Why We Need Transparency at the MBTA Retirement Fund Now

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A story in today’s Boston Globe again reminds us of the secretiveness of the MBTA Retirement Fund (MBTARF) and its complicated funding structure – enabling Fund managers to mask very costly decisions. Over the past year, The Boston Globe published a series of articles chronicling a potentially fraudulent $25 million loss at the MBTARF from a hedge fund investment proposed by a former MBTARF executive director.

Pioneer Institute has served as an indispensable resource for media, public officials, and taxpayers, providing relevant and timely research on the deteriorating condition of MBTARF‘s finances. Pioneer has released a series of reports on the Fund‘s lack of transparency and mismanagement.

In a recent report, Hard Lessons for Institutional Investors from theMBTA Retirement Fund, Pioneer focused on the substantive issues raised in Beth Healy’s Globe report, attributing the MBTA Retirement Fund‘s failings to its poor governance structure, absence of independent oversight, and lack of a coherent investment strategy.

Our report found that the MBTARF dramatically underperformed the Pension Reserves Investment Management (PRIM) Board, which oversees the assets of the state and teachers’ retirement systems. Had the MBTA invested $1,000 with PRIM in 1985, it would have yielded $15,198 by 2013, rather than the $12,251 yielded through the MBTARF. Had the MBTA invested fund contributions from 1991 through 2012 in two broad index funds, it would yielded nearly $900 million in additional assets, more than enough to cover MBTARF‘s entire unfunded liability.

The MBTARF has long perpetuated the myth that the public is not impacted by its management decisions, claiming that it is fully capable of meeting its financial obligations without state help. But a Pioneer report found that the Fund would become insolvent between 2024 and 2036 without taxpayer support. 75% of pension fund contributions come from the MBTA, which receives significant financial support from the state.

A Pioneer report on the precipitous deterioration of the MBTA plan’s finances revealed that MBTA pensions fell from 95% funded in 2006 to only 68% by 2011, resulting in a $726 million unfunded liability. The Institute called for the T’s Retirement Fund to abide by investment management and solvency regulations governing the state’s other public pension systems. Another report, Myths and Reality about MBTA Pensions, showed that the MBTA could save $1 billion by transferring employees from the T’s troubled retirement plan to the state system, and raising the retirement age.

In addition to these reports, Pioneer participated in a legislative hearing to make the financials of the MBTARF a matter of public record. After that hearing, the legislature tried to repeal a state budget amendment that would have ensured public accountability at the fund. Thankfully, Governor Deval Patrick vetoed that effort, but more reform is needed. Read our statement below related to today’s story:



The finances of the MBTA Retirement Fund (MBTARF) continue to deteriorate despite elevated investment returns. Even with questionable longevity adjustments, the unfunded liability increases to $854 million as of yearend 2013, up $128 million from $726 million in 2011.

On Wednesday, 10 December 2014, the MBTARF posted on its website an annual report for the preceding year. The report finally includes the required management discussion and analysis (MD&A) section that was being omitted in prior years in violation of generally accepted accounting standards (GAAP). The inclusion of MD&A and the online disclosure of the annual report are a step in the right direction towards greater transparency at the MBTARF.

In the 2013 MD&A, management finally documents for T retirees and the public the $25 million hedge-fund loss revealed a year ago by the Boston Globe. The fund has written this investment‘s value down to zero.

The MD&A also reports improprieties with another of the fund‘s investment managers. In the summer of 2014, the Securities and Exchange Commission charged that Weston Capital and its founder “illegally drained more than $17 million from a hedge fund they managed”. The MBTARF‘s net position was not affected because of an earlier transfer of assets, but these events highlight the elevated fiduciary risk with the opaqueness of hedge-fund investments.

With its 2013 actuarial valuation, the MBTARF shifts from a five-year moving-average to a five-year smoothing asset valuation method, “to further the alignment of its funding policies with those prevalent among the Commonwealth of Massachusetts’ public retirement systems”.

The “reset” accompanying this change allows the MBTARF to book early the unamortized investment gains from the past few years. Without this actuarial sleight of hand, the unfunded liability increases to about$854 million in 2013, up from $726 million in 2011. With the reset, the unfunded liability still rises – to “only” $757 million in 2013.

Much of the added liability is due to actuarial changes reflecting the increased longevity of plan members. The fund shifts from projecting forward the 1989 Buck mortality table to estimates based on the 1994 Uninsured Plan table (UP-94). Meanwhile, the state retirement board uses the more recent 2000 Retirement Plan (RP-2000) table. Why would the MBTARF use the more dated UP-94, especially if it aims at reporting consistency with other retirement systems in the state?

Even before these actuarial changes have taken effect, MBTA contributions increased 5.5 percent to $58 million. Employee contributions rose 5 percent, to $21 million.

Because of the lack of effective governance reform at the MBTA Retirement Fund, T pensions and taxpayer obligations continue to be atelevated risk.