Worcester Reverses COLA Vote

SEPTEMBER 2003
- Pension Bonding Muddies Water - In the aftermath of the lagging financial markets, the city of
Worcester Retirement Board has reversed an earlier vote, taken in late
June, that would have restricted this year's Cost-of-Living-Adjustment
(COLA) to 1.4%.

Due to intense
pressure from city retirees, organized labor and political leaders, the
city's five-member retirement board voted just one month later to pay
the full 3% COLA. Under the earlier approved 1.4% COLA, retirees and
survivors would have received a maximum increase of $168 a year or $14
a month, instead of the $360 a year they will now receive.

At
the June meeting, only the Board's two elected members, Ray McGrath and
Betsy Early, voted for the full 3% COLA. The Board's three appointed
members, James DelSignore, Steve Wentzell, and Thomas Wade voted
against the 3%, instead opting for the smaller 1.4% COLA.

"One
of the driving forces behind the passage of Chapter 17 was the need to
provide local retirees with the security of an annual COLA. With the
money to pay for the 3% COLA having been built into the funding
schedule, this really should no longer be an issue of debate," said
Association President Ralph White. "I am very pleased that the
Worcester Retirement Board reversed their earlier decision and went
with the full 3%. It was the right thing to do for the retirees and
survivors."

COLA Funding Mischaracterized

When
the five member Worcester Retirement Board met on June 19 to initially
vote on the COLA, they were faced by a large turnout of retirees,
political leaders, union officials and representatives of our
Association.

With over 70 retirees
looking on, Worcester Mayor Tim Murray, Association Legislative Liaison
Shawn Duhamel, former Senator and Association VP Dan Foley, and
Worcester Retired Fire and Police President Peter O'Rourke each made an
impassioned plea for the Board to grant the full 3% COLA.

The
Association sent representatives to the meeting in response to
inaccurate arguments against granting the full COLA, put forth by some
Worcester officials, including City Auditor and Retirement Board
Chairman James DelSignore. These officials had made the statement that
the city's financial problems prevented the full 3% COLA from being
paid, which ignores the facts on how retirement systems set up their
pension funding schedules.

"Like
every other retirement system, Worcester has the 3% COLA built right
into their pension funding schedule. In other words, the COLA is funded
right along with the rest of the pension benefits," explains Duhamel.
"To act as if the money for the COLA is coming directly out of the city
budget is not correct."

At the close
of the June meeting, DelSignore promised that the Board would revisit
the COLA issue at a later meeting and examine granting the full 3%
increase at that time, which they did do.

Bonding Faulted

Back
in 1998, Worcester seemed to be on the cutting-edge of pension funding
when they received legislative approval to issue $220 million worth of
pension obligation bonds to pay off the unfunded liability that the
city owed to the retirement system.

The
concept behind the bonds is simple. The city borrowed money (issued
bonds) to pay off its debt to the pension system. If the interest paid
on the bonds is less than the interest earned on the pension
investments, then the city saves money.

Some
five years after the issuance of the bonds, Worcester's much celebrated
success has slid into financial turmoil. Losses in the stock market
have reduced the retirement system's funding status from a high of 103%
on 1/1/99, down to 77.4% as of 1/1/03.

The
huge loss in pension assets has forced the retirement system to once
again adopt a pension-funding schedule to pay off the newly created
unfunded liability. As a result, the city's appropriation to the
pension system increased over $5 million for FY04. Instead of only
making a normal cost payment to the retirement system of approximately
$8 million, the city must pay $18.9 million instead ($1.26 million is
from last year's ERI).

Not only is
the city responsible for paying down the new unfunded liability, but it
is also on the hook to Wall Street to pay the debt service on the
bonds, which is roughly $16.5 million for FY04. This brings the total
appropriation for the pension fund and the POBs to $35.4 million.

Several
local communities have filed legislation to authorize the issuance of
POBs. So far the Joint Committee on Public Service has taken a cautious
approach to the bills, as the outcome in Worcester is being reviewed.

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