STATE HOUSE, BOSTON, AUG. 3, 2009…..As they delved into the intricacies of the pension system Monday, a special commission charged with recommending reforms to the way Massachusetts funds retiree benefits hit a snag on a broader issue: should their proposals come at no cost?
To some, including chairwoman Alicia Munnell, a “cost-neutral” proposal is necessary, but Rep. Robert Spellane (D-Worcester) said that if changes to the system come with a cost, it may be a cost worth bearing. Spellane co-chairs the committee in the Legislature that reviews pension system bills.
“The fact of the matter is, changing the system may not be cost neutral,” Spellane said during a commission meeting in the Ashburton Place office of the comptroller. “I understand legislatively or politically we may not be able to do that over the course of the next session … If it’s determined by the commission that we need to make some changes … and it costs money, it’s not a problem, it’s just a question of when [legislators] move forward.”
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Lawmakers have promoted the commission’s eventual work product as representing the second phase of pension system reform. The first phase weeded out longstanding loopholes that critics say allowed individuals to unfairly fatten their pensions. While some in the Legislature have expressed hope that a second round of reform will lead to larger savings, the commission’s legal directive requires an actuarial analysis of recommendations but does not require the commission to seek cost savings.
Acknowledging that legislative leaders had asked for a bill to be ready by the fall, Spellane told the News Service after the meeting that not every one of the commission’s recommendation would have to be included in such a bill. Some, he said, would likely require a stronger economy to be fiscally and politically palatable.
“Cost neutral” is not enough; any recommendations should present real cost savings for the Commonwealth. Pensions should be based on a strict formula inputting the average salary for all years necessary to vest at a given step. E.g., if you’re seeking benefits based on 25 years of service, your pension will be based on your top 25 years’ salary. Job classifications should be streamlined, if not abolished, and any future changes could only be made by the pension board — i.e., not through some last minute budget amendment from the likes of Rep. Spellane. These changes should apply to all current workers, perhaps exempting people within five years of retirement.
I await comments from the usual suspects who will inform us that basing the pension of Town Moderators and Library Board Members on average salaries (rather than their future top-three-years in a b.s. Massport job) would be an injustice and a violation of the sanctity of contract.
what happens if some long-term cost savings require short-term cost increases? Examples include buyouts, etc.
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p>P.S. Don’t violate pre-existing contracts. That ain’t cool. But, don’t get hung up on it either… fixing the contracts-yet-to-be-signed will result in savings worth grabbing, and I don’t know the actuarial or legal details, but I wonder if pension changes could be pro-rated based on how close the person is to his or her retirement requirements.
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p>P.P.S. Top three years is nonsense. Simply increasing that top top five or top seven might not have a tremendous pension savings, but it would help eliminate turnstile leadership at the top of all kinds of organizations
Whether these changes would “violate” an existing contract is by no means clear. See McGrath v. R.I. Retirement Board, 88 F.3d 12 (1st Cir. 1996) In that case, RI ended the practice of employees being able to “buy” credit for time in military service (because, as here, the system was seen as overly generous and rife with abuse). A current employee months away from vesting with purchased credits sued, and the First Circuit upheld the ability of the state to make this change. The opinion stated the general rule that “once an employee fulfills the service requirements entitling him or her to retirement benefits under a pension plan, the employee acquires a contractual right to those benefits, and the employer cannot abridge that right despite its aboriginal reservation of a power to effect unilateral amendments or to terminate the plan outright.” Therefore, until an employee has vested rights (in Mass, I believe 10 years), changes can be made.
But even after vesting, changes are possible — only changes which impair the “central undertaking” of the contract constitute a breach; impairment must be “substantial”; an employee’s reliance on the provision must be reasonable; the pension rules will be viewed collectively as a “unitary agreement” rather than a series of individual agreements.
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p>Saying that a shift from top-three-years to top-seven or total-average would somehow substantially impair employee’s pension rights or would somehow upset the employee’s core expectations is a pretty untenable assertion, especially if you exempt people right on the verge of retirement.
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p>Bottom line: changes can be made for current employees — certainly those prior to vesting, but also those who have vested rights.
It’s call a defined contribution plan. Implement it.