Residents and community leaders are looking for ways to fill the budget gap that the passage of Question 1 (Requesting an Operating Override) would have filled, and one avenue being explored is adjusting the rate of the City’s funding of its pension liability. The City’s long-term pension and retiree health insurance obligations currently exceed $1 billion. The City’s Contributory Retirement Plan covers more than 3,500 current active employees, inactive participants, and retired employees and beneficiaries.
(The Contributory Retirement Plan does not cover Newton teachers. Newton teachers are part of the Massachusetts Teachers Retirement System. However, other school employees such as principals, secretaries, aides, and custodians are part of the City’s pension plan. According to the Mayor’s FY2024 – FY2028 Long Range Financial Plan and 5-Year Forecast, these other school employees account for 20% of the unfunded liability, or 42% of active employees covered by the City’s pension plan.)
In 2015, Mayor Fuller, then Alderman Fuller, led a group of Newton residents to create a Primer on Retiree Benefits to help the Board of Aldermen understand the importance of funding the City’s pensions and other post-employee benefits. It acknowledged the importance of the gaps that existed at the time and continue to exist because Newton’s employees do not pay into or receive Social Security benefits and that funding these commitments would require a greater portion of Newton’s budget that would otherwise fund current services. The Primer stated: “the challenge lies in proactively managing tax revenues, operating expenditures, capital investments, and retiree benefit expenses while maintaining a Aaa credit rating.”
State law requires municipalities to fully fund their pensions by 2040. In Newton, the only entity that can set the funding schedule is the Newton Retirement Board. According to this legal memo from the Retirement Board’s counsel, “Unlike every other retirement system in the Commonwealth, the Newton Retirement Board (NRB) derives its authority from three special acts enacted in 1928, 1947, and 1951. A review of these acts make clear that the NRB has authority to hire an actuary independent from the Public Employee Retirement Administration Commission (PERAC), and has authority (based on reports of its independent actuary rather than the PERAC actuary) to certify appropriations due from the city in order to fund the system. In the event the City refuses to pay certified appropriations, the City assessors, by law, must include that amount in the next tax levy. The NRB may also recover the unpaid appropriation amount in an action of contract.”
In 2014, the Newton Patch reported on an announcement from Mayor Setti Warren’s administration that the City’s Retirement Board “voted to implement a funding schedule which will fully fund the retirement fund by the year 2029. This funding schedule will require an annual increase of 8.75 percent.” (NOTE: the Retirement Board’s Funding Policy Statement of November 22, 2022 suggests that the board originally approved an increase of 8.5%). This plan was quickly criticized by the Newton Taxpayers Association, which argued that the plan would result in spending “$1.3 billion over the next 27 years — or an average of $48 million/year to try to fund these liabilities.”
According to the Retirement Board’s Funding Policy Statement of November 22, 2022, the funding schedule was altered from a 2029 target date to a 2030 target date, and the percentage increased from 8.5% to 8.75 in FY2017 and then to 9.6% with the FY2018 budget. The report states that “due to investment results and other experience that differed from actuarial expectations, successive changes were made to this Original Funding Policy in order to maintain the 2029 Funding Schedule and extended the schedule to 2030 based on the January 1, 2017 valuation.”
The funding schedule was again altered on April 22, 2020, when Mayor Fuller met with the Retirement Board to seek a reduction in the FY2021 appropriation. “The Mayor requested a reduction in the actuarial funding schedule for FY2021, reducing the yearly funding schedule increase from 9.6% to 4.8%.” After hearing a presentation from Siegel Consulting on the preliminary 1/1/2020 actuarial valuation results, “the Board voted 5-0 to reduce the FY2021 funding schedule increase from 9.6% to 4.8% with other assumptions remaining the same.” Mayor Fuller would later pay the rest the following year and return back to the 9.6% increase the following year.
Ward 2 School Committee member Chris Brezski was vocal about the City’s pension funding schedule during the Committee’s vote and discussion to support the override, although he ultimately voted to support all three override ballot questions. When asked what he thought about looking at the pension funding now, in light of the failure of the operating override, he said: “Given that pension funding is forecast to consume an incremental 4.4% of the City’s budget over the coming years, I do believe that a lower rate of growth in funding should be considered as one of the ways the City will manage to still provide the services that Newton residents expect.”
Ward 2 City Councilor Emily Norton, who has been a strong advocate of paying down both the pension and OPEB liabilities, is concerned about the City’s ability to fund basic services given the failure of the operating override. She believes we need to “reconsider the rate of paydown of our pension/OPEB liabilities,” adding “new realities call for a fresh look and being open-minded about solutions.”
Finance Committee Chair and Ward 7 at-large City Councilor Becky Grossman agreed: “We need to be looking at everything, including our pension funding schedule. If we can confidently meet all of our obligations to our retirees, while simultaneously freeing up cash to fund necessary city services like schools and roads, that’s a discussion we need to have.”
