Have the MBTA’s Retirement Plans Gone Off the Rails?

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Study Finds Lack of Transparency and Chronic Underfunding Among Reasons For Sharply Deteriorating MBTA Retirement Plans’ Finances

MBTA Retirement Fund does not post complete financial statements or board minutes online, isn’t subject to state pension regulations

BOSTON – The MBTA Retirement Plan’s (MBTARP) financial condition has been deteriorating and a lack of transparency makes it impossible to know all the reasons why, according to “Have the MBTA’s Retirement Plans Gone Off the Rails?” a Pioneer Institute white paper published today.

Have the MBTA’s Retirement Plans Gone Off the Rails?

The MBTA Retirement Fund (MBTARF) was not established under Chapter 32 of the Massachusetts General Laws, which governs the commonwealth’s other 105 public pension systems, and is not subject to regulation by the Public Employee Retirement Administration Commission. Pioneer’s Senior Fellow on Finance Iliya Atanasov finds that MBTARF doesn’t post its complete financial statements, actuarial valuations or the quarterly reports of its investment managers online. Until earlier this year, it did not publish a database of retiree benefits.

“The law calls for transparency in the MBTA’s retirement systems. The T’s continued unwillingness to open its books is troubling to taxpayers and especially to its current and retired employees,” said Pioneer Institute Executive Director Jim Stergios.

Atanasov finds that MBTARP’s financial condition has worsened significantly in recent years, while the T has left a $2 billion retiree healthcare liability completely unfunded. The MBTA does not publish the complete valuation reports for any of its retirement liabilities.

MBTA wage costs increased by 55 percent from fiscal yearend 2001 to fiscal yearend 2013, but annual pension costs more than tripled over the same period.

To make matters worse, since fiscal 2008 the T has effectively borrowed more than $80 million from MBTARP, the MBTA Police Association Plan and the Deferred Compensation Plan by underfunding them. The MBTA funded its retirement plans consistently until 2008, when it began to contribute only about 80 percent of the money needed to fund the pension cost accrued during the year. The T funded just 71 percent of the cost accrued in fiscal 2012.

As a result, the T’s net pension obligation has almost quintupled, from $21 million to nearly $103 million, between fiscal 2008 and fiscal 2013. A growing net pension obligation signals that a pension plan is not on track to meet its deadline for full funding; interest is charged annually on the outstanding amount.

This is just the latest red flag for an already flawed funding plan. MBTARP is currently on a 30-year “open” schedule to reach full funding, which means that the time horizon is moved out with every subsequent valuation. According to the Governmental Accounting Standards Board, “the open method, when coupled with an amortization period of 30 to 40 years, produces no perceptible amortization of the unfunded actuarial liability.”

While the assets of other Massachusetts public pension systems have grown substantially, MBTARP’s were about the same in 2007 as they had been in 2000. The plan’s liabilities increased by 36 percent during that period.

MBTARP was 95 percent funded in 2006. By 2011, it had just 68 percent of the money needed to meet its pension obligations and the unfunded liability had ballooned to $726 million.

“When it comes to things like the MBTA pension plans’ assets and system costs, the insufficient transparency makes it impossible to know all the causes of their deteriorating financial condition,” Atanasov said. “Management doesn’t disclose the complete actuarial valuations of liabilities – or pay for them in full.”

To start addressing MBTARF’s problems, he recommends that it publish its annual budget and a subsequent statement of financial condition on its website, along with the reports from all the plan’s financial managers and consultants, together with the investment strategy and annual performance evaluation of the plan. Its board’s meeting minutes, except those restricted by privacy laws, should also be posted online.

Atanasov also recommends that the MBTA post the complete audit and valuation reports of its pension and health plans, and that the T’s pension plans be subject to the same investment-management and solvency regulations as other Massachusetts public-employee retirement systems.

About the Author: Iliya Atanasov is Pioneer’s Senior Fellow on Finance, leading the research tracks on pension management, data analysis and municipal performance. He is a PhD candidate in Political Science and Government and MA candidate in Statistics as well as a former Presidential Fellow at Rice University. He also holds BAs in Business Administration, Economics and Political Science/International Relations from the American University in Bulgaria.

Pioneer Institute recently unveiled the MassPensions.com online application that provides year-by-year comparative data and ratings for the performance of each of the commonwealth’s more than 100 retirement systems. Other recent pension research includes: Do We Need Them? How Many Retirement Boards are Necessary to Provide Pension Benefits for Massachusetts Public Employees, Improving the Investment Performance of Massachusetts Pension Funds, and Fiscal Implications of Massachusetts’ Retirement Boards’ Investment Returns.

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.