Pensions grab big share of limited revenue
BOSTON — When Gov. Charlie Baker lifts the curtain on his fiscal 2021 budget this week, many Beacon Hill observers are going to flip right to the education section to see how great of an increase public schools might get under the new funding law. But there’s another spending area that will grow by an even greater percentage - the annual payment toward the state’s pension liability.
Baker’s budget office filed the new, three-year pension funding schedule Wednesday, detailing how Massachusetts will boost its annual pension payment by more than 9.6% each year - and by more than 30% over the three-year period - as it works to stash away money to cover the $41 billion unfunded portion of the state’s expected pension liability of more than $96 billion.
To remain on track to fully fund the liability by 2036, the state’s annual pension contribution will have to grow at a clip far more rapid than the growth forecast in state tax revenue.
The funding schedule doesn’t just limit some options for lawmakers as they craft the state’s annual budget, but it also impacts the approximately 314,637 retired or active state employees and municipal teachers who are part of the Massachusetts State Employees’ Retirement System or the Massachusetts Teachers’ Retirement System.
The fiscal 2021 consensus revenue agreement announced Monday provided the first confirmation that the pension contribution will continue to grow faster than state revenues.
Legislative budget writers and the budget managers at the Executive Office of Administration and Finance agreed to make a $3.115 billion transfer to the pension fund in the next budget, an increase of $273 million or about 9.6% over the fiscal 2020 contribution. State tax revenue is expected to grow by 2.8% in fiscal 2021, which will start on July 1, top officials also agreed on Monday.
As revenue growth decelerates and the pension fund contribution increases by almost 10%, the same budget could funnel an additional $427.8 million or 8.3% into public education funding, according to a budget model prepared by the Massachusetts Taxpayers Foundation using data released from the Department of Elementary and Secondary Education. Other analysts believe a smaller, but still sizeable increase is possible.
MTF said its fiscal 2021 budget model demonstrates “the financial squeeze caused by low-growth tax revenue expectations and rising spending” related to the new education financing law, the state’s share of MassHealth expenses and pension obligations.
“After two consecutive fiscal years of above-trend tax growth and manageable spending increases, an initial analysis of the state’s finances suggests policymakers will face tough choices as they begin budget development for state fiscal year 2021,” MTF wrote in its fiscal 2021 budget preview released Wednesday.
The 9.6% annual increase in the pension fund contribution is in keeping with a recommendation the Public Employee Retirement Administration Commission (PERAC) made to A&F Secretary Michael Heffernan in the fall, and the schedule Heffernan filed Wednesday adheres to the PERAC recommendation for the rest of the three-year funding plan as well.
PERAC decided in November to recommend that A&F adopt a funding schedule that assumes the state’s contribution will increase 9.6 percent each year until fiscal year 2035, with the final payment coming in fiscal 2036.
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