Executive Summary - The Reform Imperative

Transportation - (Mass Turnpike Merger)

As the Central Artery/Third Harbor Tunnel project nears completion, we must embrace new thinking about the Commonwealth's transportation leadership, beginning with unified highway operations -- accomplished through the merger of the Massachusetts Turnpike Authority and the Massachusetts Highway Department.

The Turnpike is too small to exist as a stand-alone entity in the 21st century; it manages only 8% of state lane-miles, but spends more than 35% of all road-related operating cost. Top-heavy overhead generates losses every year in road operations. As a result, the Turnpike has raised cash by selling off important land holdings (such as Allston Landing) and by speculating on future interest rates. This speculation - called swaptions on Wall Street - contributed to credit downgrades from independent credit ratings agencies.

Recent Turnpike actions have placed the entire statewide transportation plan in jeopardy. In addition, the once-in-a-century opportunity to re-envision 200 acres in central Boston will be squandered if delegated to the Turnpike without significant city or state involvement. A simple merger will bring this dysfunctional organization under constitutional control.

By sharing overhead and other management changes, the Commonwealth will save over $20 million annually, all without any negative impact on road quality. The merger will also free up more than $190 million that are no longer needed given the credit strength of the combined entity.

The MassPike and Mass Highway Merger presentation contains additional information on this important reform.

Schools (School Building Assistance Program)

School Building Assistance Program

School Building Assistance presentation

Public Construction

In public construction, Massachusetts experiences more delays and higher costs, even after adjusting for local wage rates and climate, than other states. The Governor's Budget outlines important steps to save at least 10% on vertical construction:

• Releasing state and municipal governments from unnecessary restrictions on procurement and delivery methods for complex projects.
• Eliminating the economic disadvantages of filed subcontractor bidding.
• Improving municipal project oversight with professional managers for construction over $5 million.

Procurement and Delivery Methods

Current law mandates a so-called design-bid-build construction process where each phase must be completed before the next begins. Private sector experience shows that design-build methods dramatically reduce completion time for large, complex projects. Under construction-manager-at-risk, the state would be protected from unforeseen cost exposures. Recent evidence underscores the economic benefits of flexible building processes:

• Traditional design-bid-build at the Brooke Courthouse in Boston cost $267 per square foot
• Flexible design-build for a courthouse in Brockton cost 25% less on an equivalent basis

Construction reform will strengthen, not weaken, anti-corruption efforts and Ward Commission reforms, such as:

• Designer Selection Board, which selects project designers devoid of political influence, remains in place
• Enhanced pre-qualification procedures
• Current laws that guard against corruption in public construction are unaffected, including false qualification sanctions, tight record-keeping requirements, and prohibitions against commercial bribery, economic extortion and fraud

Eliminate Filed Subcontractor Bidding

The complex process known as filed subcontractor bidding results in unacceptable delays and wasted money. Filed sub-bids require bids from 17 separate specialty trades as the first step in construction; when a general contractor is then hired, the subs are essentially pre-selected. Unlike private construction, this bid process results in needless adversarial relationships with change orders, claims and delays.

Municipal Project Oversight

Local government may lack the expertise to effectively oversee school and other construction projects, which often results in waste and delay. Professional management is a needed component of modern construction methods.

Pensions

The state's pension system has loopholes that allow certain insiders to take advantage of the system, gain unreasonable and unfair benefits, and erode public confidence. The Governor's Budget ensures greater fairness and calculation transparency with the following prospective changes (current retirees are not affected):

• A pension cap, based on earnings over an employee's entire career, to eliminate gaming over salary and timing differences.
• Reforms that eliminate unreasonable benefits.
• A requirement to fully fund any new liability within three years.

Pension Cap

Retirement benefits for most public employees will be capped at the value of the lifetime annuity an employee could buy, assuming a contribution to the pension system of 15% of earnings, plus interest, throughout his or her entire career. Group 2 employees will have an assumed contribution of 17.5%. For Group 4 employees who work mostly in public safety and receive more generous retirement benefits, the cap will be based on an assumed 20% contribution. State police, whose pension calculation works differently than others, are excluded from the cap.

These reforms will curtail a few excessive pensions but will not affect the vast majority of public employees; the cap will allow pensions of up to three times the annuity value of an employee's pension contributions plus a generous rate of interest. Only employees with unusual pension contribution patterns, such as those who receive a spike in salary at the end of their career in government will be affected by the cap. A dramatic example - a long-term, part-time municipal official who gets a full-time government position at the end of his career - is illustrated below.

Unreasonable Benefits

Gaming the pension system to achieve unreasonable benefits undercuts the public interest. The Governor's Budget:

• Clarifies that perks, such as cars and housing allowances, do not add to pension benefits;
• places certain terminated employees and elected officials (under 55 with 20 or more years of service) on the same benefit calculation as other employees
• eliminates the "January 1" loophole that grants a year of pension credit to elected officials for a single day of service;
• puts economic fairness into "buy back" provisions by charging accrued market-rate interest over the buy back time period; and
• pro-rates pension benefits, based on time in Group 1, 2, or 4.

The consensus agreement on pension funding - a 2023 amortization date, end-of-year portfolio valuation, and other technical factors - becomes meaningless without discipline on the growth of future liabilities. For example, three recent early retirement incentive programs added over $2 billion to the Commonwealth's unfunded pension liability. In FY05 those programs account for $61-75 million of the required pension fund appropriation.

Pension Impact Statements

An additional reform - pension impact statements - will insure that new liabilities created by future changes to or exceptions from the pension law will be fully funded within 3 years, forcing accountability on all new pension proposals.

Workforce

Public employee unions in Massachusetts enjoy a special monopoly status. The result is, in effect, two states within a state. One - the private and non-profit sector - enjoys fair competition and the benefits of an open market; workers freely elect to join unions only about 10% of the time. In contrast, state and local government is a labor monopoly of rigid work rules; devoid of incentives or performance standards; workers must follow union agreements and pay dues (except for elected officials and their immediate staff).

No explicit savings from workforce-related reforms are counted in balancing the FY05 budget. Yet the imperative for reform is compelling. Governmental affairs must re-establish a healthy balance between public servants and the citizens they work for. The Governor's Budget:

• Eliminates managerial conflict of interest by clearly delineating union and supervisory positions.
• Encourages private sector competition while preserving safeguards for state employees.
• Limits civil service to public safety employees.

Courts

Budgetary appropriations for the Judiciary remain too fragmented despite some reforms adopted in FY04. The Governor's Budget promotes additional management flexibility and also identifies over $1 million in savings by consolidating the Boston Municipal Court and District Courts' administrative functions.

Increase in Managerial Flexibility through Consolidated Appropriations

In FY05, court operating and capital plans will become more integrated. For example, a new Worcester court with consolidated Superior, District, Family, Probate, and Juvenile operations will substantially reduce costs in the future.

The Governor's Budget also accelerates incentives for fee collection that have already proven to be highly effective this year. For example, Trial Court collections in FY04 are expected to increase by 40%, a $30 million improvement over FY03. In FY05, an additional $27 million is forecast by implementing these proven incentives.

Trial Court Revenue History

The Governor's Budget also includes incentives for the Committee for Public Counsel Services to keep the fair market value of legal services provided to clients who have fraudulently claimed indigence. This results in a $3 million savings to the taxpayer.

Massachusetts's taxpayers will spend an estimated $75 million this year on lawyers for indigent defendants in criminal cases. While there is currently a requirement for defendants to pay a small amount for these services based on income, the process for determining the amount is onerous and routinely ignored. The Governor's Budget includes an innovative reform to help ensure that an appropriate fee is collected from every client who can afford to pay one. Moving to a defined compensation payment system for outside lawyers is projected to save $15 million in FY05.

Finally, the Massachusetts Legal Advisors Corporation, Massachusetts Correctional Legal Services, and Mental Health Legal Advisors will be consolidated.