Opens Door For COLA Base Reform

JANUARY 2010 VOICE: Following a recommendation from the state’s public pension officials, Legislative Leaders and the Patrick Administration are now crafting a plan that will extend state and local pension funding schedules up to ten years.

Without such a change, annual pension fund appropriations would simply overwhelm state and local budgets. This was made clear at a State House hearing on November 9th before a packed audience in Gardner Auditorium. The hearing was chaired by Senator Thomas McGee (D-Lynn) and Robert Spellane (D-Worcester), co-chairmen of the Public Service Committee. 

In the aftermath of the 2008 financial collapse, which saw pension funds lose 24-33% of their value, the Public Employee Retirement Administration Commission (PERAC) began working on a plan to responsibly address the resulting spike in unfunded pension liability.

Led by Chief Actuary James Lamenzo, PERAC established a working group of private actuaries with expertise in public pension funding. The actuaries, all having experience working with the Massachusetts public funds, assisted Lamenzo in drafting the proposal that will refinance unfunded pension liabilities through 2040.

Association officials see this as a unique opportunity to raise the base to which the annual cost-of-living adjustment (COLA) is applied. A proposal has been drafted that would merge the costs associated with a higher base in the new funding schedule.

"The base has been set at $12,000 for nearly thirteen years, with the hang-up being how to pay for an increase. We believe that the base can be incrementally increased to $18,000, with the costs rolled into the funding schedule," explained Association President Ralph White. "This is really no different than refinancing your mortgage. It is sound fiscal policy and balances the needs of spreading out pension funding, while also providing for a needed benefit.

"We have been working on this issue for years and no one has been able to show a better way to pay for a higher base, other than to include it in the funding schedule. As it stands, the base is pitifully low. A solution must be found and I believe the time to act is now."

Reform Commission Proposal

As we reported in the November edition of The Voice, a recent report by the special Pension Reform Commission proposed increasing the COLA base to $18,000 in $1,000 increments. While the size of the initial increase could vary by retirement system, depending on the system's funding schedule, each system would have the ability to raise the base beyond $12,000.

Information gathered by the Reform Commission mirrors a 2005 PERAC report that found Massachusetts to be one of only three states that do not pay annual COLA benefits based on a retiree's full pension. As a result, Massachusetts' retirees witness a sizeable reduction in pension value over the years.

In addition, the Reform Commission also proposed that the funding schedules must be extended to account for the 2008 losses. Without an increase in the funding date, the government's pension appropriation could increase some 40%.
The 1,000 lb gorilla, when it comes to the state's pension systems, is the huge unfunded liability, now pegged at $22 billion, following the losses in 2008. In the current fiscal year (FY10), the Commonwealth's appropriation to the state/teachers retirement system is $1.346 billion. Without a change in the schedule, this would increase to an untenable $2-billion in the next budget (FY11).

"Even though the majority of the liability predates our pension funding schedules in 1988 and is largely the government's share of pension benefits that went unfunded, this is still a debt that must be paid off over time," continued White. "But while it may be unrealistic to expect a COLA based on your full pension, freezing the base at the current $12,000 is unacceptable."

Details Laid Out

At the November 9 State House Hearing, Secretary of Administration and Finance Jay Gonzales testified that the Patrick Administration is "looking very closely" at pension funding policy and that extending the dates of full-funding to 2040 is "worthy of consideration".

"The Secretary chose his words carefully as was to be expected," noted White. "The Governor will be submitting his FY11 budget to the Legislature in late January, under dire fiscal circumstances. It is hoped that Administration and Legislative leaders can act on a bill before that date."

PERAC Executive Director Joseph Connarton, joined by Lamenzo, provided detailed testimony that laid out his agency's proposal at the hearing. With oversight for all 103 local retirement systems, PERAC is responsible for approving municipal pension funding schedules.

The agency's focus has been to provide retirement systems with the needed tools to extend out their funding schedules and adjust the assumptions, in order to keep local appropriations level, while also requiring obligations to the pension system be maintained.

"This is the appropriate time to address improving the COLA,"  observes Legislative Liaison Shawn Duhamel. "In its report, the Special Commission recognizes this much needed reform, and now is the opportunity to do something about it."