Breaking the State

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.

Reason Foundation Director of Government Reform Leonard Gilroy interviewed Greenfield in March 2013 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.

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.

So what you’re seeing in Connecticut, Florida, California and some other states is that cities and towns have the ability to negotiate with their unions, primarily for new employees. Unless you’re Rhode Island-where the state Attorney General has said that they are going to try and limit the amount of retirement benefits for current employees-what we’re focusing on is trying not to add new employees into a system that basically doesn’t work.

So we’re filing a home rule petition. The way things work in Swampscott and in Massachusetts towns is that towns have what’s known as a warrant, and you put articles on that warrant that the town meeting votes on-we have 300 or so town residents that are meeting members-and for one or two nights we vote on all the issues that are on this warrant.

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.

So what happens is that if the selectmen vote to put the article on the warrant, then in our meeting at the end of April-if it passes, which I think it will-it’s up to our state representative to take that to the legislature and have them create a bill and then vote on it.

The other good news is that there is a legislator who is going to file very similar language in the state House of Representatives, so while we’re pursuing our efforts in Swampscott there will be legislation moving in the House at the same time.

Gilroy: To what would you attribute the state’s lack of action on this issue so far? They clearly have their own pension and OPEB issues to deal with at the state level, so it should not be a surprise that municipal governments have similar problems.

Greenfield: Well, there are facts and there are opinions. The facts are that the state has done a little bit of pension reform over the last five years to cut down on abuse. They changed the system such that overtime doesn’t count toward pension benefits, and they have done some of the other things that states are starting doing to address “pension spiking.” [Editor’s note: Pension “spiking” refers to a common practice where public employees use overtime and other techniques to increase their compensation in the last years of work to drive their future pension payouts higher.] They’ve raised the retirement age in a small way, by one or two years for some types of employees. And new employees now must pay 11% of their salary into the plan, which the numbers show is still not enough.

What they have not done is recognize that their annual investment returns, when added to employee contributions, simply don’t add up to enough funding to pay for overall cost of the pension outlays.

The other side of this is politics. While taxpayers vote for the Senators and Representatives in the state legislature, we really don’t fund their elections. But the public employee unions are very strong here in Massachusetts, and they spend a lot of money to elect Democrats in this state. I’m an independent, and my publication is completely independent. But the reality is that it’s not that much different than in Washington D.C.; that’s how politics works. If you’re relying on a certain group to fund your reelection campaign, they’re going to influence what you’re willing to do in terms of implementing the necessary reforms. This is just my opinion, but I believe that taxpayers have less influence over the politicians here in Massachusetts than do those that fund their election campaigns.

Gilroy: Going back to the projections for a moment, you had mentioned that Swampscott was facing tens of millions in unfunded pension and OPEB obligations. Is that based on the unrealistic 8.25 percent projection or the more realistic 4.5 percent that the Governmental Accounting Standards Board recommends?

Greenfield: The pension estimate is based on the 8.25 percent projection and no reforms to the current system. The OPEB numbers aren’t based on an investment return-it’s a different kind of system-but it’s an even bigger problem because healthcare costs have been rising faster than the pension costs. Here in Massachusetts they are actually looking at some OPEB reforms. The Governor put together a group of ten people-a mix of union reps, public employees, municipal officials and legislators-and they’ve come up with about a dozen reforms that they’ve asked the Governor to commit to. There’s a lot that can be done there.

What we’re primarily focusing on in Swampscott is if we can stop adding new employees to the current system, then we can almost freeze the system. Then, once we pay off our existing obligations in 20 years, then at least we will not have another debt to pay. So this is really a short-term push for a long-term solution.

But to me the biggest factor here is risk. All of the risk in this current defined-benefit plan is on the taxpayer. If there is not enough money to pay out annual distributions, the difference falls onto the taxpayer, regardless of whether the investment returns are on par or not. At the end of the day, there simply hasn’t been enough money put into the system by employee contributions over the past 50 years to cover the cost of the current and future retirees.

Gilroy: Can you talk a bit more about your home rule petition?

Greenfield: Our home rule petition says a couple of things. Number one, it says that Swampscott wants the ability to negotiate-within collective bargaining-with our municipal employee unions for retirement benefit options that we feel we can afford. It’s really that simple. So, for example, within collective bargaining-and we would still have to negotiate-we would go out and hire an actuary to come up with a plan that shared the risk. The premiums might be a little higher and the co-pays might be a little lower, but benefits wouldn’t increase at 8-10 percent each year, cost-wise.

I don’t have a specific answer right now about what kinds of changes we might make. This is really just a first step so that we can sit down with the unions and come up with a new plan together: here’s what we can afford, and let’s go hire a consultant and have them map out a plan where the risk is shared and where our costs are sustainable.

Ideally, the state would step up and offer multiple plans, varying in cost and benefits, for all cities in MA to choose from. By having the state oversee those plans, they would become portable for employees who move to a different town.

Gilroy: It sounds like you’re trying to take some concrete steps to stop digging the hole deeper. What do you see as the next steps beyond this in terms of addressing the town’s pension funding challenges?

Greenfield: We’ve started to see some states step up and recognize that current programs are unsustainable. I believe that Kansas is working on that issue right now, and out in California if you look at what San Diego and San Jose did in their reforms last year, they’re moving all of their new employees to defined contribution plans-457’s, which are the municipal equivalent of a 401k. And they’re putting the onus back on the employee to come up with a retirement plan, similar to the private sector. Utah moved the entire state system to a 401k type plan after the most recent recession.

One of the other big things that’s happened since the Great Recession, as people call it, is that people are realizing that wages aren’t going up like they used to in the private sector. An argument from the municipal employees and the unions has always been that we need a stronger pension system than private individuals have because our jobs don’t pay as well. But that’s changed.

Very few indivduals in the private sector have guaranteed raises or any type of pension plan aside from a 401k. While I wish we still lived in a world where everyone had a defined benefit plan and job security for life, that’s just not affordable anymore.

Gilroy: What drove you to take on this issue?

Greenfield: I think it basically just came from writing articles for EfficientGov. This stuff just kept popping up everywhere, and the more I read and wrote about it, the more I realized that this was just something that people were ignoring. And you’re talking about billions of dollars nationwide, and it’s endemic to every state. What I’m realizing is that at the political level-just like in D.C. with Social Security and Medicare-no one wants to touch the third rail of politics. And because the issue is pretty complicated, most taxpayers have no idea how much money is actually owed to these pension programs.

So I really believe that if something is not done, the money that’s owed to people isn’t going to get paid. If you look at what happened in Jefferson County, Alabama, if you look at what’s happening in Rhode Island, and if you look at what happened in Vallejo, California, ultimately the courts decided at the end of the day to give pensioners cents on the dollar of what they were owed. So I feel like I’m trying to protect everybody in this situation because people have been pulling the wool over the eyes of the municipal employees as well, because there’s just not enough money to go around. If you look at how much is owed, someone is not going to get paid, so if you at least start to address this problem now, ten or twenty years from now it could be fixed.

I just find it an interesting topic, and I like to take on challenges that people think are impossible to solve. To me that’s a sign that there’s a lot of room for solutions.

Gilroy: Assuming that your current efforts are successful, is there then a model or template that other communities could learn from or replicate?

Greenfield: I think so. I stole the idea from a couple of cities and towns in Connecticut-Naugatuck, Thomaston, North Haven. Within the last 12 months, they all have successfully negotiated within collective bargaining with either the police or employee unions to move new employees over to a 457 defined contribution plan. And they were good negotiations, very amicable, because the unions in those towns realized that there was too much money not being put into municipal services and infrastructure. These retirement plans were just sucking dollars from critical needs. So they stepped up to the plate and came to an agreement. The cities and towns had to give different kinds of perks, whether it was hiring new employees, or adding new equipment, or providing more training, but in return the unions agreed to go with a much less expensive pension plan.

So the template was really set by them. Writing articles about those instances is what gave me the idea. I think they deserve the credit for doing a lot of the hard work, and hopefully we’ll get the opportunity to repeat what they did. I hope more elected officials will take this upon themselves to recognize that this is probably one of the most important issues of this decade, and probably of their terms in office, and it’s a worthwhile pursuit.

Barry Greenfield is an elected Selectman in the town of Swampscott, Massachusetts and is the founder and publisher of EfficientGov.com. Barry has served in both senior editorial and sales publishing roles, including vice president of business development and sales at USAToday.com. Previously, he co-founded and led an early online gaming company, Interactive Intertainment, which provided solutions to The New York Times Company Digital, Knight-Ridder, Hearst Media, Microsoft, and others. Most recently, he was a senior executive at Compliance Week, an information service on corporate governance that was acquired by London-based Haymarket Media.

A graduate of Northwestern University, and an elected Selectman in the town of Swampscott, Mass., Barry has been an outspoken advocate of more efficient, streamlined, innovative local government. He coaches in his copious spare time, and lives in Swampscott with his wife and two sons.

Other articles in Reason Foundation’s Innovators in Action 2013 series are available online here.