A budget watchdog group is attempting to head off a request for a slight increase in the annual cost-of-living raise for 15,000 city retirees, saying the extra money should not be awarded until the city shores up its pension-fund finances.
The retirees are already expected to get an annual cost-of-living increase of $360 this year, but they are urging the city to approve a further $90.
Over time, a $90 bump could add as much as $70 million to the city’s overall pension liability, according to calculations by the Boston Municipal Research Bureau, an independent watchdog funded by businesses and nonprofit organizations.
On Dec. 31, the research bureau urged city officials to deny the additional increase.
“We shouldn’t do anything that would increase the pension liability,” said Samuel R. Tyler, president of the research bureau. “We must be vigilant. Discipline is extremely important to make this work.”
The request for the extra $90 sets up a potentially contentious issue for Mayor Martin J. Walsh, the City Council, and the city retirement board. Ninety dollars a year may seem a modest amount, barely enough to pay one month of a cable television subscription. But 15,000 city retirees are eligible for the increase over the span of a lifetime, with another 20,000 current employees looking forward to public pensions in the years and decades to come.
City Councilor Stephen J. Murphy said he is convinced that the city, after running budget surpluses in recent years, can afford to be generous to retirees “who served the city well for many years” as teachers, police officers, firefighters, and in other positions.
“In the interest of fairness we should give it to them,” he said.
Richard Stutman, Boston teachers union president, was among dozens who testified at a City Council hearing last month in favor of increasing retiree payments. He said even with inflation running at a relatively modest pace, retirees lose about 20 percent in buying power after 15 years of retirement.
“Most retirees are living fairly modestly,” he said. “And they can’t keep up with costs.”
A 3 percent cost-of-living increase has been approved by the five-member city retirement board every year since 1997. That is not expected to be contested this year. The cost-of-living increase, however, is not applied to the full amount of a retiree’s pension. It is applied to only the first $13,000; current city retirees average about $36,000 a year.
Retirees are asking for an increase in the base used to calculate the cost-of-living increases, from the $13,000 to $16,000. That is the issue that Tyler and the research bureau are contesting. While giving retirees an additional $90 a year, the increase in the base would swell the city’s liability by about $70 million, Tyler said.
Like most public pension plans in the country, Boston got itself into a deep financial hole in the past by repeatedly incurring new pension liabilities without setting aside money to cover them. The city reversed that trend in the 1990s, and now makes annual appropriations that not only cover all of the new pension obligations created each year, but also includes tens of millions of dollars more to pay down the unfunded liability built up in previous years.
The unfunded pension liability is estimated to be $1.5 billion. Even so, actuarial estimates deem the city to be in a relatively good position, compared with other public retirement plans. Boston has funded about 71 percent of its pension liability, compared with Springfield, for example, which has funded only 27 percent.
To reach 100 percent funding, Boston must continue to pay increasing amounts toward pensions: This year’s appropriation is about $170 million, next year’s about $186 million, and so on. If the city maintains this schedule, its pension liability would be fully funded in 2025, and its annual pension appropriation could plummet by almost 80 percent, saving tens of millions of dollars, Tyler said.
“Comparatively speaking, Boston is in pretty good shape, it’s true,” he said. “But we must stay the course.”
David Sweeney, the city’s chief financial officer, said the administration opposes increasing the base if that would mean extending the date for fully funding the pension liability beyond 2025. “The administration will not do anything to jeopardize the schedule,” he said.
Even without altering the schedule, the city could pay for increasing the base by adding about $2.5 million to its annual pension appropriation. But the Walsh administration is not prepared to support that without further financial analysis, including comparing its cost with other potential uses of that money, such as expanding prekindergarten education, he said.
“There are competing priorities,” Sweeney said.
The last time the base was increased was in 2012, when it went from $12,000 to $13,000.
The retirement board has sole discretion on such matters, though, practically speaking, the mayor and city councilors have influence over the board’s decisions. Two of the board’s members were voted in by retirees and current employees, and can be expected to support increases in the base, while a third member is appointed by the mayor, and the city auditor serves by virtue of her office. The fifth member was elected by the other four members.
Like other public plans, the city of Boston has a second massive unfunded liability, this one for health care insurance promised to retirees. That amount is $2.1 billion. Tyler said the city must move more aggressively on that — but after the city pays off its unfunded pension liability.
“One thing at a time,” he said.
Sean P. Murphy can be reached at email@example.com. Follow him on Twitter @spmurphyboston.