Newton will contribute $43.5 million to its pension plan in fiscal year 2024, $37 million of which (7.4% of budget) to fund our $300 million pension deficit by FY2032. Pension contributions will grow 6.6% per year, far outpacing growth in revenues. Without adjustment, the budget share going to pension contributions will increase from 8.7% to 11% by FY2031, further impairing our ability to fund schools and other city services.
There is another way. We can issue a $200 million 30-year Pension Obligation Bond (POB) with interest rate of 4.5-5% and invest the proceeds in the pension fund. The debt service ($12.9 million at 5%) plus the remaining pension contributions ($18.8 million with same FY32 target) is $31.7 million, $11.8 million lower than our FY2024 pension contribution (>2% of budget). Annual contribution savings versus projections becomes $27 million by FY2031, which can be used for whatever Newton needs. Budget savings come from both a much longer amortization period (30 years vs. 8 years) and a lower interest rate: 5% (or less) vs. 6.9% assumed for the pension plan.
The primary risk of a POB is that pension returns are lower than the debt interest rate. Our pension plan is invested in the Massachusetts Pension Reserves Investment Trust, with 10-year returns of 7.9% and over 9% since inception. The odds of our investments outpacing 4.5-5% over the next 30 years are very good.
We have the financial strength to issue a relatively low-cost bond like this. A POB need not impact our AAA credit rating as we exchange high-cost debt (our pension deficit) for lower cost debt. Many other governments in Massachusetts and other states have successfully issued POBs.
A POB may or may not be right for Newton, but our leaders should consider all reasonable options to mitigate our budget crisis.
Ryan McGlothlin
Newton Corner
