Andover's Big Pension Liabilities Could Cause Big Budget Problems

ANDOVER, MA -- The town is facing a massive budget crunch if it doesn't take steps to curb its unfunded pension liability. The unfunded liability is between $290 million and $550 million, depending on the method of valuation. The pension liability represents future payments the town will owe current employees for pensions and retiree benefits when they retire.

"We're going in the wrong direction," Retirement Board member Tom Hartwell said at Thursday night's meeting. "We're doing a poor job of managing our unfunded liability. This rate is embarrassing."

The bottom line is that retiree benefits, which currently make up about 17% of the town's annual budget, could soon rise to account for 30% or more of the annual budget, leaving less room for spending on other town services without tax increases. Put another, each of Andover's 17,000 taxpaying households is on the hook for about $25,000 in taxes to close the deficit.

"It's going to crowd out services," Hartwell said. "It's going to increase taxes...Andover is in one of the worst financial shapes of any city or town in Massachusetts."

A variety of factors contributed to the deficit and the looming crisis. The Retirement Board set overly optimistic investment returns in projecting the fund's future balance. That required lower contributions but amounted to a bet on big stock market returns. The Retirement Board currently projects investment growth of 7.25% annually, down from 8% in 2011, but still significantly higher than the 4.55% average annual return it has earned over the past 10 years.

The town also allows part-time employees to collect the same retirement benefits as full-time employees.

A previous plan that was designed to eliminate the unfunded liability over the next 30 years by increasing employee contributions to their retirement benefits was a nonstarter. Unions appealed to state Sen. Barbara L’Italien (D-Andover), who co-sponsored legislation that made it illegal for the town to implement the plan.

Hartwell suggested reducing the towns cost of living adjustment, or COLA, from the 3% it has paid out for the past 20 years. State law requires the COLA to be set to the Social Security COLA which varies from year to year, but towns can pay up to 3% at their discretion. Hartwell suggested lowering the town's COLA to 2%.

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Dave Copeland can be reached at dave.copeland@patch.com or by calling 617-433-7851. Follow him on Twitter (@CopeWrites) and Facebook (/copewrites).