Ash Voices Concerns over Legacy Retirement Costs: City Gets a ‘C’ in Its Overall Response to Mounting Costs

August 22, 2013
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City Manager Jay Ash is not one who lives in the moment.

While he cheers good news, Ash quickly shifts his attention to the next task at hand.  The former Chelsea High School basketball standout attributes that to the good coaching he had during those formative days.

“I remember admiring a dunk I had in practice, and while I stood there and celebrated, the other practice squad put the ball right into play and the kid I was supposed to be covering scored a basket at the other end.  My coach pulled me out of the practice to lecture me that my lazy inaction zeroed out my spectacular action.  That has kind of stuck with me and been one of those foundational principles that continues to motivate me and shape my every action,” said Ash.

Now, more years than he wants to admit from his days of patrolling the wood floor at the old Chelsea Armory for the CHS Red Devils, Ash’s thoughts of the next play to be made have him concerned over the impact that pension and retiree health insurance costs could have on future budgets. He acknowledged how pleased he is that Chelsea recently secured a bond rating increase, but the legacy costs the City has not fully come to grips with cause him to be nervous about the future.

“It’s not that everything is going to fall apart overnight, but yes, I’m concerned that our unfunded obligations are more than many of our neighbors and that the growth of our payments is projected to well exceed our revenue growth for decades more to come,” he stated.

Precipitating Ash’s concern were two reports out this summer on unfunded pension obligations.  The Pioneer Institute released a report on the 105 Massachusetts pension funds and gave Chelsea a “C” grade.  That report was based upon the Public Employee Retirement Administration Committee’s (PERAC) annual statement of liability for those 105 systems.

“We got a ‘C’ because our investment return was rated an ‘A.’  We can’t celebrate or accept either because the two other measures in the Pioneer report, date to be fully funded and current funding level, earned a ‘D’ and an ‘F,’ respectively,” revealed Ash, who added that the Pioneer work confirmed his own review and conclusions.

“We’re in the lower third at funding ratio, with only 53.3 percent of our liability actually funded,” he said. “The average is 61 percent, and, in that case, being average isn’t all that good.”

A lower funding ratio means higher appropriation requirements yearly until the City gets to the state-mandated 100 percent level. Several years ago, the state began to require municipalities to fully fund their retiree costs, and most municipal retirement systems have struggled to close the gap and meet that mandate. As a result, many, including Chelsea, have had to designate large portions of its yearly budget to catching up on growing retirement costs.

Those higher costs either take a bite out of revenue growth, “or worse,” as Ash says, inferring that the higher costs might require budget cuts elsewhere.

On top of the $73.5 million PERAC says is underfunded for pensions, Ash said that future retiree health costs are also underfunded by $98 million.

“There’s a bit of exuberance in certain circles about all the economic development we’ve got going on and that we’re fat and rich,” said Ash. “Well, we’re neither, and when you add in what we’ve deferred on infrastructure improvements over the years, a case could be made that we’re $200 million below where we should be.”

He compared the City’s situation to individuals earning a good living, but having high credit card bills.

“Eventually, the repayment costs get so large that the bills overwhelm you,” he said. “We’re years away from that, but we all have a responsibility to keep that possible future outcome in mind as we live and make financial decisions today.”

There is no need to panic, according to Ash.  Instead, he says that the City needs to do a bit more than it has been doing to get the legacy retirement costs under control.

“We’ve dropped our debt burden substantially, in part to start to be able to shift the savings on infrastructure costs over to paying more on our legacy obligations,” he said. “That, though, isn’t enough, so we need to find other ways of protecting our future by being more responsible in the present.”

Wall Street seemingly recognizes the problem facing cities and towns across the country, almost all of which are under the same pressures. Chelsea received a bond rating increase despite the legacy cost pressures, in part because the City understands and is working to address those pressures. Ash suggests, though, that while the City is ahead of the thinking on the problem and the possible solutions, that realization is not enough to fall back on.

“Knowing you have a problem and doing nothing about it is almost worse than not knowing about the problem in the first place,” he reasoned.

Ash said he is working with members of the City Council on a plan to improve the City’s future financial outlook.

“We owe it to our future residents and those that serve them to at least not make the situation worse, and then work to make it better,” offered Councillor Brian Hatleberg, who has been working with Ash on the possibilities for the last two years.  “As new revenues are being generated, we need to ask ourselves if we should we pay down our debt, and when additional spending increases are requested, including those for employee salary increases going forward, we have to judge those requests in the context of how we’re doing on our legacy costs.”

For now, the City is meeting all of its mandated obligations. Pension payments are projected to rise by about 4 percent annually until the debt is paid off in 2028. Future retiree health insurance costs are not currently required to be covered, although the City has begun putting aside an annual, nominal amount to begin to pay the future obligations.

“We’re solid, financially, but that means this is exactly the time that we ought to be thinking about the future,” said Ash. “Councillor Hatleberg and others on the Council are constantly reminding me of that, and it’s good to again be on the same page with them as we continue to do what many have told us is a very good job of managing the City’s short- and long-term finances.”


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