Pension

Pension costs impose hidden fee on local homeowners

Edward Mason
Published: July 30, 2007

Gloucester High athletes will pay almost $230 to play football or baseball this year because school officials say they can't afford to pay for sports and meet all their other financial obligations.

Their parents will also pay a user fee of sorts, though most are unaware of it.

Built into their property tax bills, it's the hidden cost of pension promises the city made to its employees but can't pay without taxpayers' help.

As cities and towns across the North of Boston region struggle to pay for basic services, they are spending millions of dollars a year to shore up public employee pension funds that don't generate enough money to meet obligations to current and future retirees.

The cost to homeowners is measurable.

Gloucester, for example, pumped $5.2 million into its pension fund this year | money that could have gone to school sports and other services if the pension fund were self-sustaining.

The $5.2 million payment represented almost 6 percent of the city's entire budget.

Based on the average single-family property tax bill of $4,515, the impact fee for the pension debt was more than $260 for the typical homeowner.

Using the same formula, shoring up the local pension fund cost the average homeowner $283 this year in Salem, $271 in Newburyport, $213 in Andover and $199 in Haverhill.

And those figures don't include what health care benefits promised to retired municipal employees are costing local taxpayers. Nor do they include what it costs taxpayers to subsidize the pensions and health care benefits of retired state employees.



How we got here

For decades, cities and towns paid pension benefits out of their budgets each year | a pay-as-you-go system. As salaries rose and benefits increased, they amassed huge pension liabilities with no money set aside or invested to pay them off.

The state now requires cities and towns to invest a fixed amount every year to ensure there is money available to pay future retirees.

In Beverly, Mayor William Scanlon faces a $58.3 million pension gap and must devote more than $6 million a year to make up the difference.

Scanlon said that money could be put to better use. "I'd like to be putting it into roads and streets," he said.

In some communities, the problem is compounded by investment funds that perform poorly.

Lawrence's pension fund, for example, has averaged a yearly return of only 7.4 percent over the last five years and 9 percent over the last 20 years | among the lowest rates of return among all municipal funds.

A strong market made last year a good one for most pension funds. Lawrence's fund earned 12.5 percent. But it still lagged most other local funds and the massive state fund, which returned 15.5 percent. The difference cost the city more than $3 million.

Lower returns mean less money for other services and more pressure on taxpayers to make up the difference. In fiscal 2007, it cost Lawrence $12.8 million to top off its pension fund.

"If we had the same rate of return on our investments as the state, it could close our annual operating deficit and then some," Lawrence Mayor Michael Sullivan said. "We would be able to put more police and firefighters on the street, and we could take some of the (tax) burden off our property owners."



Giving away the store

Barbara Anderson, who has kept a watch on government spending for decades as head of Citizens for Limited Taxation, said local governments spent their way into the problem.

Awash in state aid, local officials caved in to unions and increased salaries and benefits for their employees.

"In the 1990s, when there was so much local aid, municipalities gave away the store," the Marblehead resident said. "So cities and towns got themselves into a huge fixed-cost situation that's going to become a fiscal crisis."

Kenneth Ardon, a Salem State economics professor who has studied public pensions, disagreed. He said cities and towns got into the bind they're in by doing what many people do: failing to plan for retirement.

"They were making promises, but they weren't putting money aside," Ardon said.

As government expanded and salaries rose, the obligation to retired workers increased. Longer lifespans and soaring health care costs compounded the problem.

The state began to address the issue in the 1980s, investing money for its future retirees and requiring local governments to do the same, Ardon said.

But they are years away from solving the problem.

Danvers is ahead of many North of Boston cities and towns on that score.

Local pension funds are supposed to be fully funded by 2028, but Town Manager Wayne Marquis is paying more than required each year to shave four years off the schedule. His annual pension payment of $3.4 million this year included an extra $314,000.

"I look at it as like a mortgage," Marquis said. "If we pay it off early, it's beneficial to the town."

A state takeover of poorly performing local pension funds could also help cities and towns to ease the pension pain.

At the urging of Gov. Deval Patrick, the Legislature this month approved a controversial bill that will require local pension funds that significantly underperform the state fund, like Lawrence's, to turn over their assets to the state for management. Targeted cities and towns have a right to appeal the transfer. Other local funds can transfer their assets voluntarily.

Although pensions are a major expense, not all North of Boston municipalities want to give up responsibility for their management.

Andover Town Manager Buzz Stapczynski, for one, is suspicious of the state's motives. He thinks it's an asset grab.

Yet Stapczynski said he can't rule out folding Andover's fund into the state's if it would save money by increasing the return on investments. The town is looking into the idea.

"The option of joining is something we have to consider," Stapczynski said. "Richard Howe, a member of the Finance Committee, produced a report several months ago that showed the benefit of joining. That is a document that both the Finance Committee and selectmen have taken very seriously."