Unfunded Liabilities

While the recent pension reforms focused primarily on reducing the cost to the government, one component of the changes had the opposite effect: the legislation allowed local retirement boards the option of offering retirees a larger annual cost-of-living adjustment, or COLA. While Massachusetts has made its COLAs more generous, many retirement systems around the country have been reducing COLAs to save money.

Currently, there are 103 municipal, regional and agency retirement systems for public employees in Massachusetts, each administered by a five-person board and various numbers of board staff.

This policy brief introduces the MassPensions data accessibility tool by Pioneer Institute. MassPensions is a website presenting in clear and convenient format key data about the state of public employees' pensions in the Commonwealth of Massachusetts for the period 1985-2012. The low cost and fast turnaround of this project illustrate that government transparency is not always as complicated or expensive as it may seem.

The adoption of these reforms can significantly improve the performance of retirement systems statewide and reduce the costs of funding public pension benefits. Investment and payment planning will be facilitated by more predictable cash flows from investing activities, helping avert potential liquidity crises.

Throughout the US, the number and scope of defined-benefit pension plans have been on the wane for over a quarter century. Many private-sector workers have had their benefits wiped out by bankruptcies and fire sales of distressed businesses despite the legislative push from pay-as-you-go to fully funded pension plans.

The pension system for Massachusetts state workers and retirees has recently received a great deal of attention. Governor Deval Patrick signed reform legislation in June 2009, and additional reforms may be forthcoming. Much of the media coverage of pension issues has focused on sensational accounts of pension abuse.

The Middle Cities Initiative seeks to help the Commonwealth's older cities, which face economic, demographic, and political challenges. These challenges cover a wide range of issues—entrenched political cultures, significant infrastructure costs, underperforming schools, struggling retail and manufacturing sectors, crime, and poorly targeted state programs. The Initiative's goal is to develop and disseminate concrete policies to help the Middle Cities grow.

This paper will review Statement 45's potential impact on governments and review existing disclosures in financial reports as well as bond offering statements. The paper will discuss the Statement's impact on budgets and governmental operations, including collective bargaining. Funding options under Statement 45 will be detailed, including the advantages and disadvantages of irrevocable trusts and OPEB bonds. The paper will also discuss the impact of Medicare Part D subsidies received by governments, as well as the bond rating implications of policy decisions surrounding OPEB. Finally, the paper will discuss case law that has already come before state courts related to restructuring of benefits.

This paper will review Statement 45’s potential impact on governments and review existing disclosures in financial reports as well as bond offering statements. The paper will discuss the Statement’s impact on budgets and governmental operations, including collective bargaining. Funding options under Statement 45 will be detailed, including the advantages and disadvantages of irrevocable trusts and OPEB bonds.

While the pension system is not overly generous for typical employees, it is riddled with exceptions, ambiguities, and loopholes that allow some of them to abuse the system and collect unwarranted benefits, resulting in tremendous cost to the state and ultimately to taxpayers. The root of these problems is that the calculation of benefits is not based on the simple concept of contributions but the complicated interplay of four factors—years of eligible service, maximum three years of compensation, "group" or job classification, and retirement age.