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Massachusetts Association of School Business Officials

Massachusetts Association of School Business Officials. Michael J. Widmer President Massachusetts Taxpayers Foundation February 7, 2013. State Finances. Slow Recovery in State Tax Revenues Since Recession. 2.9%. 1.8%. 3.9%. 10.4%.

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Massachusetts Association of School Business Officials

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  1. Massachusetts Association of School Business Officials Michael J. Widmer President Massachusetts Taxpayers Foundation February 7, 2013

  2. State Finances

  3. Slow Recovery in State Tax Revenues Since Recession 2.9% 1.8% 3.9% 10.4%

  4. Administration Lowers FY 13 Revenue Forecast by $515 Million* * In addition, $25 million of one-time tax settlements in excess of $10 million must be deposited into the stabilization fund, bringing the shortfall to $540 million

  5. FY 13 Budget Now Depends on ~ $900 Million in One-Time Funds

  6. FY 14 Budget Gap of $1.3 Billion * Updated using FY 14 consensus revenue estimate Source: Mass Budget and Policy Center, A Preview of the Fiscal Year 2014 Budget, January 2013

  7. Governor’s Tax Reform Proposal

  8. In Addition to the Tax Increase, Governor’s Budget Relies on Nearly $1 Billion in One-Time Funds

  9. Large Draws From Stabilization Fund to Support FY 13 and 14

  10. Governor’s FY 14 Budget Grows by $2.7 Billion or 7.5 Percent

  11. Projection of Slow Growth in Tax Revenues over Next Decade

  12. Addressing the Costs of Employee Benefits

  13. Summary of Municipal Health Reform Law • The municipal health reform legislation that was signed into law in July 2011 allows municipalities, by vote of selectmen or city council, to adjust plan design or join the GIC with limited negotiations. • For those municipalities that vote to adopt the law, it establishes a process for health care negotiations: • First, a municipality proposes specific plan changes and the savings from those changes. Municipalities and the public employee committee enter a 30-day negotiation period. • If no agreement is reached, a three-person panel has 10 days to: • confirm that the proposed co-pays, deductibles, and other plan design changes do not exceed those in the highest enrolled GIC plan, • confirm that the municipality’s savings estimate is accurate, and • approve a mitigation plan that shares up to 25 percent of year one savings with employees/retirees. • The law also requires all eligible retirees to enroll in Medicare.

  14. Municipal Health Reform a Huge Success • More than 200 municipalities and regional school districts have adopted modest changes in health plans to achieve savings of $205 million in the first year, double the initial savings estimate. • Using the process set out in the reform law, 81 municipalities and regional school districts have negotiated nearly $70 million in first-year savings, with approximately half of that being shared with employees. • More than 120 additional municipalities and school districts have negotiated $137 million in savings through traditional collective bargaining since reform was first proposed in January 2011.

  15. 2011 Pension Reform Will Save $5 B for State and Municipalities • The pension reform law, signed in November 2011, will save approximately $3 billion for the state and $2 billionfor municipalities over 30 years. • Reforms, which affect only new hires, would: • Raise minimum retirement age from 55 to 60 and full retirement age from 65 to 67 for most employees. • Lengthen the period for calculating benefits from three years to five years. • Reduce incentive to retire early by adjusting the benefit scale to mirror Social Security’s benefit neutrality. • Other small changes, such as anti-spiking measures. • Pension reform was key to S & P’s upgrade of the state’s credit rating from AA to AA+ to offset the state’s decision to extend its pension funding schedule.

  16. Legislation Also Included Two Key Enhancements • For state and teachers, the base on which annual cost-of-living adjustments are calculated ( “COLA base”) was increased from $12,000 to $13,000, costing the state roughly $1.5 billion. The increase applies to current retirees, active employees, and new hires • Municipalities were excluded from the COLA base increase because 2010 legislation gave them the local option to increase it up to $16,000. • For new hires, pension contributions will be reduced after 30 years of service: • From 9 percent, plus 11 percent of any salary over $30,000, to 6 percent of entire salary for Group 1 employees. • From 11 percent of salary to 8 percent for teachers.

  17. Despite Progress, HugeChallenges Remain • Even with the success of municipal health reform and changes in the pension system, the state and municipalities still face enormous burdens in the form of employee and retiree benefits.

  18. The Burden of Funding Pensions • In the fiscal 2012 budget, the state extended, from 2025 to 2040, the time to eliminate its unfunded pension liability. Although this will reduce the rate of growth of annual contributions in the near term, over 30 years it will cost taxpayers $30 billion in foregone interest. • With 94 of the state’s 99 local and regional pension systems funded below 80 percent (including 23 that are less than 50 percent), 41 systems have extended their schedules beyond 2030. • Nevertheless, cities and towns had to increase pension contributions by 7.6 percent in fiscal 2012, almost three times their 2.7 percent revenue growth, to tackle more than $13 billion in unfunded pension liabilities.

  19. Investment Return Assumptions Pose an Added Risk • The state and most local systems assume an 8 percent annual rate of return. • Most experts consider it unlikely that pension plans will achieve the same level of returns over the next 25 years that they did during the last 25 years. • The employer, not the employee, bears this risk. • According to the Pew Center on the States, earnings of 5.2 percent would add $26 billion, or more than 40 percent, to the state’s liability. 1 1. Pew used the 5.2 percent rate according to the Financial Standards Accounting Board guidelines for private plans. The estimate is based on the Commonwealth’s 1/1/2010 actuarial valuation for the state and teachers plans.

  20. Retiree Health Care Liabilities Dwarf Pension Liabilities • Statewide, municipalities face a total of approximately $30 billion in unfunded liabilities for retiree health care, more than twice the $13.1 billion in unfunded local pension liabilities. • This is what these governments must pay in today’s dollars for the lifetime health care benefits already earned by current employees and retirees. • In addition, the state has an unfunded liability of approximately $16 billion for retiree health care.

  21. OPEB Commission Report Marks First Step Towards Reform • As a part of the 2011 pension reform, the state created a retiree health care commission to address the issue. • The state OPEB Commission released its report on January 11. It was endorsed by the Governor who announced plans to file reform legislation. • If implemented, the reforms would reduce municipal liabilities by approximately $5 billion, from $30 billion to $25 billion. • This is an important first step, but only the most affluent communities will be able to afford retiree health care benefits without additional reforms.

  22. Reforms Target Eligibility • Key Commission recommendations: • Change eligibility for most employees from age 55 with 10 years of service to age 60 with 20 years of service. • Pro-rate benefits based on years of service, starting at 50 percent of premium for those with 20 years of service up to the maximum benefit at 30 years of service. • To be eligible for retiree health care benefits, part-time employees must work the equivalent of 20 years of full-time service.

  23. Recommendation Strips Municipalities of Critical Power • Under existing law, municipalities are free to adjust their share of premium contributions for retirees, but not below 50 percent. However, the Commission recommends that municipalities be permanently prohibited from lowering contribution rates after an employee retires. • This is intended to protect future retirees, but they already receive strong protections under other recommendations: • Place a three-year moratorium on reducing municipal contribution rates for all current and future retirees. • Exempt from the reforms all current retirees, employees within five years of retirement age with 20 years of service, and employees within five years of Medicare eligibility with nine years of service. • Require municipalities to contribute at least 50% for surviving spouses. • Allow members of the teachers’ Retirement Plus program, including those at the start of their careers, to be eligible for full benefits at age 57.

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