Massachusetts pension woes raise red flags, says Pioneer report
A strong economy and the establishment of an outyear payment schedule have effectively masked a serious pension-liability problem in Massachusetts, according to Pioneer Institute.
Pension obligations have nearly tripled since 2003, said a report by the Boston-based think tank titled "Massachusetts’ Skyrocketing Unfunded Pension Liability."
“In plain terms, the long-term fiscal health of the commonwealth is being compromised by a public pension system that is in deep trouble,” wrote research assistant Rebekah Paxton and research director Gregory Sullivan.
They cited a Moody’s Analytics report last year that Massachusetts has one of the highest per capita debt levels in the nation, an aging workforce and massive unfunded future pension obligations toward which the state is making insufficient payments.
“Massachusetts’ economy is strong, but a slowdown may be on the horizon,” Moody's wrote.
Unfunded pension obligations and greater scrutiny by bond rating agencies have strained many states. Two of the most severely stressed, Illinois and Connecticut, are considering overhaul measures that include reamortization, pension bonds and the creation of a capital reserve fund.
In Pennsylvania, home to a series of downgrades over the past three years, slower increases in required pension contributions have helped narrow the budget gaps. That, according to S&P Global Ratings, has helped stabilize the commonwealth’s short-term credit stability.
“A lot of states are still dealing with unfunded pension liability problems and Massachusetts should consider themselves one of those states,” Paxton said.
Massachusetts has embarked on various overhaul efforts, including the 2009 and 2011 acts, aimed at reducing future liability and making the state pension system more sustainable.
Pioneer, however, said the commonwealth’s unfunded actuarial accrued liability spiked by 65% from 2003 to 2009, then by 113% since the second “reform” under former Gov. Deval Patrick in 2011.
According to Pioneer, while the most recent funding schedule, released in 2017, set the full-funding target date at 2037, the last three schedules – released in 2011, 2014, and 2017 -- have increasingly back-loaded the later years with “nearly impossible” contribution rates, adding $45.8 billion in increased future contributions since the 2011 funding schedule was released.
Nearly 60% of the additional contributions are scheduled for FY2031 to FY2037. Payments, if not adjusted, could balloon to upwards of %10 billion annually from roughly $2 billion.
A message seeking comment was left with the state’s Office of Administration and Finance.
“The unfunded liability continued to grow by a lot, so they altered the schedules to push these huge payments to the out years. It’s not realistic,” said Sullivan, a former state inspector general and 17-year state representative. “I think rating agencies like Moody’s are looking at this schedule and are saying ‘is it real or is it fiction?'”
Market volatility could worsen the problem, according to Pioneer.
Such volatility, Moody's Investors Service said Wednesday, underscores the risk of high pension investment return targets.
"Equity market losses in late 2018 will translate into larger than expected pension cost hikes in 2021 for many governments because of equity-heavy investment allocations within their pension systems' assets," Moody's said. "Despite the long-term investment focus of U.S. public pension systems and favorable returns in the past two fiscal years, recent market losses highlight the uphill credit challenge facing governments that rely on high-return/high-risk pension assets to cover a large portion of their pension benefit promises."
S&P Global Ratings downgraded Massachusetts in June 2017, citing cited the failure by state officials to replenish their rainy-day account despite economic growth above the national average and through an economic expansion that included the relocation of General Electric Co. from Fairfield, Connecticut, to Boston’s Seaport District.
GE – in a story dwarfed nationally last week by Amazon’s announced pullout from New York -- has scaled back its plans for a Boston headquarters and will repay the state the $87 million.
S&P rates Massachusetts' general obligation bonds AA, while Fitch Ratings and Moody's Investors Service rate them AA-plus and Aa1, respectively. All three assign stable outlooks.
Pioneer called on state lawmakers to reconsider a bill state Sen. William Brownsberger, D-Belmont, filed in 2011 to simplify the state pension system. It would provide a defined benefit comparable to Social Security for new employees, while enrolling public employees in a defined-contribution pension plan to build a supplemental retirement benefit.
According to Pioneer, this change would decrease incurred liabilities while maintaining a retirement plan for new hires.