As a top deputy described an “arms race” among states to show investors they are addressing debt, Treasurer Steven Grossman said reforming the state’s pension system to reduce the state’s unfunded liability would be critical to keeping borrowing costs low.
 
Grossman, who supports a plan by the Patrick administration to extend the state’s schedule to pay down the system’s unfunded costs by 15 years to 2040, said investors also want to see the state showing it has a plan to reach that goal.
 
The state pension system covers the retirement benefits for over 294,000 state retirees and teachers and has an unfunded liability of $18.8 billion.
 
“Bond buyers do not like it when states kick the can down the road. They don’t like that at all, so what they’re looking for is us to tell them how we’re going to get fully funded by 2040,” Grossman testified before the Senate Committee on Bonding, State Expenditures and Capital Assets.
 
Committee Chairman Sen. Brian Joyce held a hearing today on the state’s long-term debt picture to help his committee, which includes many new members, understand the state’s borrowing practices and debt outlook.
 
Officials said that despite having one of the highest per-capita debt ratios in the country, the state’s debt levels remain affordable. Grossman and Secretary of Administration and Finance Jay Gonzalez said that fact been affirmed by investors and bond rating agencies that continue to see value in Massachusetts bonds.
 
Standard and Poor’s in February revised the state’s AA bond rating to show a “positive outlook,” leading officials to believe the state could be in line for an upgrade soon.
 
Grossman said addressing pension costs though Gov. Deval Patrick’s legislation that would raise the retirement age for new employees is critical to maintaining the state’s bond rating, and must be incorporated into a state financial management plan that includes greater transparency, eliminating the structural deficit in the budget and increasing annual contributions to the pension system.
 
“It seems, not to go Charlie Sheen on you, that we’re winning, but we can always do better,” Joyce said.
 
Sen. Kenneth Donnelly, a Democrat from Arlington, said he understood that the state needs to extend the funding schedule to avoid deeper cuts in services as the economy rebounds from recession, but he questioned why public employees should “pay for the sins of the state.”
 
Donnelly noted that most public employees now contribute 11 percent of their earnings to the pension system, covering the cost of nearly their entire retirement benefit.
 
“I see this pension system as being funded, and what I’ve seen since 1988 is the state not putting their contribution in when they should have,’ Donnelly said.
 
Gonzalez said the governor’s plan to reform to the pension system is not a response to demand from rating agencies, but a step that is necessary to secure the state’s long-term fiscal health.
 
“Whether we like it or not, we have this huge unfunded liability. We have to address it,” Gonzalez said.
 
With roughly $20 billion in debt and $9 million in interest payments due over the next 30 years, officials said that Massachusetts has one of the highest per capita debt rates in the country, calculated by Moody’s to be roughly $4,600 per person.
 
Even when accounting for the above average income for Massachusetts residents, the state’s debt burden remains high when compared with other states.
 
The $20 billion total does not include significant amounts of debt held by the Massachusetts Bay Transportation Authority or the School Building Authority, agencies that use state sales tax revenues to help fund operations.
 
“As long as I can remember, we have been a high debt state. This is not new and investors have become really comfortable with it,” said Colin MacNaught, the state’s assistant treasurer for debt management.
 
Vanguard is the state’s largest municipal bond holder, followed by A.I.G. Massachusetts-headquartered Fidelity ranks in the top five, according to Treasury officials.
 
MacNaught said pensions have become “the hottest issue in the municipal bond market” with investors demanding to hear from states about how they plan to address the long-term unfunded liabilities in their systems.
 
“There’s a bit of arms race underway with states in terms of pension reforms where states are rationing off benefits. Utah is on the far end that has gone to a 401K,” MacNaught said.
 
Lawmakers also got an overview of the Patrick administration’s long-term debt strategy, a policy put in place by the governor that limits annual borrowing to no more than 5 percent or $125 million more than the previous year, with no more than 8 percent of budgeted revenue going to debt service.
 
The Patrick administration’s debt affordability analysis limits state borrowing to lower thresholds than allowed under statute, and the governor has reduced borrowing plans in the capital plan for 2008 through 2015 by over $1 billion in response to diminished state revenues.
 
Joyce commended the administration for managing the state’s debt in a systematic way, and said it might be something he would look to codify in law this session to preserve the practice for future administrations.