Focus on Finance: A Changing of the Guard in Boston

Meredith Weenick was appointed the City of Boston’s Chief Financial Officer and Collector-Treasurer in May 2011. Prior to her appointment, Ms. Weenick served as the Acting Director and Associate Director of the City’s Office of Administration and Finance and as Policy Advisor to Mayor Thomas M. Menino. Prior to joining the Menino administration in 2002, Ms. Weenick held leadership positions in local, state, and national nonprofit organizations in the fields of community service and workforce development. She holds a BA and MBA from Harvard University. Meredith Weenick recently announced that she will be leaving her position with the City of Boston this coming April.

Labor costs have often been in the Boston-area news and the arbitration ruling awarding the Boston police patrolmen’s union a 25.4 percent raise over six years became a major issue during the mayor’s race. What impact will this have on city finances?

We reserved funds to support the same raises the civilian employees get, which are essentially about half the size of the arbitrator’s award. In order to comply with the arbitration ruling as approved by the city council, we are pulling from a new revenue source that wasn’t budgeted, which is state aid that was finalized after our budget. So the bigger issue is what will happen with the higher-ranking officers. This award affects just the patrolmen and there are 600 plus detectives and superior officers who we have to expect will receive a similar raise. That would add about another $8 million in this fiscal year that we need to identify. There is about a $24 million cost for fiscal year 2015.

We do a multi-year forecast so if you asked me any time since June, I would say we are carrying a $30 million deficit we have to get to zero. This adds $24 million, so we have gone from $30 million, which is a number I can solve, to over $50 million. That is difficult to manage and doesn’t account for the potential impacts of the award on the fire union’s contract.

This adds pressure. The revenue pie is relatively fixed. We make our projections and budget conservatively on our revenue projections, which have to conform to practices approved by the Department of Revenue. Our practices are well-known and considered prudent. We have to figure out how to address this $24 million problem within revenues we don’t anticipate growing. There will have to be tradeoffs.

Aside from current labor negotiations, Boston, like many cities, has large unfunded liabilities in retiree health costs. A Pew study found Boston had $4.5 billion in unfunded healthcare liabilities in fiscal year 2009. What steps can cities take to deal with spiraling medical obligations to their retirees?

There are two main factors. Our retiree health benefits liability is about $3 billion. That’s growing. However, we are not paying our Annual Required Contribution (ARC), so each year we fall a little further behind. What made the number go from $4.5 billion to $3 billion is a state law that required all Medicare-eligible, municipal retirees to go onto Medicare. It’s basically a cost-shift onto the Federal government. We’re paying the Medicare tax. They should go onto Medicare rather than staying on the regular health care plans. While that lowered the liability, we are still falling further behind and haven’t adopted a payment schedule to really address that problem.

This is kind of opposite to the state of the pension system. The pension system has about a $1.5 billion unfunded liability at this point. We are under a state law that requires us to adopt a schedule that fully funds the pension system by 2040. Currently, we have a schedule that gets us to 2025; we have 11 years left but payments increase dramatically. City contributions go up by 9.25 percent each year until 2025. Obviously the budget won’t go up by 9.25 percent each year, so if pension payments are going up at this rate, it’s putting pressure on the rest of the expenditure pie. We feel that at least in the near term it’s a doable prospect and well worth it to fully fund that liability by 2025 because then we’ll be able to return to funding just the normal costs of the pension and turn the overage, which by then will be over $100 million over to the other post-employment benefits (OPEB) liability. We also anticipate by 2025 there will be state legislation requiring us to adopt a schedule for funding retiree health care.

Will healthcare reform, both through the Massachusetts reform and the Affordable Care Act, affect retiree health care costs and the city’s obligations?

Not yet. I very much applaud what Massachusetts is trying to do with cost containment but the path is long-term. They are experimenting with accountable care organizations and other methods of cost containment that will bear fruit much later. First we have to understand if we can administer them and then see if they are successful at driving down costs.

For the city, our next bite at the apple would be to follow a state law passed in 2011 that would allow us to put all of our employees on the state health plan and get out of the business of administering health. The state has a less generous plan but the law clearly allows us as the administration to make that executive decision. There has been impact bargaining and some mitigation to deal with that. It forced our unions to come together and bargain around health benefits.

We now meet once a month with all 40 union leaders to discuss all things health insurance. We’ve developed a quite productive relationship with them on a very complicated topic. No one at the table is a health care expert; they have consultants and we have consultants and staff. Luckily, all the changes we’ve made over the past two and a half years have been done with universal agreement from all unions. We can still trigger the law and go to the state plan, but we think there’s still room to lower costs and extract value within the collective bargaining framework. If we can keep value and lower costs, that’s good for the city and its employees. We’re engaged in a nine-month policy decision-making process that will culminate in a request for proposals next fall and a decision next winter. So we are hoping when the current agreement ends we will have a new set of health insurance products and be able to lower costs.

This cooperation has been critical. Massachusetts law says you have to negotiate with each individual union, which is incredibly inefficient when it comes to a product like health care. You can’t take a 200-member agreement into the health care market.

How has Mayor Menino’s tenure influenced the city’s financial practices and fiscal position?

The Mayor steadily invested in the city’s financial management throughout his 20 years in office. You can map his efficacy in implementing his policy agenda by the increasing sophistication of the financial management of the city. I think it’s a point of pride for Mayor Menino. The Mayor was not a financial expert, but he really knew and understood the city’s budget very well going into office because he had been chair of Ways and Means in the City Council. He knew the line items, he knew the departments, he understood all the major drivers of the budget. It still took him years to put together a team that could successfully navigate the finances for him and give him the resources to execute his policy agenda.

We are triple-A rated by Moody’s. We have very solid, conservative financial practices. We weathered the storm of the last two financial crises. We actually had more layoffs in the 2001 recession than the 2008 recession. We got better at making sure we had the flexibility to go through a recession without closing the police stations and closing the fire stations. We know that interest rates are rising and that there’s more noise in the bond market. The higher bond rates go, the less we can do for our dollar.

Mayor-elect Walsh has a series of policy priorities including early childhood education, refurbishment of school buildings, and neighborhood economic development. How can the city raise money, or cut spending, to pay for these priorities?

Under home rule in Massachusetts the city has no taxing authority independent of the state. Every time we seek to add a tax we have to go the legislature and historically we have been very unsuccessful with that. The only two tax increases we’ve seen have been associated with huge reductions in state aid due to the recession: tens of millions between fiscal year 2009 and 2010. The state felt that if it was going to dramatically cut local aid it had to give the cities and towns something that wouldn’t cost the state anything—in this case taxing authority. They gave us a 0.75 percent meals tax and a two percent addition on rooms. We’ve absorbed those into our ongoing budget but now we don’t have anywhere else to go to raise revenue.

While I think Mayor Walsh will have more sway with the legislature, I would urge him not to be overly optimistic. You certainly don’t want to budget for success until you have it in hand and we know that taxes take a long time to go through the legislature. We know that the legislature and Governor, in general, have been very negative towards local taxing authority. We will certainly support any efforts to get more revenue-raising authority from the state.

There aren’t very many places to go. It is a very fixed pie and any new spending will require tradeoffs and decision-making. As much as I’d like to invest in schools, we have police stations, fire stations, community centers, municipal buildings, and libraries that need work. We’ve treated everyone fairly. We approach budgeting from a “pie” perspective. If the city’s budget grows everyone’s slice grows but their percentage of the pie stays the same. We make exceptions of course, but do that knowingly and the goal always is proportionality.

How does state aid affect the budget?

When I report state aid I always use a net figure, taking out what we pay in for things like the Mass Bay Transit Authority and the charter school assessment. As more kids enter charter schools, the assessment goes up. The state is underfunding its obligations. There’s a ramp-down reimbursement for kids entering charter schools and they have consistently underfunded that line item since the recession. This means that raising the cap on charter schools will have an effect on the budget through higher assessments and lower net state aid. Meanwhile, we have 125 school buildings to maintain. Enrollment is down about eight percent over the past decade but we’ve had an increase of 2,000 new kids last year to reach an enrollment of about 58,000. Families are definitely interested, especially in our elementary schools and high schools. Our middle schools still need some work so we can maintain a continuum of education for kids, but that takes investment, which brings us back to the original problem of a fixed pie of resources for the city’s needs.

What is the role of a CFO in a transition and what’s the learning curve for a new team coming in after a 20-year administration?

It remains to be seen how the transition will work out in detail. We already have a lot of existing resources, so rather than a transition book you will find a transition blog, which I encourage you to check out. We have a two-fold objective with the blog: first we want to show an incoming Chief of Staff or Chief of Policy the breadth and depth of this business. Our blog posts will walk them through each department. I’ll have four or five blog posts. A Chief of Staff might not have to know the technical details of what I do but will have to know what a CFO does [in general]. The second purpose is for the public and for the public to hold the new administration accountable for everything the government should be doing. So there’s really an internal and external piece to this blog.