Andover Townsman, Andover, MA

September 20, 2012

Column: Underfunded pensions are quarter-billon-dollar secret

Greg Rigby
The Andover Townsman

---- — For decades the town managers and selectmen have written blank checks for the employee retirement benefits they negotiate in contracts.

Retirement benefits are tied to employee wages and over time, as wages increase, the benefits increase through cost of living allowances, promotions, longevity increases, and additional education achievements. The town manager and selectmen have decided that rather than pay for all the retirement benefits when they are earned to postpone paying for more than half of them until they are due, essentially shifting today’s benefit burden to future taxpayers. This process is called PayGo.

This, of course, means the future liability or debt gets larger every year, but it also means more money is available in the current year to fund new projects like a youth center, a new town yard, or a boathouse on the Merrimack. It’s an easy choice until the benefits have to be paid in a future years. As long as the taxpayers don’t notice the growing debt it’s not a problem until the employees want their benefits paid.

This is similar to paying only half of your monthly mortgage payment and spending the “savings” on an annual Disney World vacation. It’s an easy decision with the kids, and much more fun, but your mortgage grows larger each year. As long as the bank doesn’t notice the growing mortgage balance it’s not a problem until they want their money.

Until recently towns did not report these growing liabilities ANYWHERE. They weren’t “required” to report them, so even though they were real and they existed the thought process was, why upset the taxpayer?

The problem with my analogy, is that unlike taxpayers who get information on town financials at the discretion of the town management and the politicians, banks actually know if you’re not paying your full mortgage every month.

When the stock and real estate markets were flying high in the wild 1980s and ‘90s this approach appeared to work pretty well. Investment returns offset a good portion of the shortfall in funding. However, in spite of these market trends Andover and other towns were building large deficits in future benefits. At its best, Andover reached a high of 80 percent funding of the pension money only in one year (which by the way is the minimum for private sector funding – under 80 percent, the pensions are considered at risk).

Then came the market collapses of the last decade and no longer did the town have a bottomless pit of revenues, yet the retirement debts continued to grow. The town manager and selectmen, assumed the position of a flock of ostriches and buried their heads in the sand content in believing the markets would recover and solve the problem. These debts, after all, were not “on the books.”

By 2009 the town could no longer ignore the retirement debt they had accumulated and the regulators were requiring full disclosure of the future benefit liability. When the town leaders took their heads out of the sand in 2009 they owed nearly $300 million in “unfunded retirement liabilities” or debts. As one selectman said in the fall of 2011 at the mid year revue, “I can’t get my hands around this OPEB liability…where did this come from?” The answer was simple, over the years the selectmen promised it in contracts never understanding what the future liability would become, but never asking that question either. Each year they kicked the can down the road adding a few stones to the can.

Today the can is heavy with stones and it hurts to kick it any further.

So, Mr. and Mrs. Taxpayer, which solution will the town leaders choose? Will they negotiate lower benefits by going up against the unions in town and the union-supported state legislature? Will they begin to pay the full benefit expense each year, at a cost of more than an additional $9 million in 2011 and more in each subsequent year and reduce town services accordingly? Will they assess each property in the town to cover the full benefit expense, requiring a more than 20 percent increase in the average tax bill? I suspect, if history is any indication, they will continue to propose new pet projects and go back to imitating a flock of ostriches while the debt grows by a few more million each year.

This fall I will be submitting a series of columns on these unfunded liabilities to show why municipal employees and taxpayers should be concerned about the under-funded pension plan. It is a potential time bomb that could easily devalue Andover real estate in one single act.

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Andover resident Greg Rigby is anindependent investment advisor and past member of the Andover FinanceCommittee.