Most local communities are meeting barely half of their funding obligations for employee pension plans, earning them failing grades in a report released this week.
The Pioneer Institute gave F’s to Salem, Beverly, Peabody, Danvers, Swampscott and the Essex Regional Retirement System for their “funded ratio,” which measures the percentage of current and future pension costs that retirement boards have covered.
Peabody, Salem and Swampscott have less than half of the costs covered, while Danvers, Beverly and Essex Regional are just over 50 percent. Essex Regional runs the pension systems for 19 towns.
The North Shore wasn’t alone in getting bad marks. Nearly half of the state’s pension boards — 47 out of 105 — received an F for their low funding ratios, said Iliya Atanasov, a senior fellow at the Pioneer Institute and a co-author of the report.
Pensions for public employees are funded by three sources — contributions by employees and by the municipality that employs them, and by the returns on those funds when they are invested.
Atanasov said communities are falling short in their pension obligations for many reasons, including a failure to put aside enough money each year to cover future costs, and expecting a higher rate of return on investments than they actually got.
Atanasov said communities whose pensions are under-funded must come up with a “rigorous schedule” to fund them.
“After you pay the bills for basics like schools and infrastructure, that should be one of the top priorities,” he said.
Most communities have been increasing the amount of money they appropriate to pensions each year. Mayor Bill Scanlon said Beverly will contribute nearly $8.6 million toward pension costs this fiscal year, up from $7.7 million two years ago.
“It’s easy to take this thing and treat it as if you have to pay the whole sum tomorrow,” Scanlon said. “It is not the case that the entire obligation becomes due on a given day. At least right now we’re not worried about being able to pay people their money.”
Scanlon also noted that employees are paying more for their share of pension costs, which should also speed up the process. Newer employees pay 9 percent of their salary toward their retirement, plus 2 percent of their salary over $30,000.
The town of Marblehead had the highest funded ratio among local communities, at 73.7 percent. Marblehead Finance Director John McGinn credited the town’s decision 20 years to join the state pension fund, a move many other communities didn’t make until recently.
The state pension fund has generally performed better on its investments than those run by local retirement boards. Marblehead’s rate of return over the last 10 years is 8.7 percent, more than two percentage points higher than those of Salem, Beverly, Peabody and Danvers.
“Marblehead was one of the first systems that went into the state investment pool back in the early ’90s and that’s been a very important decision because the state system has done fairly well over time,” McGinn said.
The Pioneer Institute, which advocates for limited government, created a website, MassPensions, that includes information on the state’s retirement boards and the grades that it assigned for each.
Atanasov said the project is an effort to bring transparency and public attention to the state pension system.
“Despite all of the reforms that have been made, many of which were meaningful, our system’s transparency is very, very poor,” he said.
Staff writer Paul Leighton can be reached at 978-338-2675 or firstname.lastname@example.org.
Funded ratios for pension systems
Marblehead, 73.7 percent
Danvers, 58.6 percent
Essex Regional, 51.9 percent
Beverly, 51.1 percent
Salem, 49.8 percent
Peabody, 48.5 percent
Swampscott, 46.2 percent