LEGISLATIVE FOCUS ON COLA % - MassRetirees.com

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LEGISLATIVE FOCUS ON COLA %

JANUARY 1999 - 1.3% CPI Falls Short For Retirees - In light of recent changes in the process by which the federal government calculates the annual Consumer Price Index (CPI), the Association has filed legislation to allow the state’s 106 retirement systems some latitude in establishing the annual COLA percentage.

Over the past year, the Bureau of Labor Statistics (BLS), the federal agency, which establishes the CPI, has changed the factors that constitute the official CPI. In doing so, the annual inflationary index has been lowered. While this may be good for the business community, it could have a disastrous impact on retirees.

A study, conducted by the BLS, tracked an experimental index designed to monitor the spending habits of retirees. It shows a widening gap between the cost-of-living for retirees as compared to the American workforce as a whole. Between December 1982 and September 1998, the experimental index for retirees rose 73.9%, while the official CPI rose 63.5%. Since 1990, the gap has widened in accord with the dramatic leap in health care costs. For most retirees, the amount of money spent towards health care significantly increases as they age. Critics of the new process argue that the BLS does not accurately reflect this occurrence in the CPI.

“The so called ‘market basket of goods’ used by the federal government to determine the CPI is off the mark when it comes to the spending habits of retirees. You really don’t need to look any further than how health care costs are weighted to determine that the process is not reflective of inflation for retirees,” said Association President Ralph White. “If Washington is not going to address the issue, then it will have to be resolved on Beacon Hill.

“When Chapter 17 (COLA law) was passed in 1997, the CPI was deemed to be a fair index to use. Now that we know it is inaccurate, we cannot sit back and allow the problem to go unaddressed.”

Funding Schedules Key

As was the case with the original passage of Chapter 17 nearly two years ago, the key to resolving the CPI gap is contained within the funding schedules of the retirement systems. Under Chapter 32 (retirement law) each of the state’s 106 systems has established a funding plan or schedule. The schedule depicts the long range funding strategy of the retirement system, along with a schedule of payments from the employer.

The basis for each schedule is an actuarial set of assumptions ranging from anticipated investment returns to the life expectancy of the members of the system. When adopting Chapter 17, each system was required to establish, within their funding schedule, an assumption that an annual 3% COLA would be paid to all eligible retirees, even though the law provides that the lesser CPI figure be used. Each employer is then required to appropriate enough money each year to cover its pension obligations, including the assumed 3% COLA.

Members are aware that the COLA for FY’99 was 2.1%, nine-tenths of a percent lower than what was funded. The reported 1.3% COLA would be a whole 1.7% lower than the assumption placed by the schedule.

The bill filed by the Association will grant the authority to the local retirement board to pay a COLA above the CPI, up to the maximum amount allowed under the funding schedule of 3%. As is the case with nearly every bill effecting municipal finance, this proposal will be local option. Once passed by the retirement board and the local legislative body, this new process will allow the retirement board the annual discretion to pay a COLA of up to 3%.

Increase In Base Amount

In addition to filing legislation to address the COLA percentage, the Association is also taking steps to increase the base pension on which the maximum COLA is applied. With the passage of Chapter 17, the base was increased to its current level of $12,000. The Association’s bill would raise the maximum base to $16,000.

Long-time members will recall that the previous base of $9,000 had been frozen in place since 1986. Due to the high unfunded liability carried by the state / teachers systems, as well as by most local systems, increasing the base to a higher level had never been obtainable.

“I have always felt that the base was too low, but the problem has been how do you pay for raising it without damaging the pension fund,” says White. “If you double the base without having the funds to pay for it, you are only hurting those retirees with small pensions. I cannot support a proposal that leaves our most vulnerable members out in the cold.

“Some members may not want to hear it, but the fact is that our pension system cannot support true COLAs based on the full amount of one’s pension. The average pension across the state is about $13,000. Teachers are slightly higher and municipal workers slightly lower. A $16,000 base will give the average retiree the full COLA, while still providing for those members with smaller pensions.”

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