Folding the $1.6 billion MBTA Retirement Fund into the state system is essential to the very future of the agency that oversees Greater Boston mass transit, said a Pioneer Institute report.

"In the long term, the [Massachusetts Bay Transportation Authority's] financial problems will not be solved unless and until leaders are willing to confront the growing financial challenges posed by the MBTA Retirement Fund," wrote Gregory Sullivan, a former Massachusetts inspector general who is research director for the Boston-based free-market think tank.

The Massachusetts Bay Transportation Authority – the "T," as locals call the system -- has been under a fiscal control board the past two years.

Sullivan wrote the report, which Pioneer released last week, with research and operations associate Matt Blackbourn, research assistant Michael Weiner and senior fellow for finance Iliya Atanasov.
The pension fund is roughly 75% publicly funded, but has long existed as a private trust, shrouded in secrecy to the chagrin of Massachusetts sunshine advocates.

The report urged the Fiscal Management and Control Board to work with labor leaders, Gov. Charlie Baker and lawmakers to move the fund out of Social Security, institute a new pension structure for all retirement fund members and develop a plan to phase out the fund and move it into the state-run Pension Reserves Investment Management Board.

According to Sullivan, political tailwinds are more favorable.

"We have been talking with the administration of the MBTA since the report was issued, and their response has been very positive," Sullivan said in an interview. "There's lots of popular support.

"The past two years, the MBTA's fiscal control board has been dealing with big financial problems at the T," said Sullivan. "One of the areas it has not really addressed, one of its most sizable component, is the T pension system."

Public retirement systems across the country have been struggling. Morningstar, Pew Charitable Trusts, Manhattan Institute, Bridgewater Associates and JPMorgan Chase, among others, have released pessimistic data on the subject.

Lisa Battiston, a press officer for the Massachusetts Department of Transportation – the MBTA has been a MassDOT unit since 2009 – denies that the control board is dragging its heels on pension liability.

"Since taking the reins of the MBTA last year, the Fiscal and Management Control Board and the MBTA's new leadership team have consistently identified the pension fund as an area in need of reform," she said.

Controversy has long engulfed the pension fund, which began in the late 1940s when the MBTA's predecessor, the Metropolitan Transit Authority, absorbed bankrupt private systems.

Backed by a 1973 state Supreme Judicial Court ruling, the fund has resisted efforts to release pension data in the face of a sunshine provision to a 2009 transportation law and repeated prodding from transparency advocates,. They cite the public contributions toward pension costs.

"The MBTA Retirement Fund has been insulated and not subject to state-level inspection," Blackbourn said of the retirement fund, whose unfunded liability from 2005 to 2015 has spiked from $49 million to $944 million. In calendar 2015 alone, the fund's liability spiked by $154 million, which Pioneer said dwarfed the $84 million reduction in the MBTA's fiscal 2016 structural deficit.

Murkiness surround the fund has generated headlines, nationally and locally.

"The T [retirement fund] is an anomaly in Massachusetts and an anomaly in the United States of America," said Sullivan. "In the eye of the law, it's private. But its financial support comes from the public."

The T, through farebox revenues and state grants, funds about three-fourths of the pension system.

In 2014, the fund revealed that it lost a $25 million investment in an apparent Ponzi scheme through a hedge fund run by bankrupt Fletcher Asset Management.

The Boston Globe, citing documents it obtained in a lawsuit settlement, said two weeks ago that the retirement board shrugged off red flags and invested with Fletcher in April 2007. The pension system's former executive director, Karl White, who had been working for Fletcher for only six months, pitched the firm to his ex-colleagues and White's successor, Michael Mulhern, cited a "level of trust" with White.

Fletcher collapsed. Mulhern resigned as retirement fund chief in August.

Other published reports have connected the fund's dealings to associates of convicted mass murderer James "Whitey" Bulger and Francis Fraine, who admitted to a role in a Boston arson ring in the late 1970s. A message seeking comment was left with the retirement fund.

The fund's oddities – Pioneer refers to an "unusual contribution scheme" – include terms that may compromise the system's viability, according to Sullivan.

"The T's retirement system is really different from the rest of the state," he said.

Thanks to an arcane early1950s agreement with the Social Security Administration -- retirement fund members are among only 4% of all state and local government workers in the commonwealth, who pay into and receive Social Security, and for whom public employers make matching contributions to Social Security on the employees' behalf.

"Massachusetts is an outlier," said the report. "Social Security costs alone add up to [roughly] $30 million per year for the MBTA."

Worker contributions are lesser than those for mainstream state employees, 11% vs. 6.2%. Conversely, the T contributes 18% of payroll compared with the commonwealth's 11%.

Sullivan and Blackbourn say union members might be more receptive to pension overhaul, realizing the financial situation of the fund. "The tide may be turning for the legislature taking control of that 800-pound gorilla," said Sullivan.

Labor peace may set the tone. On Tuesday, the control board approved an agreement between the MBTA and Boston Carmen's Union Local 589 that officials say will save the MBTA $80 million over four years and more than $750 million over 25 years while also tweaking overtime and other long-standing work rules to lower MBTA costs and improve productivity.

The snow fiasco of 2015, which left many commuters stranded on trains in bitter cold, exposed longstanding operational problems at the T, including a roughly $11 billion state-of-good-repair maintenance backlog. In addition, the federal government is leaning on the authority to complete a light-rail Green Line extension from Cambridge to Somerville, part of a mitigation settlement related to the Big Dig megaproject.

"Beginning with the dire fiscal consequences of Boston's Big Dig in the early 1990s, America's fifth-largest transit agency gradually became a slow-motion train wreck," said Pioneer. "State officials have used every trick in the book to keep the trains running without fundamental reform, from direct state-budget subsidies to using the T's capital account for operating expenses."

Under so-called forward funding, enacted in 2000, the MBTA was supposed to self-fund without additional state appropriations. Instead, shortfalls amounted as sales-tax revenues fell way short of expectations.

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