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Mass. leaders back significant boost to pension fund

Plan is to fully meet its obligations by 2036

The Patrick administration and leaders of the Legislature have agreed to significantly boost funding for the state pension plan over the next three years and beyond, aiming to fully cover retirement obligations by 2036.

Under the plan announced Tuesday, the state would increase its annual contribution to the fund by 10 percent a year for fiscal 2015 through 2017. That’s a $163 million jump in the first year alone. After three years, the increases would be 7 percent annually.

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“This is part of a broader pattern of fiscal responsibility, and a partnership of this governor and the Legislature over the last seven years,’’ said Glen Shor, secretary of administration and finance.

Most state and municipal pension systems in Massachusetts don’t have enough money to meet all of their future obligations to current and retired employees, a chronic problem they have been under pressure to resolve for years.

The underfunded systems must add billions of dollars to pay all retirement benefits they have promised to workers down the road.

The financial crisis only made matters worse.

The state and many local pension funds across the Commonwealth extended their target dates to fully fund obligations by as much as 15 years — to 2040 — after suffering serious investment losses in 2008 and 2009.

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But extending the target date for full pension funding is expensive, too.

Those delays could cost taxpayers as much as $26.4 billion, according to a new report by the Pioneer Institute, a Boston think tank.

The state and municipalities delayed their full-funding goal to 2040 “in order to prevent a fiscal disaster,’’ writes Iliya Atanasov, senior fellow on finance at the institute, and author of the report slated for release Wednesday.

But “deferring pension payments comes at a cost – namely, the forgone investment returns that would have been generated had those monies been deposited in the system in a timely manner.’’

Under Shor’s consensus agreement with the leaders of the House and Senate Ways and Means committees, the state would contribute nearly $1.8 billion to the pension fund in fiscal 2015.

That would be more than 7 percent of total projected state tax revenues of $24.3 billion.

The state’s $57 billion Pension Reserves Investment Trust is aiming to eventually make up $28.3 billion in unfunded pension liabilities.

Public pension plans face two problems when the economy and the stock market both go south.

Pension investments lose value, and the government has less taxpayer money available to help shore up the funds. These problems are playing out at public pension funds across the country.

James Lamenzo, an actuary at the state’s pension oversight board, the Public Employee Retirement Administration Commission, said the group has been pressing the Commonwealth’s retirement boards to reset their target dates to 2035 or sooner.

“We were dealing with the 2008 loss,’’ Lamenzo said. Now it’s time to reel in the years in which pension obligations will be met, he said.

“Anybody who’s beyond 2035 should realize they’re at risk,’’ said Lamenzo.

The risk to a pension fund is that financial markets will suffer other declines between now and its full-funding target year, leaving governments owing large sums of money at times when they are strapped.

That is one reason officials decided to boost payments to the state pension plan by larger percentages in the next three years.

State Treasurer Steve Grossman, who is chairman of the state pension fund and a candidate for governor, said that bond-rating agencies will cheer the move, which in turn will keep government borrowing costs low.

“It’s an aggressive approach, it’s the fiscally responsible approach,’’ Grossman said.

Last year, the state lowered the assumed annual gain for its pension fund investment portfolio from 8.25 percent to 8 percent, a level still considered aggressive by industry standards. Lower investment gain assumptions are prudent but make it harder to reach full-funding goals without additional cash contributions.

Beth Healy can be reached at Beth.Healy@globe.com.

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