Phase III Targets New Hires

NOVEMBER 2011 VOICE: Citing the need to reign in pension costs in order to increase the Commonwealth’s bond rating, the Senate has passed a sweeping pension reform measure that serves as the third major overhaul of the state’s defined benefit pension law.

Unlike Pension Reform I & II, which were largely aimed at closing loopholes, preventing fraud and promoting greater efficiency, the latest proposal dramatically alters the basic retirement formula for future employees. State law prevents benefit reductions from taking place for current employees and retirees.

Under the Senate’s plan, a version of which was filed by Governor Deval Patrick in January, the retirement age is increased by two years in each retirement group for new employees hired on or after January 1, 2012. It also creates a minimum retirement age of 60 for Group 1 employees.

Most egregious, however, the proposal that increases the age reduction formula for those retiring prior to the maximum age within their group. While not as severe as that proposed by the governor, the Senate’s 0.125% per year reduction for new hires, with 35 years service, would still significantly reduce future retirement benefits.

Although the bill cuts future benefits, it leaves employee contribution rates largely intact – offering rate reductions after 30 years of service and again after 35 years. After 35 years of creditable service an employee’s rate would be reduced to 6.5%.

Senators Ken Donnelly (D-Arlington) and John Keenan (D-Quincy), backed by labor, spearheaded an attempt on the Senate floor to amend the bill (S2018). Their efforts failed to garner enough support to alter the bill in order to lessen the blow to new employees.
Despite this setback, both senators were successful on two other major pension issues. Senator Donnelly’s amendment to increase the minimum pension for Option (d) surviving spouses from $250 to $500 monthly, which has been an Association legislative goal, was added to S2018. The Senate also adopted Sen. Keenan’s amendment that requires that any surplus in a pension system remain in the fund for the benefit of retirees and employees.

Led by Patrick and the Secretary of Administration and Finance, state officials claim the latest reform measure would save the Commonwealth $5 billion over the next 30 years. Reportedly, a winter meeting with Wall Street credit rating agencies Standard & Poor’s, Moody’s and Fitch resulted in the call to reduce the state’s unfunded pension obligations among other moves.

Critics of the bill, including our Association, point to public and private studies demonstrating that current career Group 1 employees already pay for their own pension. Analysis of this latest proposal shows some employees self-funding 145% of their pension benefit as a result of the benefit formula change.

“It’s well documented that the Commonwealth’s unfunded liability is the result of the government not paying its share into the retirement systems for years. Employees always paid their share, but the government did not start doing their part until 1988. Also, annual payments due since that date have been tweaked on more than one occasion,” explains Association President Ralph White. “The problem we have is paying off this old debt, known as the unfunded liability. It has nothing to do with future pension costs or new employees, most of whom will totally fund their own benefit.

“What troubles me is that these future employees, our children and grandchildren, are being unfairly singled out. Their future benefits are being cut in order to pay for the sins of the past.”