The monster lurking in New Bedford’s budget

Getting your Trinity Audio player ready...

One expense in New Bedford’s city government costs more than the police department, the fire department, or the parks department — but the majority of its dollars contribute nothing to city services or quality of life.

Decades of unfunded pensions are forcing New Bedford to catch up on its obligations — spending tens of millions every year on the pensions of already retired employees. At the same time, the city has to keep funding the pensions of current employees.

This past year, New Bedford spent more than $40 million on pensions. Only about $7 million went toward covering pensions for current employees — who are now being funded at a level so that future generations won’t be on the hook for their retirement.

Each year the large majority of the city’s annual expenses on pensions — roughly $33 million last year — is a game of catch-up the city must play on decades of promises to former employees. And there’s a deadline: New Bedford has set a goal to fully catch up before 2035. (State law mandates that all retirement systems catch up by 2040.)

“The road ahead is steep and long,” Mayor Jon Mitchell told the City Council last Wednesday, describing the pension problem in his annual budget presentation. Mitchell  called pensions “another major budget item contributing to the burden on taxpayers.”

Today, New Bedford’s pension system is considered about 55% funded. That ranks the Whaling City in the bottom five of pension systems across Massachusetts. (Being 100% fully funded would indicate the city has enough resources to fund all of its pension liabilities with a stable return.)

The amount that the City of New Bedford spends to catch up on the pensions of already-retired employees would be enough to operate a second police department — which last year cost the city $27 million — with a few million left over. Or it could have operated a second fire department and emergency medical services (EMS) department, which together cost about $28 million last year.

The total $40 million spent on pensions is about the same that New Bedford spends on all general government services (the mayor’s office, the solicitor’s and treasurer’s office, facilities and fleet management, environmental stewardship) plus all highway and streets services (snow removal, waste collection, road infrastructure) combined.

“It’s a huge burden, but there’s a plan to fix it,” said Bob Ekstrom, the city’s chief financial officer.

“Some of the problems go back to the ’80s and ’90s, and are inherent in a system that was largely run by the state,” Ekstrom said. “We inherited a system from the state that was unfunded.” Cities and towns across Massachusetts are also struggling with pension obligations, but the burden falls hardest on the state’s mid-sized “Gateway Cities.”

The Mitchell administration has made paying down the pension obligation a top priority. Last year, it even spent about $300,000 of its “free cash” (which is essentially extra money at year’s end) on pension payments for the first time ever.

“It’s like throwing an extra hundred bucks toward your mortgage payment,” said Ekstrom. He said using free cash to defray this largely unnoticed expense demonstrates how committed the administration is to the problem — rather than using it to pick off easier, more noticeable, more politically expedient priorities.

Ekstrom said the city’s approach to paying down its pension obligations is among the most fiscally responsible spending in city government. 

And the city government is not actually responsible for running the pension system. The City of New Bedford is the largest contributor (about 87%) to an independently run system that benefits five public agencies, including the New Bedford Housing Authority, the SRTA bus system, the Voc-Tech high school, and the Greater New Bedford Refuse Management district.

But the city feels compelled to do everything it can to fix the problem, Ekstrom said. “Imagine New Bedford if we had $30 million more per year to take care of expenses when they first came up.”

“We wouldn’t be dealing with a 100-year-old school system,” he said. “We would already have Congdon-DeValles school,” Ekstrom said, referencing the new school project in the South End, which broke ground this month. “We’d probably be celebrating its 20th anniversary by now.”

But the road map out of the pension mess shows a hard path forward. The already expensive pension contributions are planned to increase another 50% before New Bedford arrives at its goal.

How the pension system works

The administrative building for the New Bedford Retirement Board is housed in one of the old brick mills in the South End, where Orchard Street meets Cove Road.

On any given day, Eric Cohen, 39, the agency’s executive director, is as likely to be helping people in New Bedford navigate their retirement benefits as he is to ensure the pension board’s smooth operations.

“I’m multi-faceted,” he said, explaining that some days he could be helping one of the 1,500 retirees in the system, like a fixed-income senior who needs paperwork to qualify for other forms of public assistance. Other days he could be organizing materials for the five-member board, which oversees roughly $500 million in retirement funds and the almost 30 investment managers who tend to it.

“We’re trending in the right direction,” Cohen said, who has worked for the pension board since 2020. He noted that when previous generations were making decisions about whether and how to fund pension obligations, “I believe that’s when I was playing Little League for Ma’s Donuts.”

“Politically, why wouldn’t [previous generations] fund it? Politics is funny, and I’m not a political mastermind. You want to fund something you get benefits out of,” Cohen said. The pension system, he figured, was probably easy to “kick down the road a little bit.”

In addition to the underfunding, the city’s obligation to pensioners has been accelerating, as the pension board has annually approved 3% cost-of-living adjustments (known as COLAs) for most of the last 25 years, according to The Light’s reporting. 

Other cities and towns across Massachusetts find themselves in similar situations. Today there is roughly $8 billion in unfunded pension liabilities across the commonwealth, according to a recent study from MassInc, a research and policy group.

For decades, state law made it impossible to fund these pensions: until 1977, it was illegal for municipalities to set aside employer-matching funds; and until 1987, it was illegal to invest pension funds in the stock market, according to the analysis from MassInc. 

Since those policies have changed, urban population declines in Massachusetts have made the legacy debt harder to pay down: “Gateway City residents have paid billions more than their own generation’s fair share to cover local pension costs,” the study found. 

The sharper pain felt in cities has created a downward spiral that’s hard to correct. “These competing costs reduce the quality of local government services, which tends to lower property values over time, making it even more difficult for Gateway Cities to cover pension obligations,” according to MassInc. “Today, all of these cities would boast large surpluses — or expanded public services for residents — had they received fully or even reasonably-funded pension systems in 1987.”

A fully funded pension system, Cohen explained, would reduce the amount that member organizations (like the City of New Bedford) need to contribute every year. It could also change the investment objectives that the board pursues — for example, allowing it to set less aggressive investment targets.

Until that goal is reached, Cohen said there’s not much change in his agency’s day-to-day operation: “Our job is still to provide our members with the services related to their pensions.”

The retirement board is an independent entity and wholly responsible for the system’s management. Two of its members are elected by those in the pension system. (“Typically one police and firefighter are elected, because they have the most votes,” said Ekstrom, New Bedford’s chief financial officer.) The city auditor is a board member, a duty that comes along with the office. Another is appointed by the mayor. And the fifth board member is voted on by the other four.

Those current board members are Leonard Baillargeon and James Kummer (the former policeman and firefighter), Quillan Lowney (the auditor), Angela Natho (the mayor’s appointee), and Chris Saunders (elected by the other board members). The politics of this board can be complex. 

New Bedford’s is one of 104 municipal retirement systems in the Commonwealth. There is also a statewide retirement system, called PRIM, which municipalities can choose to join.

The New Bedford Retirement Board meets once per month to oversee the system — including checking the performance of the various investment funds and managers. The board employs one advisor, Segal Marco Advisors, which provides guidance on how to allocate the funds. There are 27 other firms that do the management — the actual brokers who invest the money.

Segal Marco gives quarterly updates to New Bedford’s board on how each of the managers are performing. And each manager gives a performance evaluation before the board once per year, comparing themselves to a benchmark — like the S&P 500, or other indices — that they must match or beat.

And if New Bedford’s system — or any of the 104 municipal systems in Massachusetts — significantly underperforms the state retirement board, the state can take it over.

Ekstrom, however, provided numbers that show New Bedford’s retirement fund has consistently outperformed the state retirement fund over the short- and medium-term.

Both Ekstrom and Cohen said that as long as New Bedford continues to outperform the state’s system, the city has no desire to give up control of its retirement system.

“We’re providing the best services for people in our system,” Cohen said. “That’s what I take pride in.” He added, “You’re not gonna get this treatment if you work for the state.”

Getting worse before it gets better … Then getting worse again

In New Bedford, the pension system is a huge burden that few people want to think about — even the city employees who stand to receive its benefits.

“A lot of people don’t understand the pension system until you’re 65 and looking to retire,” said Cohen. “That’s not the ideal time. You want to plan accordingly.”

Similarly, New Bedford’s taxpayers need to plan ahead to understand the full benefits — and sharp pains — that they’re about to face. 

The good news is that the New Bedford Retirement Board has a detailed plan with rigorous actuarial assumptions, and they indicate that the system is on track to be fully funded by 2035. That means in 10 years, the city’s annual contributions will settle at a much lower, more sustainable level. No more catch-up to play. 

The bad news is that the city’s contributions must rise significantly every year until that happens. 

The annual contributions to amortize the unfunded liabilities — or in plain English, how much it costs each year to catch up — will soar toward $70 million per year in 2035. The City of New Bedford’s portion will be the lion’s share, or about $60 million of that. 

That means the largest budget item inside City Hall will go up another 50% — about $20 million more, annually — in the next 10 years. And the taxpayers who foot that bill won’t receive more roads or parks or any city services in return.

Pensions are already considered “the most burdensome aspect of our budget,” according to Ekstrom, the chief financial officer. Today, about one of every 12 dollars in the city budget goes toward pensions. (Eighty cents of that dollar is playing catch up on previously unfunded costs.)

With costs only going up from here, the exasperated taxpayer might ask, What’s the point of pensions at all? 

“It’s how we attract talent,” said Ekstrom. “Public sector employees make less than in the private sector, so the pension system is how we attract people,” by offering “stability,” Ekstrom said. 

To those who accuse the city of administrative bloat, Ekstrom said that the city’s budget is exceptionally tight: “We don’t have any excess in our budget. You have to police this large city. We have a dense city with fire needs, 280 miles of roads, associated sidewalks and streetlights.”

The pension headache requires taking a good dose of medicine. Fortunately or unfortunately, that’s the course the city is on now. And in 10 years, the largest cost center inside City Hall will become a fraction of itself. 

Problem solved? Not quite. 

Besides pensions, municipal and state retirees also receive Other Post-Employment Benefits (OPEB), which can include retiree health insurance, life insurance, and other benefits. 

And if pensions are a headache, then OPEB is a bomb.

“While the combined municipal pension liability for the 83 local systems was $7.8 billion in 2023, the combined OPEB liabilities for Massachusetts cities and towns in 2021 is estimated at $34 billion, with only $1.9 billion in assets set aside,” according to the MassInc study.

“OPEB will be the next frontier,” said Ekstrom. “Until it becomes mandated, I don’t think you’re going to see it change that much. Everybody is busy trying to solve their pension problems.”

Email Colin Hogan at chogan@newbedfordlight.org

---