF had on hand to cover the pension benefits of then retired members would run out by 2026 if the fund achieves the 8 percent assumed rate of return.

If current employees remained in MBTARF but new workers enrolled in a different plan, the fund would run out of money between 2031 and 2036. Some 12,000 current and former MBTA employees depend on MBTARF for their pensions. More than half of the members are retired.

MBTA employees can “spike” their pensions with unused vacation pay and other perks, the vast majority are still operating under the old “23 and out” system that was eliminated for new employees in 2009, and others can take early normal retirement at age 55 with 25 years of service. Thus, many workers can still retire before age 60. If that happened, the fund would go under by 2031 without support from taxpayers.

About the Author

Iliya Atanasov is Pioneer’s Senior Fellow on Finance, leading the research tracks on pension management, data analysis and municipal performance. He is a PhD candidate in Political Science and Government and MA candidate in Statistics as well as a former Presidential Fellow at Rice University. He also holds BAs in Business Administration, Economics and Political Science/International Relations from the American University in Bulgaria.

About Pioneer Institute

Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.