Today’s Fig City News features an article by Amy Sangiolo that discusses the various issues around pension funding this year, now that the operating override has been voted down.
What do you think? Are we currently paying too much, too little, or just about right into the fund that finances future committed pension spending?
I think we need more information on what impact rising interest rates have on the pace of required contributions. Presumably, higher interest rates mean a higher expected return on fixed income investments, which means we may not need to make as many contributions as previously thought to meet the burden.
Also yes – we should be funding these pensions at the absolute minimum amount to fulfill whatever obligations we are required to meet under law.
@Tim –
Wouldn’t that just be more kicking the pension can down the road with the inevitable result that the impact will be that much worse a few years from now.
As I understand it, the pension is on track to be fully funded by 2030 vs. the 2040 required by law. In the abstract, sure, it would be great to fully fund it ASAP. But at what cost? We have a hole in the NPS budget, so fully funding the pensions early literally means firing teachers and increasing class sizes – which in turn could impair the quality of NPS, decrease demand for housing in Newton, decrease the property tax base, make it harder to ultimately fund the pensions fully, etc. etc. Downward spiral.
I don’t pretend to be an expert or completely understand all of this but ….
As I do understand it, we have a very big bill that will come due in the years ahead to pay for “unfunded liabilities” – i.e. pensions and medical care that have been guaranteed to current and former employees.
If we do nothing, the proportion of our tax dollars that go towards these OPEB obligations will grow year by year and eventually become unsustainable, with bigger and bigger holes in the budget every year. This pre-funding now,before the yearly bill swells horribly is an effort to get ahead of that curve. After pensions we still have an even bigger future hole due to similar future health care costs.
My concern is that backing off now on the fiscally prudent effort to get those future OBEP bills under control will inevitably lead to all the same things you just mentioned (“firing teachers and increasing class sizes – which in turn could impair the quality of NPS, decrease demand for housing in Newton, decrease the property tax base”) but much worse in a few years.
That said … I’d be delighted if someone who does understand these issues in great detail would weigh in here because as I’m the first to admit, I’m out of my depth when it comes to these issues.
@Jerry – very simply, I think of it like saving for college. Suppose a child is born today and you want to start saving. Option 1 – you save until 2030, and then count on investment returns to carry you to your savings goal in 2040. Option 2 – you save every year until 2040.
If you do a bit of quick math – assume a $100,000 target and a 7% rate of return – under Option 1, you would need to save $5,000 a year from now until 2030. Under Option 2, you need to save $3,000 a year from now until 2040. So in Option 1, you’re out of pocket $40,000 – investment returns do the rest. Under Option 2 – you’re out of pocket about $50,000.
So yes, in the long-run, Option 1 saves you money, because more money saved earlier can benefit from higher investment returns. But in the more immediate term, Option 2 saves you money – about $2,000 a year less, which you can use to pay your current bills.
This is a gross oversimplification, but I hope this makes the general point. I think the problem with swelling obligations etc. is when pension plans are under-funded (i.e., they are not saving enough yearly to get to that end target), and the future obligation gets larger and larger because of this under-funding. I don’t think that’s what we’re talking about here – we will make sure the plan is funded (required by law), but we can take a longer path to doing so.
Tim: Except I had thought the reason why pensions were being fully funded by 2030 is so we could focus on health care costs in the following years. And if the situation changes (like due to inflation or a bank crisis) you’ve created a bubble of needed revenue in the outer years…
I’ve never figured out how net-present-value or rate-of-return calculations should be weighed when you know that your income is only going to increase by 2.5% annually.
Does the standard/simplified math still hold?
/just a personal thought.
Jerry – You are correct that we have a big bill as we pay for the sins of the past when Newton did not do enough to address this liability. The burden of the years of underfunding and setting up Newton for future fiscal success has been borne by the citizens for the last decade. Thankfully, the City has done a commendable job righting the ship, and much of the credit goes to then Alderman / now Mayor Fuller. All that said, if we continue on our current path to achieve full funding by 2030, which requires the rate of growth of pension funding to be 2.7x the City’s rate of growth, there may be consequences the citizens of Newton will not be willing to bear.
Using the City’s assumptions as of 1/1/22 (the most recently available figures), pension funding will consume an incremental 4.4% of the City’s budget between now and the fully funded date in 2030 – that is an effective 4.4% cut (“crowding out” if you prefer) to the City budget. Where will that come from? 28 cents of every dollar of growth in the City budget until 2030 is forecast to be dedicated to pension funding.
The rate of growth of funding – not a cut in funding, just slower growth – has to be a consideration for the City to continue to meet the needs of its citizens. As an example, if we increased pension funding annually at 3.5% (vs current 9.6%) to match the assumed rate of growth of the City budget, we would free up $90mm of cash between now and 2030 for City services. The operating override would have generated $57mm of revenue over that same time period. The fully-funded date would be extended to 2032 from our current forecast of 2030, still far ahead of the 2040 statutory full funding date.
This is not fiscally irresponsible. There is no pensioner who would be impacted by this. Yes, it would shift some burden to future residents of Newton, but far less than the burden that has been placed on the current residents of Newton. We simply forgo the assumed investment returns on those dollars that are not invested relative to the current City plan. We can meet our obligations to our retirees and still provide the services that the citizens of Newton expect.