Tuesday, June 16, 2009

Under the Dome: A Step in the Right Direction

House Minority Leader Brad Jones recently released this column as his latest edition of Under the Dome.

The Legislature set forth an ambitious agenda this session, tackling ethics, pension and transportation reform. This week, the Legislature took a positive step in the right direction, albeit a long overdue step. For years, Massachusetts residents have been bombarded with newspaper headlines about exorbitant pensions, taxpayer-funded perks and major abuse of the state’s retirement system. This month, the Legislature made a down payment on pension reform, but there is still much work to be done.

Pension reform is a complex issue and a daunting task that cannot and will not be accomplished over night. With that being said, there are several components of the pension reform bill that are positive. For example, this bill redefines regular compensation. Compensation will no longer include bonuses, car and housing allowances, unused sick time and vacation time, office stipends or per diem allowances. Instead, compensation will be defined as the base salary paid directly to that employee for employment. Also included in compensation will be monies paid as educational incentives, length of service, premiums paid for shift differentials, cost of living adjustments and any other compensation included in an individual’s contract or collective bargaining agreement. The most well known example of the definition of compensation being abused is the pension of former State Senator William Bulger. He saw a significant boost in pension because his housing allowance was included in his compensation and now receives an annual pension of $196,000, one of highest state pensions in Massachusetts.

Another highlight from the bill is the elimination of what is known as the one day, one year rule. Currently, this rule allows elected officials to serve one day in a calendar year and gain a full year of creditable service to be put toward his or her pension. On a similar note, this bill also does away with the so-called “king for a day” rule, which only applies to some employees. Under current law, if an eligible employee is injured on the job while filling in for a higher earning position, the state allows for increased benefits for those who go out on accidental disability retirement. In the bill the Legislature passed however, that person’s retirement will instead be based on the average salary for the 12 months preceding the injury.

Keep in mind, this is a very detailed bill and in an effort to call attention to the most significant changes, I am leaving many other components out. I do want to mention one other issue though and that is regarding the Section 10 pensions. These pensions have been used in the past by lawmakers who are not re-elected or are not re-nominated. It allows those people to begin collecting their pensions before the age of 55. According to a report by the Boston Globe state officials now collecting their pensions under the law could pocket up to $3 million over their lifetime.

While the bill that passed the Legislature addresses the biggest abuses from a front page perspective, from a financial angle, much remains to be considered. A commission is up and running with a September 1st reporting deadline on some aspects of the system that could mean millions of dollars in savings.

The first is employee classification. Currently, there are four groups in the state’s retirement system. Depending upon the type of job a person holds, he or she could retire as early as 45 and receive the same retirement benefits as someone who retires at the age of 55. This allows for tremendous confusion and grey areas within the state’s system as employees and employee groups seek to be moved to higher classification groups. We need to do away with this practice and make the whole system more understandable by implementing better standards relative to classification.

Another issue is instituting a defined contribution system, similar to a 401k in the private sector. Unfortunately, pensions don’t always reflect how much an employee has contributed into the pension system. For example, some employees receive less in pension benefits than they actually paid into the system, whereas others get far more than they ever contributed. The pension system wouldn’t be in such a dire situation if employees simply received back what they contributed. Not only is a defined contribution system easier to regulate, but ultimately it is the most fair approach for employees and taxpayers.

There is one other grey area in the pension system that deserves attention. Currently, a person’s pension is based on their three highest earning years. For example, if a person works in a municipal or state position for 16 years at an annual rate of $30,000 and is then elected to the State Senate, where he or she earns $60,000 for the four years in office, that person’s pension will be based upon the three highest earning years. I would instead like to see pension payments based upon a longer look at earnings to ensure they receive a retirement allowance that is appropriate given their retirement contributions and service history.

As I said before, this is just a small step. The Legislature still has a long way to go before the state’s pension system is completely overhauled. However, if we are able to build upon the small successes achieved in the current bill, I have no doubt we will be able accomplish meaningful and comprehensive reform.