Gov. Deval Patrick and other Massachusetts officials on Friday announced plans to file legislation that would overhaul health insurance benefits for retirees to save up to $20 billion for the commonwealth and its municipalities over 30 years.
State Treasurer Steven Grossman said the move regarding other post-employment benefits, or OPEB, which comes right before Massachusetts’ scheduled $230 million note sale on Wednesday, sends a strong message to the capital markets.
“Any state that fails to move quickly on a series of reforms to pension and OPEB benefits can expect very careful examination not only from the rating agencies, but from the investor community, because they’re the ones making the decisions to buy the bonds,” Grossman said in an interview Friday, the day Fitch Ratings placed Illinois’ general obligation bond rating of A on negative watch, citing the inability of the state legislature to pass a pension overhaul plan.
Rhode Island in 2011 passed a law overhauling its benefit system for state employees, although some unions are challenging that law in that state’s Superior Court.
Massachusetts has AA-plus ratings from Fitch and Standard & Poor’s while Moody’s Investors Service rates it Aa1.
“Massachusetts has been very proactive. On pensions they’ve done significant reform and OPEB represents the next round,” said Standard & Poor’s analyst Robin Prunty, whose agency elevated Massachusetts’ GO bonds to Aa1 in September 2011.
Grossman said the overhaul would help Massachusetts lower its borrowing costs. “This changes the ballgame for the long-term financial picture of Massachusetts,” he added.
Patrick is basing the legislation on a report by the Commission to Study Retiree Healthcare and Other Non-Pension Benefits. A pension overhaul bill, signed November 2011, established the commission to investigate and study retiree health care and other non-pension benefits.
Based on the commission’s urgings, the legislation would increase the minimum years of service requirement from 10 to 20 years; increase the minimum age for eligibility to 60 for most employees; and prorate benefits on a scale from 50% premium contribution after 20 years to the maximum current retiree benefit: 80% of premium for state retirees at 30 years.
The commission, which favored the changes in a 11 to 1 vote — only Shrewsbury town manager Dan Morgado, representing the Massachusetts Municipal Association, opposed — pegged the unfunded OPEB liability for state and local governments at about $46 billion, larger than the unfunded pension liabilities in the commonwealth. Budgetary spending for retiree health benefits exceeds $1 billion.
“Most parties got to yes, which is different from what you see in a lot of states and even the federal government,” Grossman said.
The MMA opposes a recommendation to permanently freeze the health insurance contribution rate for retirees once they retire — a provision that it said would prevent cities and towns from making adjustments to a major budget item to adapt to changing fiscal conditions and would offset a significant portion of the potential savings in many communities.
The changes will not apply to current retirees or to current employees who are within five years of retirement age for their group and have completed 20 years of service as of the reform’s effective date. State officials expect to save up to $20 million the first year of implementation alone.
“On balance, we think it’s a good package, a step forward in addressing the state’s huge unfunded liability. But it’s only a first step,” said Michael Widmer, president of the Massachusetts Taxpayers Foundation, a budget watchdog group supported by business leaders.
Grossman said Massachusetts expects to go to market in the first six months of the calendar year — and last fix of the fiscal year — with more than $1.2 billion in additional borrowing.
He said investor interest in Wednesday’s sale of Series 2013A SIFMA index notes will help gauge interest in the OPEB package.
“Investors react by how much they’re prepared to pay,” he said.
Morgan Stanley is lead manager for Wednesday’s sale. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond and disclosure counsel. Edwards Wildman Palmer LLP is representing the underwriters.