March 2, 2010
The economic downturn also shares blame for the state pension system's current actuarial shortfalls. The state's 106 local retirement boards assume annual investment returns of 7.75 to 8.5 percent when planning benefits schedules. Many pension funds lost as much as 25 to 30 percent of their value, however, following the financial collapse of 2008, PERAC investment director Robert A. Dennis noted in a newsletter last December. To make matters worse, the full impact of the 2008 downturn may not have even shown up yet in actuarial valuations because state officials use an actuarial practice called "smoothing" to average market values over five years in order to avoid high sensitivity to gains and losses.
In addition, decades of political maneuvering by state officials have led to ballooning benefits and mounting costs among other groups of state workers. Last March, the Boston Globe reported that 106 former state employees or their survivors earned annual pension benefits of $100,000 or more from the state, a group that tripled in size over the previous five years. Some of these big-benefit retirees took advantage of the state's benefit calculation formula, which calculates benefits from the average of an employee's highest three years of earnings. Most of the highest earners were retired doctors, state police officers, or university professors and administrators. Topping the list was University of Massachusetts Medical School doctor Arthur M. Pappas, who had earned a pension of $230,000 since retiring a decade before. His colleague Aldo Rossini and former University of Massachusetts president and onetime state senate president William Bulger were close behind at about $200,000 apiece.
There are also instances of kickbacks and "double dipping" by Beacon Hill legislators and other officials, detailed by the Globe in a special series of articles in 2008 and early 2009. Among the alleged abusers were 10 former state senators and representatives who earned early retirement benefits immediately after losing elections or failing to qualify for ballots and several former legislators who collected pensions while continuing to work for the state in other positions. These abuses were the main focus of a reform bill passed in 2009.
Retiring the issue
Because the Massachusetts state pension system depends so heavily on invested assets to make up the difference between employee contributions and annual costs, its financial situation largely tracks the market.The system's $22.1 billion in total unfunded actuarial liabilities last year in the wake of the market collapse were the largest of the decade. Its $4.8 billion in total unfunded actuarial liabilities during the pre-9/11 market highs of 2000, on the other hand, were the smallest in 20 years.
The good news is that state pension funds are doing better as markets recover. Managers of the Pension Reform Investment Trust (PRIT), the statewide investment fund that serves state employees and teachers as well as many local retirement boards, announced in December that its assets increased 18 percent in 2009, to $42.3 billion. The fund could gain even more if markets continue their resurgence this year.
Barring some market miracle, however, investments alone are unlikely to close the gap between assets and liabilities. The state must take some combination of three actions to restore its pension system to solvency: cut benefits, raise contributions or increase system efficiency.
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