Town On Track To Meet Pension Obligation

Regional pension system moving to fully fund obligations over next couple of decades. Lynnfield currently has $18 million in unfunded pension obligations. One possibility may involve borrowing to take care of it early.

Earlier this week at town meeting, one topic that came up for discussion at one point was the town's unfunded pension obligations - which currently amount to about $18 million.

Lynnfield's non-school personnel (school personnel are part of the state system) contribute to the Essex Regional Retirement System (ERRS), which oversees pensions for 19 towns and numerous other entities in Massachusetts. On Monday night, Gustus, with help from ERRS Executive Director (and Lynnfield town meeting voter) Joe Maney, explained that a funding schedule is now in place that calls for fully funding the system's pension obligations by 2035 (assuming at least an annual 8.25% rate of return).

According to the ERRS website, its system-wide unfunded actuarial accrued liability as of January 1, 2011 was $257,783,530, with a total actuarial value of assets standing at $278,332,006. Much of this problem nationwide stems from the beginning of the recession in 2008, when pension funds were hit hard by falling stock and investment values.

In fiscal year 2013, Lynnfield will spend about $1.72 million on pension contributions, a 9.6% ($150,173)  increase over last year. Under the regional funding plan, about half of the town's pension budget goes to the unfunded portion. Between now and 2020, contributions to the unfunded portion will continue to grow at an annual rate of about 8%, before dropping down to 7% and eventually to 4% in later years.

"It is a significant expense and it's growing, but it's not nearly as significant as the cost of healthcare," said Gustus. Last year, the town was able to rein in its employee healthcare costs by making a deal with its unions to join the state's insurance plan. However, Gustus noted that while that healthcare deal made some good fiscal inroads for the town, "all we did was turn the clock back, and now it's going to start moving in the other direction again."

Still, he added that the town is in a "pretty good position for the next five years," but "after that all bets are off." One concern is that even with new funds from the Market Street at Lynnfield project coming in, the town still needs to find ways to grow its tax base or otherwise change its costs.

With fairly substantial pension obligations to fund for the foreseeable future, Gustus also raised the possibility that the town could seek to fully fund its $18 million pension obligation in one single borrowing action. This could potentially allow the town to save significantly assuming a favorable borrowing rate, while also avoiding the need to make increasing payments to the regional system for the rest of the decade and beyond.

At the state level, Gustus noted that Massachusetts is actually in much better shape than some other states that are only doing a "pay as you go" situation without doing much planning for their longer-term pension needs. "At least ours are starting to go down," he said, adding that in about 15 years or so, "we should be out of the woods." Much further down the road, reforms such as a higher retirement age and higher contributions for new employees will aim to maintain stability in the system once it is fully funded again.


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