Study Finds Pension Obligation Bonds Could Worsen T Retirement Fund’s Financial Woes

Share on Facebook
Share on Twitter
Share on

BOSTON – A new study published by Pioneer Institute finds that issuing pension obligation bonds (POBs) to refinance $360 million of the MBTA Retirement Fund’s (MBTARF’s) $1.3 billion unfunded pension liability would only compound the T’s already serious financial risks.

With POBs, government entities deposit revenues from bond sales into their pension funds and use the money to make investments they hope will deliver returns that outpace borrowing costs.

“Virtually every study of POBs finds that timing and duration of the bond issues are critical,” said E.J. McMahon, author of “Rolling the Retirement Dice.”  “Bonds floated at the end of a bull market are the most likely to lose money, and that makes this idea a wrong turn at the worst possible time.”

If investments don’t meet a pension fund’s assumed rate of return, it could be left with debt service costs in addition to the pre-existing unfunded liability.  In 2015, the Government Finance Officers Association bluntly warned that “State and local governments should not issue POBs.”  It reaffirmed its guidance last year.

If the MBTA were a private company, federal law would require it to base the expected rate of return on its pension investments on the current and historic yields for low-risk assets such as high-quality corporate bonds.  These returns are currently around 4 percent.

But under more permissive government accounting standards, the MBTA has set its expected rate of return at 7.25 percent annually.

The MBTARF is currently projected to require $3.07 billion to cover pension expenses through the lifespans of its youngest vested employees, but its assets come up about $1.3 billion short.  Assuming the more conservative 4 percent rate of return, total liability rises to over $4 billion.

As recently as 2007, the MBTARF had more than 90 percent of the assets needed to meet its obligations.  Yet despite annual employer (MBTA) contributions that rose from $21 million in 2001 to $148 million last year, the retirement fund was only 53.55 percent funded by fiscal 2020.  Among large U.S. transit agencies, only Chicago has a lower funding ratio and a larger unfunded liability.

The T contributes 26.7 percent of covered salaries to the MBTARF, while employees kick in 9.33 percent of pre-tax salaries.  Two thirds of the money goes toward the unfunded liability, not the “normal cost” of new pension liability that accrues each year.

McMahon identifies several issues behind these problems.  The first is poor investment management.  A 2016 Pioneer study found that the MBTARF would have earned an additional $900 million between 2001 and 2014 if it deposited its funds in the better performing Massachusetts State Employee Retirement System.

The second reason is that the T underfunded the MBTARF by $66 million from 2007 to 2014.  If it had made its full contribution during those years, that $66 million would have grown to $183 million by the end of 2021.

Meanwhile, annual pension benefits continue to grow, from $96 million in 2001 to $220 million in 2020.

Finally, in large part because the majority of T employees can retire in their 40s or 50s, the MBTARF has fewer active employees paying into the fund than retired transit workers drawing pensions. The MBTARF has 0.845 active employees for each person collecting pension benefits.  Overall, the state average for active employees-to-beneficiaries is 1.358.  The MBTARF is one of only four of 105 public pension funds in Massachusetts that has more beneficiaries than contributors.

Underlying all these issues are the MBTA’s fundamental budgetary challenges.  Fare revenue is projected to remain 25 percent below pre-pandemic levels through fiscal 2023, and the Authority will have to draw down reserves to balance its $2.6 billion budget.

“The T’s financial condition requires fiscal prudence, not a risky quick fix like pension obligation bonds,” said Pioneer Executive Director Jim Stergios. “Such ploys rarely work – and a bit like a Hail Mary pass, it’s the wrong play to call especially right now.”

About the Author

E.J. McMahon is a public policy analyst focused on state and regional economic, fiscal, and demographic trends. McMahon is founding senior fellow of the Empire Center for Public Poli­cy in Albany, New York, and an adjunct fellow at the Manhat­tan Institute for Policy Research. A former journalist, he also served in senior staff positions in New York state government. McMahon is a graduate of Villanova University.

About Pioneer Institute

Pioneer Institute develops and communicates dynamic ideas that advance prosperity and a vibrant civic life in Massachu­setts and beyond. Success for Pioneer is when the citizens of our state and nation prosper and our society thrives because we enjoy world-class options in education, healthcare, transportation and economic opportunity, and when our government is limited, accountable and transparent. Pioneer believes that America is at its best when our citizenry is well-educated, committed to liberty, personal responsibili­ty, and free enterprise, and both willing and able to test their beliefs based on facts and the free exchange of ideas.

Get Updates on Our Transportation Research

Related Posts:

Study Finds Pension Obligation Bonds Could Worsen T Retirement Fund’s Financial Woes

A new study published by Pioneer Institute finds that issuing pension obligation bonds (POBs) to refinance $360 million of the MBTA Retirement Fund’s (MBTARF’s) $1.3 billion unfunded pension liability would only compound the T’s already serious financial risks.

Study Documents The Design Challenges, Contracting Issues, And Delays Facing New MBTA Fare Collection System

This new study unearths previously unseen communications between the MBTA and its contractors, showing that the MBTA’s efforts to modernize its fare collection system, including allowing payments with credit cards and bringing “tap and go” technology to Commuter Rail and ferry lines, was riddled with technological challenges and difficulties overseeing contractors as early as 2019, culminating in a 3-year delay to the project’s full implementation.

Transit Innovation Explored: A Bus As Fast As A Train?

Hubwonk host Joe Selvaggi talks with transportation expert Ian Ollis about the findings of his new research paper, "Bus Rapid Transit: Costs and Benefits of a Transit Alternative," which examines the benefits of building Bus Rapid Transit to serve communities looking for faster transit alternatives to a car.

Study Finds Bus Rapid Transit Can Offer Cost-Effective Benefits

Bus rapid transit (BRT) incorporates unique features such as dedicated lanes to provide reliable and cost-effective service while reducing congestion and its detrimental environmental impacts, according to a new study published by Pioneer Institute.

Study Raises Concern That Annual T Fare Evasion Costs Could Rise By More Than $30 Million Under AFC 2.0

According to the Federal Transit Administration (FTA), the MBTA’s $935.4 million fare collection system (AFC 2.0) that is scheduled to be implemented in 2023 will reduce fare evasion by $35 million over a decade. But the T announced in 2021 that evasion could actually increase by up to $30 million under AFC 2.0, and now a Pioneer Institute study warns that insufficient fare enforcement could drive that figure even higher under the new system.

Study: Pandemic Pension Bonus Bills Would Cost Billions and Unfairly Favor Highly Compensated Public Employees

Two identical bills to reward public employees with a retirement credit bonus for working during the COVID-19 emergency are currently pending in each chamber of the Massachusetts Legislature.  The bills would add billions of dollars in liabilities to public pension funds and reward workers based on their compensation, years of service and age rather than the type or duration of the work performed during the emergency, according to a new study published by Pioneer Institute.

Pioneer Applauds MassDOT for Allston Project All At-Grade Plan

Pioneer Institute applauds the Massachusetts Department of Transportation (Mass DOT) for its decision to move forward with an all at-grade design for the “throat” area as part of the massive $1.7 billion Allston I-90 Interchange project announced yesterday by State Secretary of Transportation Jamey Tesler. Pioneer had proposed that MassDOT should revise its Scoping Report on the I-90 Allston Multimodal Project and recommend an additional option - a modified at-grade option for the throat area - to the Federal Highway Administration.

Enduring the Maelstrom: Lessons from MassPort Leadership During 9/11

Hubwonk host Joe Selvaggi talks with author and former MassPort CEO Virginia Buckingham about her recently released book, On My Watch: A Memoir, which chronicles her experience leading the organization through 9/11 and the life and leadership lessons learned from that tragic day.

MBTA Ridership Trends Compared to Public Transportation Agencies Nationwide

The COVID-19 pandemic had a devastating effect on our economy,…

Public Statement on the MA Legislature’s Blanket Pension Giveaway

Beacon Hill just put on full display what happens when it is awash in money. House Bill 2808 is entitled, “An Act relative to providing a COVID-19 retirement credit to essential public workers.”  It calls for adding three years of additional retirement credit to state “employees who have volunteered to work or have been required to work at their respective worksites or any other worksite outside of their personal residences during the COVID-19 state of emergency…” But upon reading the brief bill, it quickly becomes clear that this legislation is irresponsible in the extreme.