FY2012 House 1 Budget Recommendation:
Issues in Brief
Deval L. Patrick, Governor
Timothy P. Murray, Lt. Governor
The Patrick-Murray administration is continuing to take a comprehensive approach to addressing the fiscal challenges associated with the Commonwealth’s pension and Other Post-Employment Benefits (or “OPEB”) liabilities. The state currently has an unfunded pension liability of $20 billion and an unfunded OPEB liability of $15 billion. Municipal governments are also faced with significant unfunded pension and OPEB liabilities. The Governor’s recent proposal to modernize and further reform the state’s pension systems would result in significant pension cost savings to state and local pension systems and help to ensure the long-term sustainability of these pension systems. This proposal would also reduce future costs associated with OPEB - as a result of an expected increase in retirement ages – and build on the administration’s ongoing efforts to address unfunded OPEB liabilities. The Governor is also proposing additional measures to increase retirement liability funding and oversight of OPEB.
The Governor filed legislation on January 18, 2010 for additional pension reform and benefits modernization that builds on previous pension reform legislation enacted by the Governor and the Legislature. The benefits modernization proposals that would impact prospective employees include: raising retirement ages, eliminating early retirement subsidies and increasing the period for average earnings used to calculate the pension benefit from three years to five years. The legislation also includes reforms to prevent abusive practices that enhance benefits at the end of an employee’s career - including excessive salary increases or changing jobs to a group with higher benefits – and a proposal to prevent “double dipping” for certain elected officials, who could otherwise receive both a salary and a government pension.
The benefits modernization proposals described above would generate pension cost saving for the Commonwealth in excess of $5 billion over 30 years, including an estimated $2 billion for cities and towns. These savings would allow the Commonwealth to reduce its pension funding schedule by an estimated three to five years and provide similar relief to cities and towns. The expected increase in retirement ages would also result in additional savings for future retiree OPEB costs of approximately $1 billion for the state and $1 billion for cities and towns over 30 years. This impact would build on previous measures to address OPEB liabilities, including the increase to the share of health care costs for new retirees from 15% to 20%, and the commitment to deposit 5% of excess capital gains revenue into the State Retiree Benefits Trust Fund.
The Governor appointed a task force on long-term liabilities in connection with the budget process last year. The task force was lead by A&F and solicited input from other government stakeholders, including the Public Employee Retiree Administration Commission (PERAC) and the State Comptroller, as well as outside experts. This effort informed the Governor’s recommendations for pension reform as well as the additional proposals and recommendations listed below.
The new schedule also includes 5-6% increases in pension funding during fiscal years 2013 to fiscal year 2017 and would prohibit any reduction in appropriations during this time frame that would otherwise be allowed as a result of actuarial gains. Instead, any gains could only be used to shorten the schedule and as a further measure of discipline, increased appropriations would still be required to meet the 2040 fully funding date if necessitated by actuarial losses. This format will ensure ongoing increases in pension appropriations and mitigate the cyclical problem inherent in funding schedules where appropriations are often lowered when available resources are at their greatest.
Prepared by Greg Mennis, Executive Office for Administration and Finance ·
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