PERAC Executive Director & Chairman Bill Keefe called the meeting (remotely via Zoom) to order at 11:07 AM. Mr. Keefe explained that because the meeting was remote, all motions made during the meeting would be voted on by roll call and that the meeting would be recorded.
Special COLA Commission members in attendance at the Zoom meeting included State Senator Michael Brady, MTRS Executive Director EmeritaErika Glaster, State Taxpayers Foundation President Doug Howgate, PERAC Executive Director Bill Keefe, State Retirement Board Executive Director Kathryn Kougias, Executive Office of Administration and Finance Assistance Budget Director Amelia Marceau, Representative Dan Ryan, Mass. PRIM Executive Director and Chief Investment Officer Michael Trotsky, and President of Mass. Retirees Frank Valeri.
PERAC Staff, including First Deputy Executive Director Caroline Carcia, Assistant Deputy Director Patrick Charles, Actuary John Boorack, Actuarial Assistant Nate Geitz, and Investment Analyst Anna Huang, were present at the Zoom meeting to provide technical expertise and support to the Commission members.
Other attendees at the Zoom meeting: AI DeGirolamo (Sen. Brady’s Ofc.), Brant Duncan (American Federation of Teachers), Donna LoConte (Sen. Brady’s Ofc.), InstaTrac, Janey Frank, Jay Leu (PRIM), Jim Lucia, Jim Machado (Fall River Retirement Board), Mike Canavan, Nancy McGovern (Mass Retirees), Patrick Brock (Hampshire County Retirement Board), Sada Korroch (Rep. Ken Gordon’s Ofc.), Seth Gitell (PRIM), Tom Bonarrigo and William Rehrey (Mass Retirees).
Minutes Approval
Before the motion to approve the February 4, 2025 meeting minutes, Mr. Keefe introduced Representative Dan Ryan, the new chairman of the Public Service Committee, representing Charlestown and Chelsea. Rep. Ryan is starting his sixth term in the House and has previously chaired the Election Laws Committee. Mr. Keefe then handed the floor to Rep. Dan Ryan for a brief self-introduction.
Rep. Ryan briefly introduced himself, expressing his enthusiasm for working with everyone on the Committee. Mr. Ryan reflected on his past experience working for Congressman Capuano for nearly 17 years, focusing on labor, veterans, and Social Security issues, primarily related to retirees. He highlighted his early involvement with the government pension offset and windfall elimination issues and emphasized the importance of advocating for public workers. Rep. Ryan expressed his appreciation for the Commission's work and looks forward to collaborating with and learning from the team.
Commission member Erika Glaster motioned to approve the February 4, 2025 meeting minutes. State Senator Michael Brady seconded the motion, and a vote was taken:
Michael Brady YES, Erika Glaster YES, Doug Howgate YES, Bill Keefe YES, Kathryn Kougias YES, Amelia Marceau YES, Dan Ryan ABSTAIN, Michael Trotsky YES, Frank Valeri YES; and the minutes were adopted.
Actuarial Analysis Presentation
Mr. Keefe introduced Actuary John Boorack from PERAC, who would present various analyses and proposals related to the enhanced COLA, including the impact of inflation on retirees and other factors relevant to their ongoing discussions. He then handed the floor over to Mr. Boorack.
Mr. Boorack’s presentation encompassed two parts: the analysis based on retirement duration and benefit levels and the method of financing.
The analysis is based on retirement duration and benefit levels
Mr. Boorack outlined updates to the parameters discussed at the previous meeting. These updates focused on individuals with 20 years of service and who have been retired for at least 15, or 20 years. The update looked at those with benefits below 150% of the average benefit for both state and teachers' retirement plans. It also focused on those with no benefit restriction, those with benefits below the poverty level for a two-person household, and those with benefits below 150% of the poverty level for a two-person household.
Mr. Boorack then revisited the previous proposal for individuals with at least 20 years of service. The options were:
- A $100 annual increase for those retired at least 15 years, costing ≈$96M.
- A $200 annual increase for those retired at least 20 years, costing ≈$126M.
- A hybrid plan where individuals retired for 15-20 years would receive a $100 increase, and those retired for 20 years would get a $200 increase, costing ≈$173.8M.
Mrs. Glaster asked about the “ Increase in AAL” on the slide and whether the AAL is the lump sum amount. Mr. Boorack confirmed it’s accurate.
Mr. Boorack provided updated figures for individuals whose benefits are below various thresholds, starting with those under 150% of the average benefit for both state and teachers' retirement plans. They presented three options:
- $100 annual increase for those retired at least 15 years, costing ≈$203M.
- $200 annual increase for those retired at least 20 years, costing ≈$205M.
- A hybrid plan where individuals retired for 15-20 years would receive a $100 increase, and those retired for 20 years would get a $200 increase, costing ≈$350M.
For the retirees with no benefit limit with at least 20 years of service, the cost is as follows:
- $100 annual increase for those retired at least 15 years, costing ≈$219M.
- $200 annual increase for those retired at least 20 years, costing ≈$215M.
- A hybrid plan where individuals retired for 15-20 years would receive a $100 increase, and those retired for 20 years would get a $200 increase, costing ≈$376M.
Mr. Boorack then presented the analysis on individuals with at least 20 years of service and benefits below the poverty level for a two-person household ($21,150 annually):
- $100 annual increase for those retired at least 15 years, costing ≈$12.4M.
- $200 annual increase for those retired at least 20 years, costing ≈$18M.
- A hybrid plan where individuals retired for 15-20 years would receive a $100 increase, and those retired for 20 years would get a $200 increase, costing ≈$23M.
For the retirees with at least 20 years of service and benefits below 150% of the poverty level for a two-person household ($31,725 annually):
- $100 annual increase for those retired at least 15 years, costing ≈$44M.
- $200 annual increase for those retired at least 20 years, costing ≈$63M.
- A hybrid plan where individuals retired for 15-20 years would receive a $100 increase, and those retired for 20 years would get a $200 increase, costing ≈$81.3M.
Mr. Boorack then emphasized that all the figures presented are the costs of paying in a lump sum to provide these additional benefits.
Mr. Valeri noted that the cost of the enhanced benefit has changed significantly based on the eligibility limit. He highlighted that the lowest threshold is the poverty level, while the highest is with no limit, and commented that adjusting the eligibility standard causes a considerable difference in cost. Mr. Valeri then asked whether a "no limit" eligibility standard would apply to all retirees.
Mr. Boorack clarified that the "no limit" eligibility would apply to every retiree with at least 20 years of service and who has been retired for 15 or 20 years.
The method of financing
Mr. Boorack discussed methods of financing the enhanced COLA, explaining that all the figures presented reflect lump sum payments rather than amortized values over several years. One potential financing method is for the legislature to increase the COLA base or adopt another COLA plan if the retirement plan experiences actuarial gains, especially from investment returns.
Mr. Boorack discussed two possibilities for funding: at least 10% returns over two or three consecutive years. He noted that this would be 3% more than the current assumed rate of return. Since 1990, there have been seven instances of two consecutive years of double-digit returns, occurring roughly once every five years, and three instances of three consecutive years of double-digit returns, occurring roughly once every 12 years. Mr. Boorack elaborated that the analysis, based on the January 1st, 2024 Commonwealth valuation results, focused only on the assets of the state and teachers' retirement plans.
Mr. Boorack noted that the plan returns 10% for two consecutive years, and the estimated actuarial gain would be ≈$4.6B, which could offset the increased liability from the proposed COLA changes. Mr. Boorack emphasized that the largest was ≈$376M, which he had presented earlier.
For three consecutive years of 10% returns, the estimated gain would be ≈$7B.
Mr. Boorack clarified that these numbers assume a 10% return for two or three consecutive years.
Mr. Boorack explained that during the seven periods (since 1990) with two consecutive years of double-digit returns, the average returns ranged from 14.3% to 20.4%, 7% to 13% higher than the assumed return above. He noted that the $4.6B figure provided earlier assumes returns 3% above the expected investment return. If returns were 6% or 13% higher, the system could see a $9.2B gain. A 13% return could reach up to $16-20B for two years.
For the three periods (since 1990) with three consecutive years of double-digit returns, the average returns ranged from 16.5% to 19.8%, 9.5% to 13% higher than the current assumed return. If the return was only 3% greater than the assumption the gain would be ≈$7B. If the returns were 9.5% to 13% higher than assumed, we could expect gains of between $21B to $30B. The estimated $21B gain over three years would be more than enough to offset the proposed COLA provisions.
Mr. Boorack also addressed a question from a previous meeting that Mr. Trotsky asked about how many retirees were impacted by inflation due to the COLA base in the State and Teachers systems. The analysis revealed that 93.8% of state retirees and 97.6% of teacher retirees have been impacted. Mr. Boorack concluded by asking any questions about the data presented.
Commission members commented after Mr. Boorack’s presentation:
Mr. Valeri asked if the percentage of retirees impacted by the COLA changes would change significantly if the base amount were set at $18,000 and to what degree.
Mr. Boorack responded that the percentage of impacted retirees would decrease, but unknown to what degree, as he did not have data on the number of people receiving benefits of $18,000 or below.
Mr. Valeri expressed interest in knowing the percentage decrease for people receiving benefits of $18,000 or below.
Mrs. Glaster asked what percentage of the pension fund is currently attributed to state and teacher plans when calculating actuarial gains from consecutive years of 10% returns.
Mr. Boorack stated that he did not have the data available but suggested that Mr. Trotsky might have the answer to the question.
Mr. Trotsky estimated that the state and teacher retirement plans constitute between 80% and 85% of the pension fund and offered to provide a more precise answer later.
Mrs. Glaster commented that knowing the percentage would be helpful. She noted that the employer historically uses investment gains to reduce future contribution schedules, while losses result in increased employer contributions. Referring to the FY24 return of 9.5%, Mrs. Glaster suggested there is potential funding for supplemental COLAs and raising the COLA base to $18,000, as discussed in the previous meeting, where $2.9B was mentioned to cover the cost of increasing the COLA base.
Mrs. Glaster suggested that on a triennial schedule, if the pension fund achieves a certain percentage of gains over three years, those gains should be shared with the members, even if only half of them are distributed. She proposed creating a policy that allows the employer to keep some of the gains while also giving back to the members.
Mr. Valeri asked why a 3% above the current assumption rate (7%) was chosen as the trigger for double-digit returns rather than a lower percentage, such as 1.5% or 2%.
Mr. Boorack explained that double-digit returns are easier to track and are significant regardless of the investment return assumption. He also mentioned that a recommendation would be made for the investment return assumption in the upcoming 2025 valuation. Still, whether it would stay at 7%, be reduced, or increase is uncertain.
Mr. Boorack further explained that double-digit returns as a starting point are more straightforward because they provide a clear benchmark. In contrast, using a smaller percentage difference, like 1.5% or 2%, would fluctuate as the assumption changes, making it more complex. Therefore, double-digit returns are preferred for consistency, especially since the assumption has varied over the past 20 years.
Mr. Valeri suggested that if the investment return assumption is lowered to 6.5%, the excess gains would be significantly higher for a 10% return. He proposed tying the excess gains to a certain percentage above the assumption (e.g., if the assumption drops to 6.5%, the threshold would be 8.5%, and so on). Mr. Valeri questioned why this approach isn't being considered.
Mr. Keefe suggested that using double-digit returns is for illustrative purposes and that the Commission can suggest or recommend other numbers. He indicated that setting a margin instead of a fixed percentage would be wise, allowing flexibility if a recommendation is made or something becomes statutory. Mr. Keefe further commented that 10% is an easy number to identify, and it seems like a significant gain if the return exceeds 7%. It's a 3-point difference representing almost a 50% gain over the expected return. Mr. Keefe noted that a 10% return is not common, and the goal is to balance the system's and the Commonwealth's needs. Setting a lower margin would result in reaching the threshold more often.
Mr. Valeri appreciated the illustration, noting that it effectively shows how different factors are connected. He also suggested a longer-term trigger mechanism, such as using a five-year average instead of years of consecutive gains, to better align with long-term funding goals.
Mr. Howgate expressed concern about tying benefits to the rate of return, which the treasurer's office determines as an administrative decision rather than a legislated one. He pointed out that setting a system where actions are triggered once a certain margin is exceeded could lead to complications, as decisions in one area could have unintended consequences on other parts of the system, particularly with COLA changes. He suggested using a fixed number, potentially reviewed periodically, to avoid these potential issues, rather than a margin.
Mr. Keefe noted that PERAC sets the rate of return, and Mr. Boorack will present it at the upcoming meeting. While the process is still administrative, more people are involved in the decision-making. Mr. Keefe then asked Mr. Howgate if he would be comfortable setting the margin based on changes in the rate of return, such as using a range of 7% to 10%, 6% to 9%, or 6.5% to 8.5%, and whether the rate of return change would impact the margin.
Mr. Howgate expressed concern about the suggestion; while he acknowledges the importance of fully funding the system, he prefers the stability of a set number over a fluctuating margin to prevent unforeseen problems, although he is not entirely opposed to the margin approach.
Mr. Keefe suggested that the Commission consider making the recommendation a catalyst for legislative action rather than an automatic trigger. He proposed that a mechanism could be in place to notify the legislature when certain conditions are met, allowing the legislature to review and take final action on COLA status. This process would ensure that the legislature remains responsible for the final decision.
Mrs. Glaster suggested an alternative approach to COLA increases, where instead of triggering increases based on a percentage, the Commission could look at the overall net investment gains at the end of each triennial period. If there are actuarial gains for the state and teacher plans, these gains could be used to fund a COLA improvement in a lump sum without increasing future obligations. They mentioned that for FY24, the investment gain of $9.1B could fund a COLA increase as long as there aren't significant losses in the following years. This approach would ensure that any COLA increases are paid through actual investment gains rather than adding to the funding schedule.
Mr. Keefe and Mr. Boorack commented that this approach is a different way of calculating gains than the method that Mr. Boorack presented earlier. Still, both approaches would achieve the same result of paying for the benefit in full.
Mrs. Glaster commented that without applying these approaches, the gains would simply reduce the employer's future contribution requirements and be absorbed into the state's funding at the beginning of the following triennial schedule.
Mr. Valeri emphasized capturing gains within a set period as they tend to disappear after each triennial valuation and are used elsewhere, such as for conservative scheduling or administrative purposes. He suggested that members should share in the gains, especially when the fund performs well, and suggested that with a 10% return over two years, raising the COLA base to $18,000 would be possible and fund an enhanced COLA benefit.
Mrs. Glaster agreed with Mr. Valeri's suggestion, adding that this approach would allow for sharing the gains while reducing future contributions to the system.
Mr. Valeri noted that the past two years have shown excess gains, with averages of 9% to 11%, and questioned why 10% was chosen as a threshold instead of 9%. He pointed out that if the 10% target had been used, the system would have exceeded the expected return for 2023 and 2024, generating over $4B in excess gains. This amount would cover the proposed changes without creating future unfunded liabilities. Mr. Valeri agreed with previous comments, emphasizing that retirees and beneficiaries should share these gains while ensuring the Commonwealth's financial credibility.
Mr. Boorack acknowledged that there was no disagreement but emphasized that they discussed the same concept differently. He explained that while others are looking at investment gains over the three years tied to the triennial schedule, he is considering gains over two or three years. In both cases, the goal is to capture gains, but they are simply exploring different methods, whether through investment returns or actuarial gains tied to the funding schedule. Mr. Valeri agreed with Mr. Boorack’s points.
Mrs. Glaster also emphasized the need to consider potential losses, focusing on the triennial schedule. At the end of each schedule, the net result—gains or losses—can be assessed, allowing for a clearer understanding of the actual position before setting the following schedule. This approach could allow for some of the gains to be used to benefit retirees.
Mrs. Kougias agreed with Mrs. Glaster, stating that it addresses Doug's issue and clarifies the trigger mechanism.
Mr. Howgate agreed with the consensus on capturing and sharing gains with retirees and supported tying it to the triennial schedule. He suggested this timing would be ideal since it aligns with proactive planning and decision-making. While recognizing that there are multiple ways to approach this, Mr. Howgate preferred the idea of aligning it with the triennial schedule, as suggested by Mrs. Glaster.
Mr. Keefe asked whether the group would consider setting a threshold for investment gains tied to the triennial schedule, similar to the double-digit analysis discussed earlier. The idea would be to determine a threshold that triggers sharing excess gains while ensuring the system remains healthy. Mr. Keefe sought confirmation that he was accurately summarizing the discussion.
Mr. Howgate suggested that capturing any gains achieved beyond expectations from the previous three years is important after completing a triennial schedule. He proposes that these excess gains should not be discretionary, and instead, the overage should be directly allocated to the intended purpose.
Mrs. Glaster asked what percentage of the gain should be allocated to retirees, whether 50/50, 80/20, or even 100%, given that they have received nothing for a long time.
Mr. Valeri recalled a proposal from a few years ago to establish a COLA reserve fund, where 30-33% of excess gains would be allocated to this fund. This percentage was chosen conservatively; the rationale for diverting excess gains to the fund was to provide a transparent trigger mechanism for the legislature to monitor and utilize for COLA-based increases, benefiting retirees and active employees. The Commonwealth would retain the remaining two-thirds, and one-third of this fund was invested and was profitable based on the Commonwealth’s annual statement. Mr. Valeri suggested that at least one-third of the excess gain from the investment should be shared with the beneficiaries and active employees to increase the COLA base.
Mr. Keefe suggested that Mr. Boorack revisit the discussion and run scenarios for the next meeting to explore how different gain thresholds would impact the costs, referencing the percentages of gains and costs presented earlier. Mr. Boorack agreed.
Mr. Keefe confirmed that for the next meeting, Mr. Boorack would prepare various scenarios, examining different percentages of gains over three years, comparing those with costs, and determining how the gains would be split between the members and the Commonwealth. The Commission members will then further discuss the information presented.
Mrs. Glaster suggested reviewing the last triennial schedule to determine if there was an overall investment gain and how much it represented. This review would help relate to Mr. Boorack’s analysis of the cost of base increases and supplemental COLAs. By looking at one-third of those gains, the Commission could see what could have been done instead of letting the gains roll into the following schedule. However, Mrs. Glaster acknowledged uncertainty about whether the next two years will perform as well as the previous period. Nonetheless, this review would provide insight into what could have been done had the Commission been in place.
Mrs. Glaster asked whether the deadline for submitting the Commission report had been extended. Mr. Keefe confirmed that the reporting deadline has not yet been extended. Chairman Gordon mentioned that he was working on it and that they could follow up with Rep. Ryan.
Mr. Keefe stated there was no update on the stabilization fund task force. Rep. Gordon checked its status, and the task force is reviewing the formula for how excess capital gains are distributed to the stabilization fund, OPEB, and the Commonwealth pension. Mr. Keefe suggested that this review might offer an opportunity to alter the formula to help fund a COLA increase, but there is nothing new to report.
Mr. Howgate suggested that, given the state's fiscal pressures and the potential increase in demand for windfall capital in the coming years, it may be wiser to look within the pension fund as a more stable source to support initiatives.
COLA Commission Draft Principles Presentation
Mr. Keefe summarized recent changes and introduced the next agenda item, discussing COLA Commission Draft principles. These principles were drafted for the Commission's review and included the following key points:
- The Massachusetts public retirement system is a co-dependent partnership between the citizens of the Commonwealth, their government, public employees, and Retirement Board members to responsibly fund, administer, and protect the system.
- While Massachusetts public pensions can provide larger benefits than Social Security, Massachusetts public pensions do not keep pace with inflation as well as Social Security because of the COLA base cap of $13,000 and the 3% annual limit, particularly in high inflationary periods.
- The longer one is retired, the greater the impact of inflation and the greater reduction in buying power of the pension.
- State and local retirees in Massachusetts spur economic output, generating $1.35 in economic activity for each $1 paid out in public pension benefits.
- The State and Teachers’ COLA bases have been increased once in 28 years and place them in the bottom 20% of the state’s 104 public retirement systems. Two systems have a lower base, 15 systems have the same, and 85 systems have a higher base.
- To increase COLAs to deflect inflationary impact is a desired and just course of action, but one that must be done in a fiscally responsible way for taxpayers, the government, and the health of the system and in a fair and equitable manner for retirees.
- Using a share of significant investment gains to fund increased COLAs would have the least impact on the general fund, state budget, and retirement system and would generally cover the cost.
Mr. Keefe then opened the floor for comments and discussion to guide the next steps.
Mrs. Glaster commented that the draft principles were well presented and summarized the group’s discussions.
Mrs. Kougias recommended revising number two by removing the beginning of a dependent clause and starting with "Massachusetts public pensions do not keep pace with inflation."
Mr. Keefe proposed that members send a revised version with suggested edits and holding a final vote at a future meeting.
Mr. Valeri suggested the number two on the “COLA base cap” using simpler language, such as explaining that the cola base cap results in a maximum annual benefit of $390, making it easier for the public to understand.
Mr. Kougias suggested keeping it as a draft without voting until all suggested changes are in.
Mr. Keefe clarified that the purpose of this initial presentation is to gather input and that a vote would only be considered at the next meeting if Commission members are comfortable with the draft after discussion and editing.
Logistical Issues
Mr. Keefe suggested coordinating the next meeting date using the Doodle tool. He provided availability options and sought input from Commission members. He also informed Commission members of the expiration of open meeting law waivers on March 31st. He noted that it is uncertain whether the waivers will be extended and that it will lead to whether the next meeting will be an in-person meeting.
Mrs. Glaster suggested hosting the next meeting at the MRTS, as it would be more convenient for members in Charlestown if the meeting were held in person.
Senator Brady suggested that meeting on the 7th would work better for him if it were convenient for everyone. That date was agreeable to many at the meeting. He also mentioned that they recently received their committee reassignments and have spoken briefly with Chairman Gordon. Mr. Brady also mentioned plans to meet with Chairman Ryan to ensure everyone stays informed. He noted that some proposals have been delayed until April 2nd on the federal level. While the state is doing well with its reserve, he acknowledged the uncertainty of future developments, particularly if proposals from Washington move forward.
Mr. Keefe concluded by stating that he would send out an invitation for the next meeting with the proposed April 7th date and would float a couple of other dates in the first two weeks of April.
Commission members expressed appreciation for Mr. Boorack’s presentation, and Mrs. Glaster motioned to adjourn the meeting. Mr. Valeri seconded the motion, and a roll call vote was taken:
Michael Brady YES, Erika Glaster YES, Doug Howgate YES, Bill Keefe YES, Kathryn Kougias YES, Amelia Marceau YES, Dan Ryan YES, Michael Trotsky NOT PRESENT (He left the meeting at 11:50 AM because he had another meeting scheduled at noon); Frank Valeri YES. The meeting was adjourned at 12:06 PM.
Special Cost of Living Adjustment (COLA) Commission Meeting Documents
ActurialUpdate_COLA 031025.pdf
COLA Commission minutes 02042025.pdf
COLA Commission DRAFT principles.pdf
Approved,
Bill Keefe, Chairman
| Date published: | April 24, 2025 |
|---|