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Massachusetts Pension Funding Deal Less than Meets the Eye

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As we recently wrote in “The Costs of Delaying the Funding of Public Pensions in Massachusetts,” in 2010 the Massachusetts legislature and governor postponed the date by which the state and teachers’ pension systems will be fully funded. In essence, they refinanced the pension liability by moving back the date for fully funding it from 2025 to 2040 in a scramble to stitch together a viable budget in the aftermath of the financial crisis.

[quote align=”right” color=”#999999″]While the Patrick administration and legislators can don the badge of fiscal responsibility, the brunt of the cost will fall on future budgetary cycles.[/quote]

The move resulted in an unprecedented 6.56% drop in the state’s annual contribution for 2011, but would come at an estimated cost of $26 billion in added payments because of forgone investment income. The funding schedule adopted at the time included a 5% ramp-up in payments for FY 2012-2014 and 6% for FY 2015-2017. After that, pension payments would rise by the annual statutory limit of 4% that is applied to most other pension systems in the state which are funding through 2040.

On Tuesday, state leaders announced they will try to make up for some of the actuarial losses caused by the delay. As part of this seemingly good news, they pushed up the target for full funding by four years (to 2036). The announcement trumpeted next year’s pension contribution, which they represented as $163 million larger than that in the current fiscal year.

A closer look at the data reveals a funding deal that looks more like an election-year PR move than a significant change in budget policy. While the Patrick administration and legislators can don the badge of fiscal responsibility, the brunt of the cost will fall on future budgetary cycles.

Fiscal Year

Existing Schedule

Appropriation ($mn)

New Funding Deal Appropriation ($mn)

Appropriation Increase from Old to New Schedule ($mn)

Appropriation Increase from Old to New Schedule (%)

2015

$1,727

$1,793

$65

3.77%

2016

$1,831

$1,972

$141

7.69%

2017

$1,941

$2,169

$228

11.75%

Total

$5,499

$5,933

$434

7.89%

For fiscal 2015, the state’s overall pension appropriation will actually increase by $65 million, a very modest 3.77% bump, over the existing schedule that would achieve full funding by 2040. This is just a drop in the bucket – about 0.19% of an anticipated FY 2015 state budget of about $34 billion.

Substantial pension funding increases don’t kick in until FY 2017, when the new appropriation will be 11.75% larger than the one currently in the statute. After that, the appropriations will rise at 7% annually rather than the current 4%.

If state leaders are serious about addressing the underfunding issue, they should commit more upfront payments. One relatively painless option is to sweep any residual fund balances and end-of-fiscal-year tax windfalls into the pension fund. Enshrined into law, such a provision would also work to promote fiscal discipline.

Such savings and excess revenues typically go into the state’s rainy-day fund, where they are easy pickings for general spending, or directly into the general fund. Once committed to pensions by statute and deposited into the system, they could not be touched by politicians looking for a temporary fix to the state’s ongoing structural deficit problems.

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