MTF report warns of mounting pension, OPEB liabilities

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Public worker pension and retiree health liabilities in Massachusetts are continuing to mount at an alarming rate, warns a report from the Massachusetts Taxpayers Foundation released on Oct. 10.

The total for covering all pension and retiree health benefits promised to current state and local employees and retirees is about $146 billion, but state and local governments have set aside only $63 billion of that amount, or 43 percent, leaving $83 billion in unfunded pension and retiree health care obligations, according to the report.

Of the $83 billion, nearly $37 billion is for unfunded pension benefits and $46 billion is for unfunded retiree health care benefits, referred to as “other post-employment benefits” or OPEBs.

Pension liabilities are only 63 percent funded statewide, and there is virtually no funding set aside for retiree health care liabilities, the report finds.

“A variety of factors account for this reality,” the report states, “including legislation to enhance benefits and provide early retirement incentives, as well as the failure of most systems to achieve the typical 8 percent or 8.25 percent target for annual earnings on pension assets.”

Compounding these problems, according to the report, is that nearly all systems have extended their pension funding schedules to restrict short-term growth in contributions, but this move adds dramatically to long-term costs.

The effect of the state’s pension reform law that passed two years ago will not be seen for many years, the report states, because it applies only to employees hired after April 2, 2012. In 2012, the impact was practically nonexistent: pension reform reduced the total liability for state employees (excluding teachers) by just $500,000, or 0.002 percent.

Municipalities are dedicating more resources to pension systems, but despite large sums contributed in recent years, they are making little or no progress in reducing their unfunded liabilities. In 2000, the state’s 99 local pension systems had approximately $13.5 billion in total unfunded liabilities, but that number had grown to $14.7 billion by 2012. Although the unfunded liability for municipalities has grown more slowly than the state’s, the same factors have resulted in municipal pensions being just 57 percent funded in 2012, compared to approximately 59 percent in 2000.

In 2000, all systems were on track to have their pensions fully funded by 2028, but by 2012 nearly three-quarters of local systems had extended their funding schedules to 2030 or later.

Municipal retiree health care liabilities “are overwhelmingly unaffordable for nearly all communities,” the report states. Statewide, unfunded municipal retiree health care liabilities are twice that of their unfunded pension liabilities.

“Without further reforms, the combined pension and retiree health care liabilities for the state and municipalities will be a tremendous burden on budgets for years to come, continuing to siphon resources away from important public services such as education, public safety, and transportation,” the report states.

At a legislative hearing on Oct. 31, the MMA will be submitting testimony calling for major reforms to reduce OPEB costs.

View and download the Massachusetts Taxpayers Foundation report: “Crippling State and Local Retiree Liabilities”