Massachusetts State and Municipal Retiree Systems Costly, Underfunded

An October 10th bulletin by the Massachusetts Taxpayers Association has summarized the growing and challenging issue of underfunded pensions and retiree health care obligations on all levels of government in Massachusetts. According to the bulletin, the combined $98 billion state, teachers, and municipal pension systems were only 63% funded, with $36.37 billion in unfunded liabilities.

In addition to having only 63 cents for every dollar promised to public employees in pension benefits, state and municipal governments at best have 2 cents for every dollar promised in retiree health care obligations. In 2012, the combined state and municipal liability for retiree health care was $46.66 billion, with only about $300 million in actual funding.

Taken together, Massachusetts taxpayers, pensioners, and government officials have to deal with pension and health care systems that, combined, amount to $145.6 billion, with only $82.7 billion in funding. With only 43 cents for every dollar in promises made to public employees, the systems are in need of substantive reform.

Given the speculative nature of defined benefit pension accounting, it is also possible that the funding problem in Massachusetts is even worse than that. If calculations by State Budget Solutions are to be believed, than the funding levels for the state employee and teacher pension systems is actually drop to 33% funding. This yields an unfunded liability of $88 billion, which far exceeds the $21 billion unfunded liability identified by the Massachusetts Taxpayers Association for state and teacher pensions.

Whichever figures are used, it is clear that Massachusetts is yet another system in need of reform. Solving the problem will certainly be difficult, but failing to take on the problem now will only make it more difficult to deal with it later on. Should state and municipal governments insist on holding onto the defined benefit system, then more contributions are needed. In practical speak, this means either employees must contribute more of their salaries towards their pensions, taxpayers contribute more towards the system, or both.

In choosing this option, employees will be left with less take-home pay and taxpayers will see more of their money going towards a system that may be as much as $88 billion unfunded. Alternatively, the state and municipal governments can go the way of states like Alaska and the private sector and implement a more sustainable defined contribution plan. In doing so, the retirements of public employees would be predicated on actual contributions rather than 20- to 30-year funding assumptions with speculative discount rates. This options would also require Massachusetts to pay off the unfunded liabilities as quickly as possible–which will ultimately save taxpayers in the long-run and ensure that public employees will receive retirement benefits promised to them.

Dealing with retiree health benefits is another challenge and warrants immediate attention. Massachusetts joins seemingly every other system in the country in failing to fund OPEBs and the 1% funding of its promises to public employees requires legislative attention at the very least.