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.
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.
Related Posts:
This study illustrates why 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.
Download Rolling the Retirement Dice: Why the MBTA Should Steer Clear of Pension Bonds
Massachusetts is again considering a constitutional amendment that could dramatically increase the income tax on retirees and small businesses. Pioneer Institute has published dozens of research papers on the economic implications of the proposed tax hike, and recently compiled them in a book, Back to Taxachusetts? How the proposed tax amendment would upend one of the nation’s best economies. In this brief, six-minute video, Pioneer Executive Director Jim Stergios and Director of Government Transparency, Mary Z. Connaughton, walk through:
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“She’s a good girl. She helps me a lot. She has big, big dreams. I don’t have the money, but she has big dreams. I hope she’s going to get everything, but she works so hard. She works so hard in school.”
“Our family is needing to make some really big sacrifices because we believe this is important, and so, we’re basically going to do whatever it takes… Sometimes we look at each other and go ‘I don’t know if I can do it again another month…’”
“A lot of the families have to sacrifice and work multiple jobs… And just scraping together enough money to just make tuition, just the basics.”
“It is discriminatory, that parents who want to choose an alternative to public school for their children, would not in any way receive any compensation for that, whether it be tax credit, whether it be a voucher…”
In the 1840s, nativist movement leaders formed official political parties and local chapters of the national Native American Party (later the American Party), although they continued to be commonly known as the Know-Nothing Party. Politicians sought to insert provisions into state constitutions against Catholics who refused to renounce the pope. The Know-Nothing movement brought bigotry and hatred to a new level of violence and organization.
The party’s legacy endured in the post-Civil War era, with laws and constitutional amendments it supported, still today severely limiting parents’ educational choices. A federal constitutional amendment was proposed by Speaker of the House James Blaine prohibiting money raised by taxation in any State to be under the control of any religious sect; nor shall any money so raised or lands so devoted be divided between religious sects or denominations. These were then named the Blaine Amendments of 1875.
in recent decades, often in response to challenges to school choice programs, the U.S. Supreme Court has demonstrated great interest in examining the issues of educational alternatives and attempts limit parental options. Massachusetts plays a key role in this debate. The Bay State was a key center of the Know-Nothing movement and has the oldest version of Anti-Aid Amendments in the nation, as well as a second such amendment approved in 1917. Two-fifths of Massachusetts residents are Catholic, and its Catholic schools outperform the state’s public schools, which are the best in the nation.
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.
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.
Related Posts:
This study illustrates why 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.
Download Rolling the Retirement Dice: Why the MBTA Should Steer Clear of Pension Bonds
Massachusetts is again considering a constitutional amendment that could dramatically increase the income tax on retirees and small businesses. Pioneer Institute has published dozens of research papers on the economic implications of the proposed tax hike, and recently compiled them in a book, Back to Taxachusetts? How the proposed tax amendment would upend one of the nation’s best economies. In this brief, six-minute video, Pioneer Executive Director Jim Stergios and Director of Government Transparency, Mary Z. Connaughton, walk through:
Related Posts:
Study Finds Pension Obligation Bonds Could Worsen T Retirement Fund’s Financial Woes
/in Featured, Press Releases, Press Releases: Government, Press Releases: MBTA, Press Releases: Pensions, Press Releases: Transportation /by Editorial StaffBOSTON – 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.
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Rolling the Retirement Dice: Why the MBTA Should Steer Clear of Pension Bonds
/in Better Government, Pensions, Pioneer Research, Public Program Reform, State Budget, Transportation, Unfunded Liabilities /by EJ McMahonThis study illustrates why 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.
Download Rolling the Retirement Dice: Why the MBTA Should Steer Clear of Pension Bonds
Hubwonk360 Video: If we tax them, will they leave?
/in Blog: Economy, Economic Opportunity, Featured, Video - Economy, Videos - Economy /by Editorial StaffMassachusetts is again considering a constitutional amendment that could dramatically increase the income tax on retirees and small businesses. Pioneer Institute has published dozens of research papers on the economic implications of the proposed tax hike, and recently compiled them in a book, Back to Taxachusetts? How the proposed tax amendment would upend one of the nation’s best economies. In this brief, six-minute video, Pioneer Executive Director Jim Stergios and Director of Government Transparency, Mary Z. Connaughton, walk through:
Get Updates on Our Economic Opportunity Research
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