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