### Operating Inefficiencies Add Millions to MBTA Retirement Fund Costs

## EXECUTIVE SUMMARY

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.

## OPERATING COSTS

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.

## EXPERIENCE STUDY FOR 2010-2014 AND ACTUARY’S RECOMMENDATIONS

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.

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.

## FUND VALUATION FOR 2014

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.*