Fig City News recently spoke with David Helfman, a Newton resident with significant experience in labor strike negotiations, advising unions on collective bargaining packages, as well as serving as a trustee on pension funds. The notes from this discussion are condensed for this article.
FCN: You have a background serving on pension boards. What’s your take on Newton’s current situation?
Helfman: The major hurdles in these negotiations are the tight control Mayor Fuller has over the level of school resources, a history of cutbacks in school staffing that the NTA is looking to reverse, the need for cost-of-living adjustments to maintain attractive wages for teachers and living wages for support staff.
Since residents defeated the property tax override measure, Newton has announced that it has about $54 million available in what it calls “free cash” or “surplus.” This is largely due to Eversource withdrawing its appeal of property tax levies and numerous conservative revenue estimates in Newton’s budgets through FY23. There’s also a $25 million rainy day fund.
The Mayor and CFO [Maureen Lemieux] are concerned about pension funding; Newton currently sits on a pension deficit of about $300 million. Understanding this pension liability and the plan to eliminate it are important to understanding the City’s financial plans.
Newton is one of more than 100 municipalities that participate in PRIM, the State’s Pension Reserve Investment Management fund. Newton’s pension obligations generally include all workers except certificated educators; they receive pensions out of a separate state fund. The Newton Retirement Board works with its actuary to set the annual funding level and it administers the benefits paid by its plan.
The state is requiring all municipal plans to fully fund their benefits by 2040. The Newton Retirement Board has determined that the City must fund its $300 million shortfall by 2032. To do that, the City’s appropriation towards the pension must increase at a 6.6 percent rate through 2032.
Let’s consider the pension cost. Plan actuaries determined the benefits being earned by Newton City employees this year cost just under $18.7 million, or about 15 percent of payroll. This figure is referred to as the Normal Cost. Newton City workers are contributing $12.25 million, and the City is contributing $6.4 million. In other words, workers are paying two-thirds of the cost of the benefit they are earning.
But the much larger, albeit temporary, cost for Newton is covering some of its unfunded liability. That adds an additional $37 million, bringing the City’s total pension cost to more than $43 million.
There’s some debate around the Retirement Board requiring the entire unfunded liability to be covered eight years earlier than the state requires. The Board is concerned that an investment downturn may throw the City off-schedule for covering its liabilities.
While this is a legitimate concern, it is not a sufficient justification for such an accelerated timetable. Most market recoveries are relatively quick; if we encounter one that is not, the State will likely shift its 2040 deadline for full funding.
FCN: What happens once the pension is fully funded? Isn’t there still a large unfunded liability for retiree health insurance?
Helfman: Yes, there is. Prior administrations failed miserably when it came to setting aside funds to cover pension and retiree health insurance benefits. Newton has a committee to oversee OPEB, or Other Post-Employment Benefits. The committee last met in 2022.
The City has changed its approach. It used to be “pay as you go,” meaning the City would pay for retiree health insurance each year without any prefunding for City employees over their careers. That’s what resulted in unfunded OPEB liability. More recently, the City has begun prefunding benefits for new hires. For recent and future hires, there should not be unfunded liability. Newton also changed its health insurance plan to Blue Cross, reducing premium expenses while shifting higher out-of-pocket costs to retirees.
That still leaves a sizable unfunded liability for both current retirees and employees hired prior to the shift in funding strategy. Newton plans to direct a portion of what it had been paying for pensions into the OPEB account. The difference will be available for general appropriations. Unlike pensions, there is no state mandate for full OPEB funding; the City can take as long as it wants.
NPS teachers are covered by the retiree health benefits. Last year the City informed NPS that it was shifting OPEB costs for school employees from the Newton Public Schools budget to the Newton City budget. While this may simplify budgeting for the schools, it does not fundamentally change any risk. In the event OPEB costs escalate more rapidly than revenues, the Mayor retains authority to offset the differences in the overall NPS appropriations.
Overall, I think the moves Newton has made towards reducing its liabilities are good. I would encourage it to continue working with the Retirement Board to explore how slight modifications in the payment timetable can enable more current investments in both City and School District programs and infrastructure.
[Author’s note: “fully funding” a pension plan is understood to mean that the current financial assets held in trust, including forecasts of the future investment income on those assets, are sufficient to fully satisfy the expected future payments to retirees that those plans are required to make.]
FCN: Based on your experience, and publicly available information, what are your thoughts on this mediation process?
Helfman: I’m not at the bargaining table, so my impressions are based on what I see in the media. A mediator uses his or her professional judgement in determining how to move the parties closer to a mutually acceptable agreement. Sometimes that requires face-to-face conversations between the teams; at other times sidebar talks are utilized (when the mediator works with one or two representatives from each team on individual issues at impasse). When these approaches are not effective, the mediator will keep the players away from each other and instead shuttle between the rooms seeking compromises.
No matter how the mediator structures the talks, it is important to look for compromises in the positions. Are the parties demonstrating flexibility in their proposals? Are they open to creative strategies suggested by the mediator? I note these strategies often involve extending the term of the agreement and shifting funding across years to lower total costs. This provides the employer more time to approve funding while enabling the union to deliver sufficient progress towards reaching bargaining goals to deliver a successful member contract ratification.
FCN: If the parties are inflexible, what happens then?
Helfman: In the last two days (Sunday and Monday) the union has demonstrated flexibility in its positions. As a result, the cost difference has come down. Even with all the pension and retiree health insurance funding needs I discussed earlier, Mayor Fuller has sufficient resources to enable the School Committee to compromise and reach a mutually agreeable settlement. And this can be accomplished without layoffs. She needs to stop withholding resources.
[Author’s note: Subsequent to this Q&A, the Newton School Committee announced on January 30 revised proposals to the NTA.]
FCN: What do you mean by “withholding resources”?
Helfman: When the City Council received a strategic budget plan from Newton CFO Maureen Lemieux last fall, she acknowledged in addition to this year’s free cash and rainy day funds, current year budget as well as 5-year projections are conservative. She reported that by October 2023 — four months into the current fiscal year — interest earnings had already exceeded the project for the entire year. The City is on track to bring in $14 million in interest earnings this year compared to a $2.5 million budget. We’re building more free cash for next year.
The cost of overly conservative budget projections is a failure to provide adequate appropriations for critical services. With an impasse that now stands at a portion of the free cash levels, even if you hold back $20 million to offset future pension cost increases. And it is a small percent of the Newton operating budget. Mayor Fuller should loosen the purse strings, the School Committee should respond in kind to the NTA’s recent concessions, enabling the mediator to bring the parties together with a settlement.
In coming years, if the economy contracts and jeopardizes Newton’s ability to improve roads and infrastructure while maintaining public safety and school staffing levels, it should prioritize working with the Retirement Board to gain the funding flexibility it needs and should have.
FCN: What about higher teacher compensation leading to staff cuts, as the City has warned will happen because overall budget is finite?
Helfman: As I just said, a settlement — which will undoubtedly fall somewhere between the current positions –can be afforded without staff cuts. Predicting staff cuts is a scare tactic used on the NTA and community. And it can’t be substantiated given the City budget surpluses and NTA bargaining concessions I’ve already addressed.
The same thing is true of projecting a budgetary cliff that results when costs exceed revenues and net assets are depleted in future years. The only cliff we’re sure of here works to the City’s advantage: it is the cliff in pension appropriation needed once the pension liabilities are covered.
