EagleTribune.com, North Andover, MA

August 25, 2013

Editorial: Public pension shortfalls threaten municipal solvency

The Eagle-Tribune

---- — If you think the federal debt is cause for concern, just wait until you hear what local officials have promised in your name.

The Pioneer Institute, a Boston public policy think tank, recently issued a report examining the status of public employee pension funds in cities and towns across the state. It is not a pretty picture.

Public pensions in Massachusetts are woefully underfunded. As of 2010, the total public employee pension obligation — the amount that has been promised to public employees — was $92 billion. But the amount available in public pension funds to meet those obligations is short by nearly $31 billion.

Massachusetts law requires that public pensions be fully funded by 2040. If the rate of return from pension fund investments does not meet their often overly rosy forecasts, taxpayers will be left to make up the difference.

The problem stems from the “promise them anything” mentality of municipal leaders in negotiating labor contracts with public employees. When one set of public employees — the municipal leaders — is negotiating with another set of public employees — the employee unions — who is looking out for taxpayers’ interests?

Then, having given away the store at the bargaining table, elected leaders betray the public again by failing to set aside the money necessary to cover the cost of their extravagant promises. Why put away money to cover tomorrow’s problems when there are so many things to spend it on today?

To see the result of this irresponsible behavior, look no further than Lawrence where the pension shortfall of $204 million is the third worst of the 105 public pension systems in the state, according to the Pioneer Institute report. Lawrence has just 39 percent of the funds it will need to cover its pension obligations. Only Springfield and Everett are worse.

Lawrence has given itself “little breathing room,” according to Pioneer. Lawrence projects it will be fully funded in 2038, just two years short of the state-imposed deadline. The low-percentage of funding and long time to full funding each earned Lawrence a grade of “F.”

In so many ways, Lawrence is the sick man of Massachusetts. But even comparatively wealthy communities have their pension problems.

Andover’s pension system received a composite grade of “D” because it was only 50 percent funded last year and the town says it will need until 2040 to fully fund it.

Other local communities are doing somewhat better. Haverhill received an overall grade of “C.” Its pension system was 49 percent funded last year and the city projects it will be fully funded by 2032. Methuen also received a “C.” Its pension fund was 47 percent funded and is projected to be fully funded by 2032. North Andover is part of the Essex County retirement system, which is 52 percent funded and will need until 2035 to reach full funding, earning it a grade of “D.”

These pension shortfalls are a sword hanging over the heads of taxpayers. If the economy remains stagnant or worsens, the rates of return on investments on which these projections depend may not pan out.

A typical private sector worker must invest his own funds in a 401(k) or other vehicle to provide for his retirement. The private sector worker may get a small contribution from his employer as well — if such programs survived the recent economic downturn. In such a “defined contribution” plan, the investment risk is on the worker.

But public sector workers enjoy “defined benefit” plans, under which for a modest contribution from each paycheck, the worker is guaranteed a certain payout after reaching age and years of service markers. For most public sector workers, this results in a modest pension. But too often we read of the public employee who “retires” at 55 and receives 80 percent of his salary for life, only to go on an earn another paycheck for the next 10 years in the private sector.

This system is unsustainable and may drive some municipalities into bankruptcy. Taxpayers cannot continue to foot the bill for such irresponsibility.