The Long-Term Squeeze on Municipal Finances Massachusetts Association of School Business Officials Michael J. Widmer, President Massachusetts Taxpayers Foundation February 10, 2014

Economic Context 2

Challenges to Economic Growth Stagnant employment growth since 2001 Rapidly aging population Workforce will begin to decline in 2015 High business costs –Regulations / Permitting –Unemployment insurance –Energy –Health care –DOR tax policies 3

MA Employs 60,000 Fewer Today Than in 2001; Would Have 180,000 More Jobs if MA Had Grown at US Rate 4 3,382 3, % Source: U.S. Bureau of Labor Statistics 3, %

180,000 More Jobs Would Have Generated $700 Million in Additional Income Tax Revenues in FY 13 5

MA Manufacturing Employment Declines 60 Percent; Difference Has Cost MA 150,000 Jobs 6 Down 60% since 1980 Source: Moody’s Analytics, January 6, 2014 Down 37.8% since 1980

Percent of MA Population 65+ Soars Starting in Source: Moody’s Analytics

Massachusetts’ Work Age Population (15 – 64) Peaks in Source: Moody’s Analytics

U.S. Work Age Population (15 – 64) Continues to Grow 9 Source: Moody’s Analytics

State Finances Will Continue to Challenge Lawmakers

Tight Budgets for the Foreseeable Future Revenue growth less than 5 percent annually over the next decade Growth in major obligations exceeds revenue growth –Medicaid –Debt service –Employee benefits Curtailed federal spending over the next 10 years through ACA and sequestration (recently postponed by the budget agreement for two years until 2016) –Medicare ~ $7.3 billion –NIH ~ $1 billion –Defense ~ $6 billion 11

State Facing Sustained Period of Slower Revenue Growth 12

Health Care and Employee Benefits Consume 85 Percent of Increased Spending Since

The Long-Term Squeeze in Municipal Finances

Municipalities in Longest Period of Slow Growth in Prop 2 ½ Era 15

Property Taxes Grew at Slowest Rate Since 1985 Property taxes account for half of all municipal revenues and increased by just 3.6 percent in 2013, from $13 billion to $13.4 billion. 16 Average Annual Property Tax Growth, 1985 – 2012: 5.4% Note: Proposition 2 ½ was not fully implemented until 1984, so growth for 1982 to 1984 is excluded for the graph.

Slow Recovery Is Limiting Increases in State Aid After years of cuts, the rebound in state aid lags that of other economic recoveries. 17

Municipalities Face Enormous Unfunded Retiree Liabilities Unfunded Liability ($ billions) 2012 Total Liability ($ billions) Funded Ratio Municipal Pensions$13.2$ % Municipal Retiree Health Care$30.0 <1.0% Total, Retiree Benefits$43.2$ %

Spending on Benefits and Debt is Crowding Out Basic Services Municipalities find themselves in a long-term budget squeeze because the costs for pensions, employee and retiree health care, and debt service are rising faster than revenues. 19 Growth, 2007 to 2012 Revenues, 13.1%

Debt Service Costs Grew Twice as Fast as Other Spending Debt service costs grew by 23 percent between fiscal 2007 and 2012, totaling $2.26 billion in Municipalities hold more than $12.7 billion in outstanding debt—almost as much as their unfunded pension liabilities. This is principal only and does not include interest costs. 20

Municipal Workforce Is Shrinking Municipalities have eliminated more than 15,500 full time positions, or six percent, since FY Total Municipal FTEs , , , , , ,472 Change-15,570 Source: Massachusetts Division of Local Services data

Despite Billions in Contributions, Little Progress in Funding Pensions In 2012, the state’s 99 local pension systems had approximately $13.2 billion in unfunded liabilities, compared to $13.5 billion in Municipal pensions were just 58.5 percent funded in 2012, compared to 59 percent in Of the 99 systems, 97 are below 80 percent funded and 26 are less than 50 percent funded. The lack of progress can be attributed to several factors: –Benefit enhancements –Weak investment returns –Extending funding schedules –Minimal savings from 2011 pension reform 22

Pension Reforms Apply Only to New Hires; Provide Minimal Savings Pension reforms (in present value terms) will save municipalities only $500 million out of a total liability of $35 billion, or roughly 1.5 percent. Savings are small because the pension reforms apply only to new hires (beginning April 2012): –Raises the minimum retirement age from 55 to 60 and the full retirement age from 65 to 67 for most employees. –Lengthens the period for calculating the pension benefit from three years to five years. –Reduces the incentive to retire early by adjusting the benefit scale so that it mirrors Social Security’s benefit neutrality.

The Retiree Health Care Challenge Municipalities have $30 billion in retiree health care liabilities—99 percent unfunded. –This is what cities and towns must pay in today’s dollars for the lifetime health care benefits already earned by current employees and retirees. 24

The Retiree Health Care Challenge Rather than paying down liabilities as they are doing with pensions, municipalities have opted to pay-as-you-go. Cities and towns spent an estimated $800 million on retiree health care benefits in fiscal 2012, almost equal to unrestricted (general government) aid. Without change, spending is expected to grow to $1.5 billion in 10 years. 25

Huge Increase in Property Taxes Required to Fund Retiree Health Care (single family homes) 26 Municipality ARC Shortfall ($1,000s) Total Residential Share of ARC Shortfall ($1,000s) Single Family Property Share of Shortfall ($1,000s) Tax Bill Increase Per Single Family Property Average Tax Bill Tax Bill Increase Brockton$36,983$24,179$17,332$1,057$2,95436% Fitchburg8,2436,1863, ,82021% Haverhill4,9473,6912, ,6486% Holyoke13,0156,5584, ,91527% Lawrence25,01114,8755,1551,2092,39750% Lowell23,26116,1068, ,20522% New Bedford21,35214,4687, ,76223% Pittsfield7,9755,1623, ,79513% Springfield18,55111,1977, ,63811% Worcester32,36220,22912, ,30715% Total$191,699$122,649$72,781$565N/A

Huge Increase in Property Taxes Required to Fund Retiree Health Care (businesses, thousands of dollars) Municipality ARC Shortfall (A) Business Share of Shortfall (B) Total Business Property Tax Levy, FY 2011 (C) Percent Increase in Business Tax Levy (D) Brockton$36,983$12,804$35,77636% Fitchburg8,2432,0579,81121% Haverhill4,9471,25620,5466% Holyoke13,0156,45823,72827% Lawrence25,01110,13620,10150% Lowell23,2617,15432,13222% New Bedford21,3526,88430,03623% Pittsfield7,9752,81322,47913% Springfield18,5517,35466,00011% Worcester32,36212,13381,83215% Total$191,699$69,050$342,44020% 27

The Need for Urgent Action The longer that retiree health care obligations go unaddressed, the more severe the consequences for retirees. As with municipal health reform, even with changes in eligibility and benefits, retirees would still receive a very generous benefit. 28