The decision by the board of the MBTA Retirement Fund to commission an independent review of the troubled $1.6 billion fund is an important step. But eliminating the T’s retirement fund entirely may ultimately be the only way to fix what ails it.
The root of the problem is that the fund was organized in 1948 as a private trust, even though it serves 12,000 active and retired public employees. It isn’t subject to public records laws and only releases selective documents, even though the fund relies on taxpayer dollars.
Its “private” status is why it took two years before we discovered that the fund had lost the entire $25 million it invested with a hedge fund represented by the MBTA fund’s former executive director.
It’s clear that the retirement fund isn’t doing well, but it’s hard to know just how bad it is.
For example, MBTA wages are up by about 50 percent since 2001, but pension costs have risen by 250 percent. Three-quarters of that increase has been shouldered by the T. That means us — since the MBTA got $1.1 billion from taxpayers in the form of sales tax revenue, local assessments and direct assistance in 2013.
Part of the reason the fund is struggling is that MBTA employees don’t contribute enough toward their pensions. By statute, most state employees contribute about 10 percent of salary toward retirement. But T employee pension contributions are subject to collective bargaining; in 2012, the amount was about 5.5 percent.
Generous benefits are another reason. The now-famous “23 and out” provision that allowed many employees to retire in their 40s is gone, but MBTA pensions remain richer than their state counterparts. Workers can still begin collecting at age 55 if they have worked for 25 years. Unlike state employees, they can use back pay and unused vacation time to increase their pensions.
The T fund’s condition continues to deteriorate despite increased MBTA contributions. In 2008 the fund had 81 percent of the money needed to meet its obligations. Officially, it’s now about two-thirds funded.
But according to a 2015 report co-authored by Harry Markopolos, the whistleblower in the Bernie Madoff case, the T’s fund may be overstating its financial health by as much as $470 million. If true, the pension system would actually be less than half funded.
Markopolos and Boston University finance professor Mark Williams say the T’s retirement fund has changed accounting methods three times in three years to put the best face on its finances. In an era in which public pension funds are becoming more realistic and reducing assumed investment returns, the T’s fund has increased its assumed return from 7.5 percent to 8 percent, even though its long-term rate of return has been 6.73 percent.
An independent review should provide much-needed insight into what’s going on at the fund. But no review can change the fund’s status as a private trust or the fact that employees contribute too little and the benefits are too rich.
Enrolling new transit employees in the state pension fund and phasing out the MBTA Retirement Fund is a complex financial undertaking, but it may be the only viable answer for T employees and retirees — and for Massachusetts taxpayers.
Charles Chieppo is a research fellow at the Harvard Kennedy School’s Ash Center for Democratic Governance and Innovation and the author of “Transforming the T: How MBTA Reform Can Right Our Broken Transportation System.”