Town explores options with it’s under-funded pension liability
Published on August 1st, 2001
STONEHAM, MA - Stoneham officials are considering issuing a bond to reduce the unfunded town pension liability.
Stoneham’s unfunded pension liability rose $5 million between January 1999 and January 2001.
“Carrying this debt is like extending a home mortgage,” said Elsie Wallace, Administrator of the Stoneham Retirement Board. As the liability drags on Stoneham has to pay more and more interest.
How and when Stoneham resolves this liability may affect the quality of life for all residents. The subcommittee looking into several options includes Selectmen Mary Pecoraro and Tony Kennedy, Finance Board Chairman Richard Gregorio, Acting Town Administrator and Retirement Board member Ron Florino and Wallace.
The subcommittee will present its findings at the Aug. 14 Selectmen’s meeting, Florino said.
Pension history
In 1937 the Stoneham Retirement Board was formed under the authority of Mass General Laws Chapter 32. Chapter 32 told communities where they could invest their money. This “legal list” as it was known included mostly bank stocks and railroad bonds.
Stoneham, like most communities, operated its pension system on the cash accounting “pay as you go” model: returns from year x were used to pay retirees from year x.
Big change came in the 1980s. In 1983 communities were no longer limited to the “legal list.” At this time Stoneham carried a $5 million unfunded pension liability. In 1988 the state amended Chapter 32, requiring communities to fund their pension liability within 40 years.
To be fully funded the town would have to possess enough cash to pay the full retirement benefits earned by all employees. So if the town were to go bankrupt, everyone working and retired would still get back everything they earned by contributing to the system over the years.
Stoneham decided to try to get the job done in half the time, setting up a schedule to reach full funding in 2016. According to the plan endorsed by Town Meeting in 1991, the last amortization payment would be made to the pension account in 2015.
Becoming fully funded wasn’t easy because of new state mandates as well as past local practices. Stoneham was a “pay as you go” community, and debt had been accumulating for years. But communities like Stoneham were stung by a series of changes made at the state level over the past 20 years.
The Public Employees Pension Reform Act of 1988 created an early retirement option and the option to work past age 70 and removed the $30,000 cap on annual pensions.
In 1979 the state began reimbursing local communities for cost of living adjustments, but in 1997, this burden was shifted back to the towns.
The rise and fall of the stock market adds another wily variable. The state run Pension Reserves Investment Trust (PRIT) Fund, which Stoneham voluntarily joined last year, assumes an eight percent return on its investments. From June 1 to Dec. 31 of 2000, the return was negative two and a tenth percent.
An incentive to join PRIT was the promise of an annual payment from the state to help with unfunded pension liability, but no payments have come to Stoneham, Wallace said. She has written a letter to Governor Jane Swift.
Today’s worries
As of Jan. 1, 2001, Stoneham’s unfunded pension liability was $20,275,220.
The town annually appropriates $2.4 million to amortize unfunded pension liability. But because of the down market, the town will have to come up with another $600,000 in 2003 to stay on schedule, Florino predicts.
“If this gets bad enough, it could lead to layoffs,” Florino said.
Carrying debt also affects the town’s bond rating, meaning the rates Stoneham can get when borrowing to build new schools, for example.
Solutions
“We could appropriate more money, but where would it come from?” Gregorio asked.
Other options are changing the schedule of payments or issuing pension obligation bonds.
Altering the schedule would delay the inevitable; the liability must be erased by 2028. But sometimes, depending on interest rates, delaying payments makes sense.
The bond option has some exciting pros and scary cons. If the town can sell tax free bonds at around six percent, as explained to town officials recently by Pricewaterhouse Coopers actuary Dan Sherman, and realize the eight percent from PRIT, which Florino calls a conservative estimate, then the town can grab hold of some cash — as much as $20 million — quickly and make money on the deal.
But Town Meeting and the State Legislature must approve issuance a bond. Plus the town wants to research the financial details further before taking action. This all takes time. If interest rates rise, no one may want to buy the bond when and if the town issues it. Or if the market remains sluggish, returns from pension fund investments may not climb back to eight percent. This would result in an even deeper debt hole.
Gregorio is kicking around a hybrid, “don’t put your eggs in one basket” solution.
In Massachusetts, only Worcester has tried the bond solution. It worked for them.
“I think to get permission from Town Meeting to ask the state if we can issue a bond, to get the option, is the right first step,” said Retirement Board member Bill Abbott.
The subcommittee will speak to Selectmen and the townspeople about unfunded pension liability at the Aug. 14 Selectmen’s meeting.
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