Local retirement systems generate heavy costs, larger fiduciary risks
BOSTON – Massachusetts’s 102 local pension systems typically report administrative costs that are much higher than those of the Massachusetts State Employees’ Retirement System (MSERS), according to a new study published by Pioneer Institute.
In “The Bay State’s Public-Pension Complex: Costly and Unaccountable,” Dr. Iliya Atanasov finds that the 102 local systems (84 municipal, 12 regional, and 6 “special” systems such as the Massachusetts Housing Finance Agency and Massport) have average per-member administrative costs that are at least three times those of the MSERS. Many are far higher.
“Hyper-expensive agency funds like those of Massport and the Massachusetts Housing Finance Agency should be folded into the state system,” said Pioneer Executive Director Jim Stergios. “The legislature should also allow communities to vote with their feet and join the state system because of the huge savings.”
In 2012, MSERS administrative (non-investment) costs were $51 per member. At the other end of the spectrum, the MHFA retirement board reported spending $971 per member on non-investment costs in a single year. Dr. Atanasov estimates that consolidating the fragmented public pension systems into the MSERS would save taxpayers at least $27 million annually.
Savings will also be realized because local systems tend to have higher investment costs. From 2008 to 2012, MSERS investment-expense ratios were between one and six basis points below the estimated average of the local systems. A single basis point corresponds to millions of dollars every year. Local systems which did not invest with the state pension-investment fund frequently paid fees much higher than that average.
“Since Massachusetts law requires communities to make up for any pension funding gap,” Dr. Atanasov warned, “every extra penny spent by retirement systems is a penny less in taxpayers’ pockets.”
Keeping tabs on 102 local systems seems beyond the capacity of a handful of auditors at the Public Employee Retirement Administration Commission (PERAC), which regulates public pensions in the commonwealth. PERAC’s audits typically cover a three-year period and often take over a year more to complete. This means that the audits often happen four or five years after events have taken place.
As of October 2016, the last audit reports appearing on the PERAC website for nearly two thirds of the local systems were completed in either 2011 or 2012. The last audit posted for the Franklin regional system was from 2009.
The elevated fiduciary risk became manifest recently in Boston Globe coverage of ties between attorney Garrett Bradley and Plymouth County Treasurer Thomas O’Brien, who oversees the county’s pension system. Over a decade, O’Brien received $100,000 in political contributions from Bradley’s law firm and another firm for which Bradley lined up public and union pension funds willing to act as plaintiffs in class-action lawsuits. The contributions accounted for nearly half of all those received by O’Brien during that period.
On the advice of the same attorneys who donated to O’Brien, Plymouth County filed 14 class-action lawsuits over the last decade. The pension system realized about $40,000 from the lawsuits, but they netted the lawyers more than $40 million. Bradley and his firm are under federal criminal investigation for the firm’s massive political donation program. Meanwhile, Plymouth County had some of the highest investment expenses found in Pioneer’s study.
Dr. Atanasov notes that when local pensions are merged into the MSERS, it must be done equitably. For example, the assets received by the MSERS from any system must belong solely to the former members of that system and be apportioned to their accounts. Governmental units that fully funded their pensions should not be made responsible for the unfunded liabilities of those that have failed to make sufficient pension contributions.
The study is based on expense data from 195 PERAC audit reports made public in the 2012-2016 period.
About the Authors
Iliya Atanasov is Pioneer’s former Senior Fellow on Finance, who spearheaded research on pension management, budget analysis, infrastructure and municipal performance. Iliya received his PhD in Political Science from Rice University, where he was a Presidential Fellow. He also holds BAs in Business Administration, Economics and Political Science/International Relations from the American University in Bulgaria.
Gregory Sullivan is Pioneer’s Research Director, and oversees the Centers for Better Government and Economic Opportunity. Prior to joining Pioneer, Sullivan served two five-year terms as Inspector General of the Commonwealth of Massachusetts and was a 17-year member of the Massachusetts House of Representatives. Greg is a Certified Fraud Investigator, and holds degrees from Harvard College, the Kennedy School of Public Administration, and the Sloan School at MIT.
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.