Massachusetts faces a major crisis in its public pensions. At the state level alone, we are $22 billion in the hole with respect to unfunded liabilities. That shortfall threatens to prolong our budget crisis and imperil our economic future.
Political slogans and gimmicks cannot solve this crisis. Massachusetts needs a thoughtful, comprehensive, and responsible plan to fix it. Steve Grossman's plan.
Steve has a three-part proposal, some of which would require new laws. But as the head of the Pension Reserves Investment Management Board ("PRIM"), the Treasurer has the authority to make major moves toward a more prudent and effective investment strategy for our $44 billion pension holdings that protects both retirees and taxpayers.
First, Steve believes the governor and legislature must continue to make annual contributions (currently $1.4 billion per year) to pay down the liabilities. A failure to maintain discipline and continuity in the past is one key reason we got into this predicament.
Second, we need additional pension reform. Last year's legislation went a long way to correcting the most outrageous abuses. But we are still living beyond our means. Steve supports such measures as:
* Anti-spiking: "Spiking" is giving employees a big pay jump when they near retirement, which boosts their pension benefits. Except for bona fide promotions, we must limit such last-minute benefit hikes.
* Increase the number of years on which pension benefits are calculated from the current highest paid three consecutive years to at least five so that benefits more closely track against employee contributions throughout their careers.
* Set a cap on pension benefits. Most state employees and teachers collect modest pensions, but a handful have received $100,000 or more. The maximum should be $85,000 or less.
* Increase the retirement age. Public employees in non-hazardous positions should be in closer alignment with Social Security's framework -- now 67 as the standard retirement age and 62 for early retirement.
Third, Steve will bring a new investment philosophy to the Treasury and PRIM, which he can advance on his own initiative as chairman of the investment board.
Steve believes in a practical, common-sense approach: prudent strategies executed by competent managers.
"My parents were products of the Depression," Steve says, "What they taught me was: "Live within your means, protect your nest egg, invest wisely, do not engage in excessive speculation.' That will guide me as State Treasurer."
When the markets crashed in 2008, the state pension fund plunged nearly 30% in value, about $16 billion. Although it has recovered value since, it is still nearly $10 billion below its peak. The fund has gone from being one of the best performers in the state and the nation to one of the weakest. This is not OK with Steve, and it should not be OK with the taxpayers.
While the economic tsunami is a major factor, the losses were compounded by unwise decisions with respect to real estate and exotic financial products -- moves that boosted returns in good times, but came back to haunt the fund when trouble hit. Steve believes that there was a failure to protect the nest egg, and this will change when he is Treasurer.
With $44 billion to manage, a $22 billion hole, and a legal mandate to earn 8.25% annually, Massachusetts must recruit the best available professional talent to manage the pension funds. Steve has been clear that if managers want to make Wall Street money, then by all means they should go to Wall Street. But we do need to pay managers competitively with other states. Massachusetts cannot afford bargain basement hires.
In line with national practice, Steve would pay modest bonuses to managers who exceed carefully specified benchmarks, but in no case would there be bonuses when the pension fund loses money.
Furthermore, to open up the process as soon as possible after taking office, Steve would take a series of steps to dramatically improve accountability and transparency in the management of our pension assets. They would include the following:
* A rigorous, competitively bid RFP ("request for proposal") process to insure that the Commonwealth is getting the best deal possible in terms of service, quality, value, performance and professionalism.
* The implementation of an emerging managers program that would enable smaller managers as well as women-owned and minority-owned firms with distinguished track records serving other pension or endowment funds to compete for a share of our pension management business. Maryland instituted such a program and found that the energetic newcomers frequently outperformed the established firms.
* Full disclosure on our website of all contractual relationships entered into by those organizations doing business with our pension fund and their value in financial terms. Timely and accurate dissemination of this information will greatly enhance the credibility of our pension fund management.
With billions at stake, this is no time for shortcuts or political ploys. Steve Grossman has the experience, the skills, and the plan to safeguard the Commonwealth's pension funds.