Who is a member?
Our members are the local governments of Massachusetts and their elected and appointed leadership.
The Honorable Aaron M. Michlewitz, House Chair
The Honorable William N. Brownsberger, Senate Chair
Joint Committee on Public Service
State House, Boston
Dear Chairman Michlewitz, Chairman Brownsberger and Distinguished Committee Members,
On behalf of cities and towns across the Commonwealth, the Massachusetts Municipal Association urges you to embrace a powerful package of reform measures to address the looming OPEB funding crisis that threatens the fiscal stability of both state and local government. Over the next 30 years, the Commonwealth and our communities are facing a combined unfunded liability that exceeds $46 billion. Local government’s share of this unfunded liability is estimated at $30 billion – a staggering burden that is totally unaffordable for taxpayers.
OPEB REFORM IS NEEDED TO ENSURE THE LONG-TERM HEALTH OF OUR ECONOMY, PRESERVE ESSENTIAL SERVICES, SAFEGUARD RETIREES, AND PROTECT TAXPAYERS
Massachusetts is not alone. Many states are confronting the burden of Other Post-Employment Benefits (these are the non-pension benefits provided to retirees, consisting primarily of health insurance), which has emerged in recent years as accounting systems have more accurately forecast the long-term cost of the current retiree health insurance benefit structure. Without major reform now, these costs will drive up local property taxes and force painful cutbacks in essential services that are vital to our economy. Without meaningful reform, cities and towns will be forced to reduce the number of teachers in the classroom, police officers on the streets, and firefighters on call for emergencies. Every service from public works to public health will be impacted.
It is important to be absolutely clear that local officials and the MMA are calling for OPEB reform in order to protect public sector retiree benefits in both the short and long term. Cities and towns are committed to providing retirees with excellent health insurance benefits. Yet these benefits must be affordable and sustainable for local taxpayers. Otherwise the resulting fiscal crisis will squeeze out funding for vital services, force layoffs of public employees, and drive up local property taxes.
In particular, the taxpayers of Massachusetts will be watching this debate very closely. It is estimated that only 8 percent of the taxpayers in Massachusetts who work in the private sector have any type of retiree health insurance benefit from their employers. It is unreasonable to expect that voters will agree to pay higher taxes to fund a benefit that is unavailable to the overwhelming majority of citizens. As strong supporters of good benefits for our valued public sector employees and retirees, it is clear that real reform is necessary. We must make the current system affordable and sustainable in order to protect the long-term viability of retiree health insurance benefits.
OPEB REFORM MUST EMPOWER MUNICIPALITIES, AND CANNOT RESTRICT OR CONSTRAIN LOCAL AUTHORITY
Our overall message today is that local officials stand together to respectfully and urgently ask you and your colleagues in the Legislature to embrace a powerful OPEB reform package that protects and provides cities and towns with the authority and management tools necessary to deliver sound, affordable and sustainable health insurance benefits to their retired employees.
The MMA was an active and constructive contributor to the Special Commission to Study Retiree Healthcare and Other Non-Pension Benefits, and deeply appreciates the commitment of all stakeholders in the effort to review the looming OPEB challenge. H. 59, the Governor’s proposed reform bill, contains a number of very good components of the Commission’s report that we strongly support and appreciate. However, the measure falls substantially short of the reform that is needed, and would not provide suitable relief to communities and local taxpayers in both the short and long term. We ask that you strengthen H. 59 so that it addresses the concerns we outline below.
Under H. 59, Cities and Towns Would Realize Little Financial Relief Over the Next 10 Years and OPEB Costs Would Grow at an Unaffordable Pace
Under H. 59, the projected savings for municipalities sounds impressive at first blush ($9 billion to $12 billion over 30 years), but the actual savings offered by H. 59 is inadequate, especially during the next 10 years. Only 5 percent of the estimated savings in H. 59 would be realized between 2014 and 2024. Under H. 59, municipal OPEB expenditures to fund retiree health insurance benefits would increase by approximately 58 percent during the next 10 years, from $800 million a year to $1.265 billion annually. Local aid and local revenues will not grow at a similar rate, which means that OPEB costs would increase at an unsustainable pace, forcing cuts in municipal and school services, and increases in local property tax rates.
The estimates are that H. 59 would generate cumulative savings for cities and towns of approximately $650 million over the next 10 years, and $9 billion to $12 billion at the end of 30 years. But it is important to place this savings number in proper context: cities and towns will still be spending more each year to fund OPEB costs. The “savings” that would be provided is the estimate of even higher costs that would be avoided. During the next decade, municipalities and local taxpayers would still be spending over $10 billion to fund retiree health benefits, and over the next 30 years communities would still spend over $48 billion. Part of the reason why only 5 percent of the projected savings in H. 59 would show up in the first 10 years is the aggressive grandfathering of large numbers of current employees to exempt them from any changes, including the new plan in H. 59 that would prorate the taxpayer-funded premium contribution based on years of service. These grandfathering provisions would be especially costly due to the number of employees who plan to retire well before age 65, the Medicare eligibility age. Non-Medicare retirees enroll in the same plans offered to active employees, which are much more expensive than the Medigap and pharmaceutical supplement plans that are triggered at age 65.
Even at the end of 30 years, H. 59 would only reduce the municipal unfunded OPEB liability by one-sixth, from $30 billion to $25 billion. The bottom line is that more aggressive financial relief is necessary, which can only be achieved by embracing a package that allows for greater savings during the early years, which leads us to a discussion of two major flaws in H. 59: the erosion of existing local management powers and the imposition of unaffordable unfunded mandates.
H. 59 Would Strip Cities and Towns of Their Existing Management Authority to Adjust the Percentage of Retiree Health Insurance Premiums Funded by Local Taxpayers – Placing Fiscal Handcuffs on Municipalities and Eliminating a Major Cost-Control Tool
As noted above, only 5 percent of the avoided costs envisioned in H. 59 would come during the next 10 years, and communities would still see their local OPEB costs grow by nearly 60 percent. Unchecked, this rapid escalation of OPEB obligations will force cuts in important services and put unabated pressure on property taxes.
A major flaw in H. 59, and in the Commission’s report, is the proposal to strip cities and towns of their ability to adjust the percentage of retiree health insurance premiums paid by local taxpayers. Under the current system, cities and towns fund an average contribution of approximately 70 percent of premiums for retiree health plans, with some above this level, and some below this percentage. Communities now have the local-option authority to adjust the premium contribution percentage, and many have been exercising this authority in order to control the overall impact of OPEB benefits on local taxpayers and budgets. But H. 59 would freeze the local premium contribution percentage at current rates for at least four years, dating back to January 1 of this year and going forward for three years after enactment. And after this total moratorium expires, cities and towns would be dramatically limited because they could only adjust the contribution percentage for future retirees, mandating taxpayers to permanently pay a fixed percentage of premiums for all existing retirees, even if the cost of that benefit would force layoffs of existing employees, cuts in services, and higher property taxes.
The legislation before your Committee proposes an unacceptable violation of local authority and decision-making. Essentially, H. 59 and the Commission’s recommendations would turn local officials into bystanders who could only watch as OPEB expenditures consume a greater portion of local budgets. For this reason, the bill as drafted would move Massachusetts in the wrong direction, away from the goal of the meaningful reform that is necessary. It is difficult to see how this provision in the legislation would be sustainable, considering that 90 percent of taxpayers have no access to similar funding guarantees for health insurance when they retire, yet they would be asked to increase their own property tax bills and absorb service reductions that would result from the legislation. These decisions are best made locally, not via a statewide mandate that would straightjacket cities and towns.
H. 59 Would Impose Unaffordable Unfunded Mandates and Benefit Enhancements on Many Communities
In addition to the challenges outlined above, H. 59 and the Commission report would also mandate benefit enhancements that would impose new financial burdens on many cities and towns. In some cases, the new mandates would be crippling. For others, the requirements would significantly increase their OPEB liabilities.
There are approximately 10 communities in Massachusetts where retirees can access health insurance benefits, and the retirees pay 100 percent of the premium. These communities still incur an OPEB liability, because the retirees benefit from the lower cost premium that comes with a group plan, and overall the community (and active employees) pay higher premiums because, in general, retirees incur more health care expenses than the average subscriber, and those higher costs are factored into the premium rate. However, H. 59 and the Commission report would mandate that these communities pay a minimum of 50 percent of retiree premiums. This would impose a totally unaffordable cost on these towns and would cripple their local budgets.
In addition, there are approximately 40 communities in Massachusetts that allow surviving spouses to access health insurance benefits, as long as they pay 100 percent of the premium. As noted above, these cities and towns still incur an OPEB liability, because the surviving spouses benefit from the lower cost premium that comes with a group plan, and overall the community, active employees and retirees pay higher premiums because, in general, surviving spouses incur more health care expenses than the average subscriber, and those higher costs are factored into the premium rate. Under H. 59 and the Commission report, cities and towns would be mandated to pay at least 50 percent of the premium for existing surviving spouses who subscribe now, and for all future surviving spouses.
If state government wishes to impose the benefit enhancements and mandated costs outlined above, these expenses must be funded in full by the Commonwealth. Under Proposition 2½, cities and towns cannot absorb these costs via the property tax, and the result would be fiscal hardship for local budgets and local taxpayers in dozens of communities across the state. The choice is clear: either the state should fully fund these mandates, or the provisions must be struck from the legislation.
PLEASE EMBRACE A STRONG AND COMPREHENSIVE OPEB REFORM BILL NOW
Our testimony today has focused on one major theme: Powerful reform is needed now to prevent the looming OPEB funding crisis that threatens the fiscal stability of the state and our cities and towns. We have identified several provisions in H. 59 that we strongly oppose because they would undercut the effectiveness of the other aspects of the bill and delay meaningful savings for decades. Yet we also want to take this opportunity to applaud the aspects of H. 59 that would move Massachusetts in the right direction.
We strongly support the provisions that would increase the years of service needed before employees qualify for lifetime benefits from 10 to 20 years. We support the proposal to add five years to the minimum age necessary to qualify for retiree health insurance, and we support the framework that would prorate benefits based on years of service once an employee has qualified, establishing a base of 50 percent of the maximum benefit after 20 years, up to 100 percent of the maximum benefit after 30 years, with intermediate steps at 23 and 27 years of service. Further, the bill would not limit these changes only to future employees, because such a limitation would make it impossible to address OPEB reform in any meaningful way for far too long. These are not easy reforms to embrace because they would affect highly valued employees who serve cities and towns and the Commonwealth with distinction. Yet they are necessary in order to move us closer to the affordability and sustainability that must come. We applaud the Governor and the Commission for supporting these changes.
Time is of the essence – the earlier that Massachusetts embraces comprehensive OPEB reform, the easier the solutions will be. Delaying this issue or adopting a weakened package of reforms will merely kick the can down the road and impose a greater burden on the next generation of citizens, employees, retirees and taxpayers. We look forward to working closely with you to support the reforms necessary to protect our economy and the important services that cities and towns deliver to the citizens and businesses of the Commonwealth.
Thank you very much.
Sincerely,
Geoffrey C. Beckwith
Executive Director, MMA