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Fixed costs are the most rapidly increasing component of municipal budgets.  According to the Municipal Finance Task Force, in Massachusetts municipalities “the [combined] spending areas of education, fixed costs and debt service have consumed approximately 80% of annual budget growth since 1987, with education alone taking up 52% of new budget growth.” 

6)    Control municipal health care costs through participation in group plans and Medicare
Cities and towns can manage skyrocketing health care costs by joining the Group Insurance Commission (GIC), which provides health insurance and other benefits for 275,000 state employees and other groups.  As of 2007, municipalities are now able to join the GIC, and to take advantage of lower health insurance costs negotiated by the state.  Municipalities that wish to join must get the support of the unions representing most (but not all) of their employees.  

A recent Massachusetts Taxpayers Foundation report underlined the crisis in municipal health insurance costs. Their 2005 survey of 32 cities and towns, undertaken in cooperation with the Massachusetts Municipal Association, found that employee health care appropriations had risen 63% since 2001, at the same time that total municipal budgets had only grown 14%. Eighty percent of all property tax revenue growth from existing properties allowed under Proposition 2½ went to one line item – health insurance for employees – and one-fifth of communities responded that health insurance costs ate up all the revenue growth allowed by Proposition 2½.

Municipalities considering a switch to the GIC may find the process daunting.  MAPC currently operates a “Municipal Health Insurance Action Center” that provides background materials, analytical tools, model agreements, and case studies.  MAPC also provides assistance directly to cities and towns by conducting analysis of the costs and benefits and facilitating conversations among management and unions

MAPC and stakeholders should monitor participation in the GIC and reevaluate the program over time, with an eye toward amending the legislation.  Among the options that might be considered in future years: decreasing the threshold for union approval; or requiring GIC participation for municipalities that have very high annual health insurance increases (e.g., more than 25% beyond the state’s increase) to transfer employees, dependents and retirees to GIC coverage.

Municipalities can also save money on their health insurance costs by requiring all retirees to enroll in Medicare, as allowed by existing law.  This move shifts a significant portion of health care costs to the Medicare system; though municipalities may still need to provide an extension plan so that their benefits are comparable to those in the municipal plan.  A legislative change is needed so that enrollment of retirees in Medicare does not require a municipal legislative vote, but instead be at the discretion of the same authority (e.g., mayor or board of selectmen) that is authorized to make other health insurance decisions.  Over time, the Commonwealth may also consider requiring all cities and towns to enroll retirees in Medicare. 

6.a    MAPC should expand its assistance to municipalities wishing to join the GIC

6.b    MAPC should draft legislation amending Chapter 32B § 18 to facilitates cities and towns enrollment of retirees in Medicare

7)    Safeguard and restore basic personnel management powers
In order to operate efficiently and still provide high quality services, municipalities need to enact policies that support flexible and innovative management methods.  Such strategies should include more discretion for management, as well as collaborative engagement of labor and unions to develop creative strategies for containing labor costs.  Collective bargaining agreements should recognize the value and rights of labor without impeding the ability of municipal officials to provide cost-effective high quality services.  

Personnel services are the most significant cost for cities and towns, amounting to more than 65 percent of local government budgets.  In an effort to control these costs, many local government officials make management concessions and agree to “pay-later” benefits.  The result has been a steady erosion of local government’s ability to effectively manage its workforce and realize the best possible value for its citizens.  

Municipalities need to retain or restore key management and personnel rights during the collective bargaining process, including the rights to hire, fire, and assign staff; establish standards for employment; evaluate performance and make promotions accordingly, determine staffing levels; and outsource services from external contractors.  One way to accomplish this is through legislation that stipulates those rights that cannot be subject to collective bargaining.

7.a    The Massachusetts Municipal Association should develop legislation outlining non delegable management personnel rights

8)    Reform underperforming municipal pension programs
Municipal pension programs would benefit from greater oversight by the state and participation in state investment programs.  Such coordination and oversight are likely to result in higher yields investment yields and lower management costs.

The current structure of the state pension system, with its proliferation of boards and poor oversight, costs municipal taxpayers millions of dollars per year.  The Public Employee Retirement System in Massachusetts consists of 106 separate retirement programs, each of which makes its own decisions regarding eligibility and supervise investments. Two of the programs are state-run, serving state employees and teachers; the remaining 104 programs serve a variety of municipal, county, district, and public authority employee groups.  These independent programs vary greatly in size.  Local retirement boards have the choice of whether to manage their investments on their own or to invest all or a portion of their assets in the Pension Reserve Investment Trust (PRIT). Most local boards choose to retain control of their investments.

While local control may be warranted for rulings on eligibility, it is less obvious whether local control of investment decisions is justified. Local independence comes at great cost. According to the Pioneer Institute, a review of 10-year and 20-year return histories demonstrates that the vast majority of local boards underperform PRIT by significant margins.

The time for reform of the Commonwealth’s fragmented pension system is long overdue.  The current fiscal climate demands prompt and forceful action.  The pension system could capture economies of scale and provide access to the highest quality managers by putting all assets in a single pension fund, of which PRIT is likely the leading candidate.  

The Commonwealth recently adopted legislation increasing the state’s ability to review the investment performance of local pension funds and allow for state takeover of underperforming funds. Passed in 2007, the law requires that the assets of local funds be rolled into the state system if their assets are less than 65 percent of their liabilities, and if the funds have an average 10-year rate of return at least two percent less than that of the PRIT.  The effects of this change should be evaluated over time and the potential for increased centralization should be evaluated.  In the meantime, expanded oversight by the appropriate state agencies will help to prevent fraud and waste at local pension boards. 

8.a    The legislature should authorize expanded oversight by the Public Employee Retirement Administration Commission

9)    Reform public employee pension system to eliminate exceptions, loopholes, and unfunded liabilities  
While the Public Employee Retirement System is not overly generous for typical employees, it is characterized by exceptions, ambiguities, and loopholes that allow some of them to abuse the system and collect unwarranted benefits, resulting in tremendous cost to the state and ultimately to taxpayers. The root of these problems is that the calculation of benefits is not based on the simple concept of contributions but the complicated interplay of four factors— years of eligible service, maximum three years of compensation, “group” or job classification, and retirement age.

The system is fundamentally flawed: the structural weaknesses and loopholes result in a system that can reward employees arbitrarily and allows the Commonwealth to push costs onto future taxpayers. Moreover, the complexities of the system reduce transparency.  Many loopholes and exceptions are not tracked by any oversight body making a determination of the total cost of these unfair practices is an imprecise science.  However, it is estimated that these loopholes raise the state’s current liability by more than three billion dollars and increase the required annual payment into the pension system by more than $125 million, a number that will grow over time. The bulk of this cost comes from specific retirement programs, but the wide array of other gaming techniques adds millions more in annual costs.

While the list of problems is long, two major reforms could address the most serious abuses: enacting pay-as-you-go language to require full funding of legislative changes, and tying benefits more closely to employee contributions. These modifications, combined with other minor changes, would dramatically improve the system.

9.a    The legislature should adopt pay-as-you go legislation for benefit changes

9.b    The Legislature should reform the PERS benefits structure to make it fair and affordable for the Commonwealth

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