Tipping the balance

Lynn has an unfunded pension liability of $257 million, the largest of any Massachusetts community north of Boston. And its annual pension contribution next year is due to increase by $1.5 million on July 1 to $23.5 million, according to the state’s Public Employee Retirement Administration Commission, which oversees 106 public pension systems.

“It’s a big number that has to be paid,’’ said Richard Fortucci, Lynn’s chief financial officer. “It’s getting to a point where it could hurt other areas of our budget.’’

Investment losses have meant higher pension costs for cities and towns. Funds in the area lost at least 20 percent of their value in 2008, according to state data. Although Wall Street is recovering somewhat, the 2009 gains might not be enough to offset the pension pinch on local budgets. “It’s not all rosy,’’ said Saugus Town Manager Andrew R. Bisignani. “The jury is still out as to how well [the stock market] will do.’’

Local leaders are banking on help from a pension-overhaul effort on Beacon Hill. Governor Deval Patrick has filed a bill that would give local pension systems until 2040 to pay off unfunded pension liability. State law now has a deadline of 2030.

The bill, separate from a bill Patrick filed last week to improve the state pension system, aims to help prevent local systems from being hit with huge increases in pension costs because of market losses.

“It’s not feasible for a system to absorb a 30 percent increase in its appropriation,’’ said James Lamenzo, an actuary for the Public Employee Retirement Administration Commission. “What we have proposed, by extending the payment schedule. . . . If we are not allowed to go beyond 2030, we’re going to have big problems.’’

Under Patrick’s bill, a retirement system would require that any future gains be used to shorten a payment schedule, not reduce annual payments, a state spokeswoman said.

“When the market comes back, and their assets come back, local pension funds will be in a better position to meet their obligation,’’ said Cyndi Roy, spokeswoman for the state Executive Office for Administration and Finance. “The governor recognizes there is a need to give additional tools to help manage pension liability.’’

Pension funds get money from investment income, worker contributions, and tax dollars.

But for decades, communities did not set aside enough money to pay for future retirement costs. Since 1988, the state has required communities to make scheduled payments, with a goal of paying down the debt. A system is considered fully funded when it has enough money to pay for benefits if every employee retired at once.

The original payoff deadline was 2028, extended to 2030 last year as the economy worsened. Still, communities have been hit by cuts to state local aid and lower tax revenues, and some fear the pension burden will only further strain local budgets unless the payoff deadline is extended.

“It’s like a ticking time bomb waiting to go off,’’ said Andy Bagley, research director at the Massachusetts Taxpayers Foundation, a nonprofit fiscal watchdog group. “When cities and towns see payments go up 50 percent, when local aid is cut, it’s a pretty tough time to find another five, six or seven million dollars.’’

Local leaders agree the pension tension is growing. “It’s a real budget-buster, ’’ said Methuen Mayor William Manzi. “It’s a fixed cost, just like health insurance. . . . Add those two 800-pound gorillas together, and you get a one-two knockout punch.’’

Methuen’s pension costs increased $600,000 this year, to $6.6 million. Manzi will tap a reserve fund to pay most of the increase, after the City Council voted last month not to pay the hike by increasing property taxes. Methuen’s pension costs are due to increase $700,000 next year, according to state data.

Manzi favors extending the funding deadline to 2040, even though it will likely mean added costs. “It’s not the best fiscal policy,’’ he said. “But it ought to be extended, because if you don’t stretch it out somewhat, than then these payments are just going to crush municipal budgets.’’

In 2008, Lynn was one of several communities that was told it had to invest retirement assets with the state Pension Reserves Investment Trust Fund. A local retirement system whose returns over a 10-year period do not come within 2 percentage points of the state fund must transfer its assets to the state.

But in 2008, the state fund lost 29.5 percent of its value, leaving Lynn and other communities with higher costs. “It’s ironic that we had to put our money into the system and then, boom, the market crashed,’’ said Gary Brenner, administrator of the Lynn Retirement Board. The PRIT fund had a 17.69 percent gain in 2009, state data showed.

Lynn was facing a $2.7 million increase for next year, until the state agreed in November to lower the amount to $1.5 million. The remainder of the increase will be spread out over the next three years, Brenner said.

Even retirement systems that have historically performed well have had to adjust. In Danvers, the town was on track to pay its $51.54 million by 2024. But after its investment portfolio took a 27 percent hit in 2008, the board voted last month to extend its payment schedule to 2028, trimming its payment by $1 million, to $5 million, for next year, said Leonard Marshall, the town accountant and chairman of the Danvers Retirement Board.

“It’s made things more tolerable,’’ he said. “If a system didn’t do that, you’d take a bigger hit. That is very difficult when everyone is trying to balance dollars and there are fewer dollars to balance.’’

Kathy McCabe can be reached at kmccabe@globe.com.