Operating Inefficiencies Add Millions to MBTA Retirement Fund Costs

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Actuarial valuations and an experience study for 2010-2014 obtained by moneyfact.org provide a rare glimpse at the workings of the secretive MBTA Retirement Fund (MBTARF).

Recommended changes to actuarial assumptions would add about $4.8 million to annual required contributions (ARC) estimated on 2014 payroll basis. Overall payments into the fund would rise to $95 million. They can be expected to grow at a 3-4% annual clip, in line with experienced payroll increases and planned amortizations of unfunded liabilities.

A 122% increase in assumed MBTARF operating costs would add $2.3 million to the ARC, whereas adjustments of service and demographic assumptions would add another $2.8 million annually.

Moneyfact.org analysis of MBTARF operating costs for 2007-2012 shows they averaged 29 basis points on average yearly net assets. Over comparable periods, the Massachusetts state and teachers’ retirement systems had a 7 bps operating-expense ratio (OER), less than one fourth that of the MBTARF. The two state systems’ average operating expense per member was $80, while the MBTARF spent closer to $370.

The MBTARF’s 2014 operating-expense ratio was 25 bps. Its operating cost was $328 per member, a dollar higher than the prior year.


Moneyfact.org compared MBTARF operating costs for 2007-2012 to 2007-2009 data for the Massachusetts State Employees’ Retirement System (MSERS) and 2007-2012 data for the Massachusetts Teachers’ Retirement System (MTRS). Operating costs are defined as all costs except investment expenses, benefit payments and reimbursements.

The nine years of data for the state systems yielded an average annual expense of $80 per member, ranging from $52 to $102. Based on the same data array, the state systems’ operating-expense ratio (OER) averaged 7 basis points on average annual net position.

The MBTARF’s average administrative (operating) expense from annual reports for the 2007-2012 period was $370 per member, ranging from $282 to $444. The average operating expense ratio for the period was 29 bps, ranging from 24 to 34 bps. The MBTARF average is more than four times the obtained average OER for the state systems.

The MBTARF’s OER was 26 bps in 2013 and 25 bps in 2014.


In the 2010-2014 experience study, the MBTARF’s actuary recommended raising the expense assumption from 0.45% to 1% of payroll. That is a 122% increase in assumed plan management costs. Applied at 2014 payroll, it would add $2.3 million to annual required contributions.

The actuary recommended using the RP-2000 mortality table for valuation purposes, with adjustment. The Society of Actuaries has promulgated the RP-2014 mortality table. The MBTARF’s actuary did not provide any rationale for using the obsolete table. In the 2014 valuation, the actuary used an adjusted UP-1994 mortality table.

The experience study recommended lowering most rates of service and disability retirement as well as early separation from service. These changes tend to increase the expected pensionable pay, leading to higher normal cost for the benefits being earned.

Recommended assumption changes pushed the estimated normal cost of the retirement plan to 9.67% of payroll, up from 8.99% (these figures exclude the provision for operating expenses). The increase amounts to $2.8 million in additional contributions annually, based on 2014 payroll.

The normal-cost ARC component rises with payroll, which has grown at 2-3% per annum for the past 15 years. Amortizations for unfunded liabilities increase at a 4% rate. Payroll and amortization increases add up to an anticipated 3-4% annual growth rate for the ARC.

*ARC is intended for following fiscal year. **Based on 2010-2014 experience study. Source: MBTARF

*ARC is intended for following fiscal year. **Based on 2010-2014 experience study.
Source: MBTARF

Based on the 2014 experience study, the total contribution rate was expected to increase to 22.98% from 21.82% of payroll, which translated into a $4.8 million bump in the ARC as of 2014 payroll. The new ARC amounted to $95 million a year.

A 4% annual growth rate of the ARC would result in a $140 million ARC within a decade if the MBTARF meets an 8% return target recommended by the actuary. (The fund has nonetheless lowered the return target back to 7.75%.)

The new assumptions are expected to increase the unfunded liability by about $5 million.


In the 2014 actuarial valuation report, the actuary “found reasonable” an increase of the assumed rate of return from 7.5% to 8%, effective yearend 2011. This change had been made earlier by the assumptions subcommittee of the retirement board. Meanwhile, public retirement systems in Massachusetts have been lowering their assumed rates of return.

The valuation did not take into account the aforementioned 2010-2014 experience study, but was based on the prior 2005-2009 experience study.

Stated figures may not compute exactly because of rounding or omitted detail.

MBTARF 2010-2014 Experience Study

MBTARF 2014 Valuation

MBTARF 2013 Valuation

Flawed Pension Funding Schedules Cost MBTA Millions


The MBTA Retirement Fund’s 2014 financial statements reveal an eight-year-long employer-contribution shortfall of some $66 million. The shortfall indicates that contribution rates implemented with the MBTA’s pension agreement deviate from Governmental Accounting Standards Board (GASB) practices. Over eight years, the mismatch has increased the MBTA’s pension interest cost by approximately $23 million. Interest costs escalate exponentially over time and put credit ratings at risk. The MBTARF’s actuarial assumptions imply that the interest cost on these insufficient contributions will rocket to well over $100 million through 2024.


The MBTA Retirement Fund made public its 2014 financial statements after much delay. Despite voting to make the statements public, the retirement board remained determined to continue its fight against transparency in defiance of Massachusetts law.

The audited statements were produced in a copy-protected format hampering the free dissemination of data. The statements contain typographical errors, which does not enhance their credibility.

The management discussion and analysis discloses two hedge-fund investments which ended up in potentially fraudulent schemes. These two investments totaled $35 million, of which at least $25 million had to be written off as a loss.

Gross of fees, the MBTARF’s investment return for 2014 was 5.51%. An index-tracking diversified portfolio of 60% US stocks and 40% US bonds would have returned nearly twice as much: 10.01%.

The Massachusetts state pension investment board reported an 8.2% return (gross of fees) the same year.


On the final pages of the MBTARF’s statements are the schedule of employer contributions and the underlying assumptions. The first column on the left side of the contribution table shows the calendar year, which is also the MBTARF’s fiscal year. The second column shows the actuarial contribution determined in accordance with GASB and actuarial standards of practice. The next two columns show the MBTA’s actual contributions during the year in dollars and as a percentage of the actuarially determined contribution.

funding schedules

Source: MBTARF

According to these data, from 2007 to 2014 the MBTARF incurred a gross contribution deficit of $66 million relative to the GASB baseline. During the period, the actual contributions averaged about 85% of actuarially determined contributions.

The discrepancy signals that employer contributions to the MBTA Retirement Fund (MBTARF) were not made in accordance with GASB recommendations. Inadequate contributions increase the pension cost and the net pension liability. If left unchecked, they lead to insolvency of the pension plan and jeopardize the credit rating of the MBTA.

Based on the asset returns of the MBTARF for the period, the insufficient contributions added some $89 million to the plan’s unfunded liabilities by yearend 2014. The forgone investment interest comes to about $23 million or about one quarter of the added underfunding. The MBTA, which is kept alive with taxpayer money, is directly responsible for this interest cost.

Interest costs rise exponentially. Using the 8% then assumed rate of return of the MBTARF, the $89 million principal as of yearend 2014 implied projected interest costs in excess of $100 million for 2015-2024. These costs would not be incurred if MBTA pension funding were in compliance with GASB-recommended practices.

MBTA Retirement Fund Condition Deteriorated in 2014


Since 2012, the MBTA Retirement Fund (MBTARF) has become a poster child for poor governance, mismanagement of pension assets and accounting irregularities. The MBTARF has not yet produced an annual report for 2014 because of the “fiduciary review” the retirement board is conducting, as The Boston Globe reported. However, the MBTA and its Fiscal and Management Control Board (FMCB) have released unaudited data on the fund’s likely results for 2014.


According to a draft presentation posted on the FMCB website, the total liability of the MBTARF increased to $2.45 billion.

The unfunded liability rose to $816 million, up $59 million from a year earlier, when it was $757 million.



The FMCB draft says that the MBTARF was 67% funded.



According to the draft presentation, the MBTA is slated to contribute $77 million to the MBTARF in fiscal 2016, up 45% from four years earlier.

Source: MBTA, FMCB

Source: MBTA, FMCB


The FMCB draft lists an MBTARF assumed rate of return (ARR) of 8%. Only one of 104 other public retirement systems in Massachusetts had a higher ARR in 2014.

Based on the unaudited data disclosed by the FMCB and on previous performance, it can be estimated that the MBTARF’s return (gross of fees) was between 7.3 and 8.6%, with a baseline estimate of about 8.2%.

For further details, please refer to the attached documentation.

mbtarf2014estimates.xlsx | PDF

 This article was originally published on 2015.10.23.