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

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