In Massachusetts, the state mandates the types of retirement benefits that municipal governments provide to employees, effectively precluding local governments from having full control of their fiscal destiny. As unfunded pension and retiree healthcare obligations continue to mount in local governments in Massachusetts-as across the country-at least one town is trying to end the state’s grip on local governments and give them the ability to pursue their own tailored, financially sustainable retiree benefit reforms.
The push for local control is being driven by Barry Greenfield, a selectman in Swampscott, Massachusetts and the founder and publisher of EfficientGov.com, a publication aimed at spreading public policy innovations. Greenfield has led the push to build a coalition of Massachusetts cities and towns-all of which have unfunded retiree benefit obligations-to build support for legislation that would give local governments the power to determine retirement benefits, rather than having the state mandate what municipalities provide.
Swampscott offers an illustrative example of the challenge local governments face. The town of 13,700 people has an unfunded liability of approximately $38 million dollars, and current pension costs account for close to 10% of the town’s budget. Worse, the town faces an $80 million unfunded liability in retiree healthcare. Together, retiree pension and healthcare benefits are currently consuming almost 20 percent of the town’s annual budget.
In our latest interview in the Innovators in Action 2013 series, I interview Greenfield on his efforts to give local governments the power to determine public employment retirement benefits in Massachusetts, getting the state out of a key aspect of municipal decisionmaking. Here’s a brief excerpt of the interview:
Leonard Gilroy, Reason Foundation: Can you describe what prompted you to launch your current pension reform initiative?
Barry Greenfield, Town of Swampscott, MA Selectman: My town, Swampscott, is involved in a state-run public employee pension plan-a mandated retirement system that we pay the cost for, but which is overseen by the state. This plan covers public employees and teachers as well. It’s a defined-benefit plan where the retirement benefits for your pension are based on years of service, a multiplier that’s based on what type of employee you are, and what age you retire, in addition to employee contributions and investment return. The town contributes to those retirement benefits primarily through property taxes. A similar state-run system dictates OPEB [other post-employment benefits] like retiree healthcare benefits as well.
What’s happened over the years is that when they first implemented this program-which I believe was in 1911-the number of active employees to retired employees was at least 40-to-1. And that’s what most of these plans were designed on-a high level of active employees with relatively few retired employees. But over time, as the country has aged and people have aged, we in Swampscott are now down to a 1-to-1 ratio.
Most pension experts-and by that I mean academics, as you’ll get different answers from the actuaries involved in the state-run pension system-will tell you that the research has shown that once you get to a 5-to-1 ratio of active to retired employees, you’re really heading for trouble because you just don’t have enough new active employees paying contributions into the system to keep it afloat. There’s a myth that each employee contributes enough to pay for their own pension. Even when you add the projected investment return, the numbers simply don’t add up.
We’re at a 1-to-1 ratio in Swampscott, and it’s only going to get worse, because we have an aging workforce. If you look at the age of our municipal employees, they’ve all been working for 10 to 15 years and there are very few new employees coming into the system. People are working longer because the longer they stay working, the better the pension and OPEB benefits are.
So what I started reading and writing about in other states is what I would describe as the ability of cities to take control of their pension issues and realize that they’re unsustainable, as city and town services are falling by the wayside simply to fund retirement benefits. So what you’re seeing is that property taxes are rising-mine have gone up 50% in six years-but the services in the town have not improved. Almost all of that money has gone to pension or OPEB benefits.
[. . .]
This April, the town will be voting on a home rule petition that says we should have the freedom to decide what retirement benefits are a fit for our financial situation. The reality is that each town is not identical in terms of its fiscal footprint. We’re a small town trying to offer city-like services with few prospects for regionalization. It’s not necessarily saying that we’re going to move away from a defined benefit plan, nor does it say that we’re going to move toward a defined contribution plan. It’s not saying exactly what we’re going to do-all we want is the freedom to pursue options because we’re $38 million underfunded in our pension obligations and close to $80 million underfunded in our OPEB obligations. While those numbers may change a little on a day-to-day basis, they are still significant numbers when you’re talking about a town of only 13,700 people.
So I think that our town has proven that this particular mandate from the state-and I actually believe it’s an unfunded mandate-we need to be able to determine what’s best for us. We’ve proven that the current system doesn’t work for us, so that’s what this issue is all about.