Pensions to strain city, town finances

New infusions needed as funds lose value

Massachusetts cities and towns will probably face bigger payments into pension plans that cover their workers and retirees because of this year's stock market plunge, potentially forcing communities to cut spending on police, schools, and other services.

Local pension funds, which are heavily invested in financial markets, lost about 29 percent of their value through the end of November, mirroring declines in other public pension funds nationwide, according to an estimate by Robert Dennis of the Public Employee Retirement Administration Commission. The organization oversees the state's 106 public pension funds, which cover hundreds of thousands of people.

Barring a market recovery or increased aid from the state, officials warn, cities and towns will almost certainly have to make larger payments in the next few years to compensate for the decline in pension assets, using money earmarked for other spending.

"It's very serious, not just for pension funds, but for everyone," said Geoff Beckwith, director of the Massachusetts Municipal Association, which represents local towns. "It will force a cash crunch on cities and towns and create real havoc."

Unlike state and federal governments, the local communities have few ways to raise additional money without voter approval, partially because of Proposition 2 1/2, the state law limiting property tax increases. In addition, state lawmakers have already suggested they might reduce local aid to balance the budget.

Even before the market crashed, most commu nities didn't have enough money set aside for pensions. Of 106 public pension funds, only three were fully funded by Jan. 1 - meaning they had sufficient assets to meet obligations to current and future retirees - according to the latest figures available. Eighty-two systems were funded below 80 percent, the level pension specialists generally consider acceptable, and seven had less than 50 percent of the money needed.

While there is no indication that government pensions are in jeopardy, growing deficits mean municipalities will gradually have to shovel more money into their plans. Under state law, communities are required to make regular payments to fully fund pension plans by 2028.

"I don't know a retirement system in the Commonwealth that hasn't expressed concern," said Joseph Connarton, executive director of the state public retirement commission.

Indeed, some cities and towns were already attempting to cope with deficits nearly the size of their entire annual budgets.

For instance, the City of Everett, with a $125 million budget, reported a pension deficit of more than $100 million. As of Jan. 1, its pension plan was only 37 percent funded. Springfield's pension shortfall is $403 million, three-quarters of its annual budget, and the plan was less than 43 percent funded as of the beginning of the year.

Other systems with less than half the assets needed in their pension systems include Lynn, Chelsea, Lawrence, Webster, and New Bedford. Boston's pension fund was 64 percent funded as of January 2006.

"Looking forward to 2009, cities and towns should try to rein in spending and be prepared for another tough year," said state Treasurer Tim Cahill.

But communities won't immediately have to make higher pension payments. Typically, they recalibrate pension contributions every three years, using complex actuarial assumptions to figure out how much they will owe to current and future retirees. While some are scheduled to update figures next year, others won't run new calculations until 2011. And even communities that adjust their figures next year won't start making revised payments until 2010. In addition, pension systems commonly use accounting techniques to spread out losses and gains on their investments over several years, reducing the impact from one aberrant year.

"Public pension funds take a long-term view," said Keith Brainard, research director for the National Association of State Retirement Administrators. "They tend to measure investment returns over decades, not quarters or years."

To allow cities and towns more breathing room, the Massachusetts Municipal Association plans to push for legislation to extend by several years the 2028 funding deadline.

"It would give pension funds more time to have the assets recover some of their lost value due to the wild swings on Wall Street," said Beckwith, the municipal group's director. "Holding fast to the 2028 date could cause massive cash flow problems for cities and towns and cause unacceptable cuts in essential services."

The Legislature set the deadline in 1987, when many Massachusetts pension funds were underfunded. Under the law, local pension systems are required to periodically measure how well they are funded and devise a schedule of regular payments to close any deficits.

Governor Deval Patrick's administration has not decided whether to extend the deadline for local funds, though it already done so for the state employees and teachers systems by two years, from 2023 to 2025.

Some local and state officials say an extension could potentially increase the amount of money municipalities will ultimately have to pay. Private companies are dealing with similar pension funding problems. Some have reduced benefits or dropped plans altogether.

"The longer we delay the funding, the worse it becomes," said Springfield auditor Mark Ianello, who chairs that city's retirement board. "You have to bite the bullet at some point and stick to the funding schedule. Each day that we delay funding, it costs more down the road."

Like many municipalities, Springfield already is grappling with a huge bill to make up for past underfunding of its pension plan. Next year, the city is supposed to make a contribution of more than $34 million to its plan. If it had been fully funding the plan all along, the city would owe only $3.9 million.

Everett has been forced to make up for its pension plan deficit by using money that could have gone toward a new fire station, sidewalks, or other services. It is scheduled to make a $10.5 million payment into its plan in 2009.

"There are so many other things I could do with" the money, said Everett Mayor Carlo DeMaria Jr., who took office this year. "Predecessors of mine just put in the minimum amount, not realizing the impact" of a shortfall over the long term, he said.

Now officials in Springfield, Everett, and other communities worry that pension bills could climb even higher after they close the books on 2008 in a few weeks.

Connarton, who runs the state's public retirement commission, said unless the markets turn around, most communities will undoubtedly need to contribute more to their pension plans in coming years. And it's one expense communities can't skip.

"There's no way around it," Connarton said. "You have to pay pension costs."

Todd Wallack can be reached at twallack@globe.com.