5% COLA For State and Teacher Retirees: Local Option Pending in Senate

September 2022 Voice: During the summer of 2021, as serious signs of inflation began to become evident, Mass Retirees put a plan in place to build the case for improvements to the COLA starting in Fiscal Year 2023. These efforts paid off with the passage of a 5% COLA, signed into law by Governor Baker in late July.

Backed by historically high pension fund investment returns over the bulk of the past decade, the Association made the case for sharing the success with retirees in the form of better COLA benefits.

“No one wants to see high inflation, which is a terrible circumstance for retirees living on fixed incomes. Thankfully, our pension systems have been well run and properly funded since the late 1980s. This meant that the money was available within the pension systems to be tapped to pay for COLA improvements,” explains Mass Retirees President Frank Valeri, who is also an elected member of the State Retirement Board. “Had inflation spiked a decade ago, I’m not sure the retirement systems would have been able to respond in the same manner. What we’ve been able to do is really a testament to the work that has been done over the past few decades.”

Section 154 of the FY23 State Budget grants a 5% COLA to eligible State and Teacher Retirees on a $13,000 base for this fiscal year. To be eligible for the FY23 COLA, you must have retired prior to July 1, 2021.

As unanimously passed by legislature, the budget also contained a provision (Section 134) granting authority to the 102 local retirement boards to also increase the local COLA up to 5% for FY23. Each local retirement system has already adopted a 3% COLA for this fiscal year, which is the maximum percentage allowed by law.

Responding to pressure from the Mass Municipal Association (MMA), which characterized the local option as an unaffordable cost on municipal governments, the governor sent Section 134 back to the legislature with an amendment. In addition to majority approval from the 5-member retirement board, Baker’s amendment ads the approval of the local executive authority. In a city this is the mayor; board of selectmen or aldermen in a town; county commission in a county. 

Regional retirement systems will be required to receive the approval of 2/3rds of the municipalities belonging to the system.

“While this is certainly not an ideal or even needed extra step for approval of the additional 2% COLA, we were forced to accept the governor’s amendment. With the formal legislative session ending on July 31, we did not have the needed time to push back. Had we done so, we ran the risk of the local option provision being vetoed and no local retirees receiving the additional 2% added to their COLA,” said Mass Retirees CEO Shawn Duhamel. “We will make this new local option requirement work to the best of our ability, so that our local retirees receive the same relief from inflation as State and Teacher retirees.

“It is unfortunate that the MMA is back to their old deceptive tricks of putting out misleading information. Reasonable people can disagree on public policy and debate different ideas. But it is something else entirely when one side repeatedly misstates the facts and is able to get away with it.”

COLA Base Growth

As the companion article on the growth of the local COLA base explains, the 102 local retirement systems set their own local COLA base (with local legislative approval). For retired State employees and Teachers, the COLA base is set by state law. City of Boston teachers are members of the Boston Retirement System, thus receive the same COLA benefits as municipal retirees.

The current $13,000 COLA base for State and Teacher retirees was last increased in 2011, when it increased by $1,000. As is the case in all retirement systems, the COLA base is a key component within the assumptions of the Commonwealth’s pension funding schedule.

Each $1,000 incremental increase in the base carries an annual budgetary cost of roughly $55 million, as well as an increase in long-term unfunded liability of nearly $500 million. The fact that Massachusetts’ COLAs are cumulative are the reason for the long-term costs to the retirement system. In many other states, COLAs are treated as one-time bonus payments, often referred to as a “13th check”.

Mass Retirees proposal to increase the COLA base to $16,000 would cost $165 million a year, with over $1.5 billion in new unfunded liabilities.

“Due to the high costs associated with raising the COLA base, such an improvement most often must be made in conjunction with the revaluation of the pension funding schedule. This allows for asset gains to offset the cost of any new benefits,” said Association Legislative Chairman Tom Bonarrigo. “Given the gains made during the most recent 3-year period (2019-21), our hope is that the costs associated with a higher COLA can be offset by the asset gains. As we have said, our goal remains for retirees to share in the success of their retirement system.” 

FY23 is the 3rd and final year of the current pension funding schedule for State and Teacher retirees. This fall work will begin on revaluating the systems, before establishing a new schedule for FY24-26.

Our Association has received commitments from legislative leaders and retirement officials that the State and Teacher COLA base will be closely looked at in conjunction with the revaluation, prior to setting the new funding schedule. Our hope is to make incremental improvements that bring the COLA base closer in line with the average Social Security benefit paid within Massachusetts – which for 2022 is just shy of $20,000. 

“We routinely receive questions, particularly from new retirees, asking why the COLA is not applied to the retiree’s full pension instead of a limit base. The short answer is that the retirement systems were not designed nor are they funded to accommodate full COLA benefits. Very few retirement systems are setup that way. Some pay no COLA at all, while many others treat the COLA as a limited bonus payment,” continued Duhamel. “At the present time there is no easily workable way for full COLA payments to be implemented within our system. Doing so would require a large increase in pension funding, both from active public employees and the taxpayers. It’s just not how the system was ever intended to operate.

“What we do think is a workable solution is to achieve incremental increases on a more routine basis. Ideally, this should take place every three years in conjunction with the funding schedule revaluation.” 

While there are many individuals and organizations to thank for the assistance they provided our Association in passing the FY23 COLA increase, one individual stands out. House Ways and Means Chairman Aaron Michlewitz deserves our sincere gratitude for making public retirees a personal priority during this budget cycle. Representing Boston’s North End, downtown and Chinatown, Aaron has long been a friend of Mass Retirees. As a former Chairman of the Joint Committee on Public Service, he has a deep understanding of public retirement policy. Without Chairman Michlewitz’s support, the 5% COLA would have been unlikely.

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