Mayor Marc Laredo backs a plan for the City of Newton to issue Pension Obligation Bonds, and it has been approved by the Newton City Council, but concerns remain about the long-term financial risks involved.
Pension obligations 101
At a basic level, a pension obligation is a debt the City owes to employees. Unlike a mortgage or credit card, the exact size of the debt is unknown, since it depends on both how long employees work to earn retirement benefits, and how long they live to receive retirement payments.
A “fully funded” pension means the employer presently has enough cash and investment assets to pay the forecasted full amount of the pension liability. That forecast depends on future earnings on investments, growth of the liability as employees work more years, and actuarial expectancies of benefit duration, and all are unknown variables in that forecast.
Most of the funding for current and future pension payments comes from payroll deductions from current employees as they work. According to Newton’s Chief Financial Officer Maureen Lemieux, in a normally funded system, the annual City contributions should be 4-5% of the employee payroll, or $7-8 million. This percentage is less than a typical employer’s Social Security tax, which the City does not pay since its employees do not participate in the Social Security system, or earn those benefits, via their City employment.
Some history
However, decades ago, Newton – like many Massachusetts cities – did not keep pace to fully fund its annual contributions. In 2011, the state passed a major pension reform law that requires all municipal pensions to be fully funded by 2040. Shortly thereafter, Newton Alderman – and future Mayor – Ruthanne Fuller penned a comprehensive report detailing the serious consequences of Newton’s underfunding, noting at that time the pension liability was only 52.3% funded.
Since then, the City has annually funded tens of millions of dollars into the pension to make up the shortfall. Since the 2011 pension reform law, Newton and its Retirement Board (an independent body chartered with overseeing the City’s pension funding status) have agreed on various deadlines to reach fully funded status.
Recent decisions
Just prior to Mayor Laredo’s announcement to seek a Pension Obligation Bond, in response to the City’s request, the Retirement Board agreed to extend the pension funding deadline from 2032 to 2035, still well ahead of the 2040 deadline.
In exchange for postponing the deadline, the Retirement Board secured annual benefit increases from the City by increasing cost-of-living-adjustments (COLA). (This was accomplished by raising the base pension amount upon which the COLA is applied by $3,000.) These increased payouts are expected to require approximately $300,000 per year of increased City funding into perpetuity.
Lemieux said the City has faced mounting fiscal pressure in recent years and effectively had three options: cut spending, raise revenue, or adjust the timeline for fully funding the pension system. Ultimately, City officials chose two strategies in parallel: extend the funding deadline and pursue a pension obligation bond.
“What we’re trying to do is have all these balls up in the air, get the pension funded, provide the services that everybody wants, and keep our Aaa [bond] rating,” she told Fig City News.
Maintaining Aaa bond rating
When asked why retaining Newton’s Aaa rating was paramount — given that interest costs increase by only about 0.1% to 0.2% (or only $10,000 to $20,000 annually per $10 million borrowed) for a borrower dropping to an Aa rating — Lemieux said “Aaa is more than just a number, it’s a verification that we’re managing the City and all the finances people entrust us with well.”
Lemieux pointed to a Moody’s report published in November 2025, before Newton extended its pension funding schedule, that described the City as being in “a healthy financial position bolstered by diligent and forward-looking fiscal management.”
Moody’s analyst Nick Lehman said Moody’s has not yet reassessed Newton’s credit profile in light of the proposed pension obligation bond, but said the City’s most recent audit reflected strong fiscal management, including healthy reserves.
“Pension obligation bonds from a rating agency perspective are neutral transactions at best,” he said. “There is a history of them being a credit negative for certain municipalities, however, so it depends on how well funded the pension plan is to begin with.”
Pension obligation bonds
Pension obligation bonds allow municipalities to borrow large sums of money and invest them into pension funds with the expectation that investment returns will exceed borrowing costs.
The City of Newton would borrow between $290 million and $300 million and deposit the proceeds directly into the pension system, specifically with the Massachusetts Pension Reserves Investment Management Board (Mass PRIM), the Boston-based money manager that handles several municipalities’ pension assets in a large multi-asset fund. The lump-sum large contribution would bring Newton’s pension to fully funded status. The City would then spend 13 years repaying that bond through 2040. See chart above.
The success of the strategy depends on the assumption that investment returns will exceed borrowing costs. Lemieux said the bonds would likely carry an interest rate of roughly 5%, while expected investment returns are projected above 6%. If pension investments outperform the borrowing costs, Newton would theoretically come out ahead financially, through what is known as “positive arbitrage.”
Unlike many traditional municipal bonds, pension obligation bonds are taxable.
Short-term relief
Lemieux said that the Retirement Board extending Newton’s pension funding schedule from 2032 to 2035 freed up $5 million in this year’s budget, helping the City increase school spending without pursuing an override. She estimated that a pension obligation bond could generate another $10 million in budget flexibility over the next five years.
In the City’s previous funding framework, officials planned to shift much of the money used for pension payments toward another liability, the Other Post-Employment Benefits (OPEB) fund, once the pension system became fully funded in 2032. Under the new proposal, that transition would instead be delayed as the City continues paying off the pension obligation bond through 2040.
Lemieux said the proposal would not eliminate Newton’s long-term obligations but instead restructure when and how they are paid.
“The upshot of this whole thing is we are going to get significant operating budget relief, beginning now,” she said.
Long-term risk
In December, during his final Finance Committee meeting before retiring, former City Councilor Lenny Gentile voiced concerns about the stewardship of Newton’s finances. He questioned Mayor Laredo’s plan to add new staff positions to his administration. Months later, Gentile is again raising concerns – this time about Newton’s pension funding strategy.
Gentile said City officials have a responsibility to be good stewards of taxpayer money, and he argued that the short-term budget relief is not worth the long-term financial costs that could come with extending the pension schedule and pursuing a pension obligation bond.
He added that Newton’s previous approach to gradually funding the pension system by 2032 was already working without the need for what he viewed as dramatic changes to the City’s long-term financial planning.
“We’ve been getting by,” Gentile said.
Lemieux acknowledged the strategy carries significant risk. Newton currently has $600 million in pension assets. After issuing the bond, that figure would rise closer to $900 million. In that scenario, a 10% market downturn would increase potential losses from $60 million to $90 million while bond payments would still continue.
Lemieux said the City would attempt to manage that risk by starting out overfunded at 103% and building in financial reserves while delaying OPEB funding.
“This is how you keep yourself out of trouble,” Lemieux said.
Newton’s pension assets are invested through the Pension Reserves Investment Trust Core Fund, managed by Mass PRIM. The City’s pension strategy assumes long-term investment returns of 6.9% annually. PRIM’s Core Fund has earned average annual returns of 8.5% over the past 30 years.
The Retirement Board’s investment policy also acknowledges that market conditions can make those return targets difficult to achieve in some years, which could leave Newton exposed to some losses while still owing fixed bond payments.
Looking ahead
Pension obligations were previously funded in increments over time, but under the proposed strategy the City would inject hundreds of millions of borrowed dollars into the pension system at once, betting that long-term investment returns will exceed borrowing costs.
As previously reported by Fig City News, the pension obligation bond proposal still requires additional approvals at the state and local levels before any bonds could ultimately be issued. City officials expect that approval process could extend into fiscal year 2027.
This pension liability arose through decades of the City underfunding payments against it, so taxpayers now are shouldering that burden. The currently approved strategies of extending the deadline and issuing pension obligation bonds have the effect of continuing to share this burden with taxpayers further into the future.
Is issuing a bond to fully fund the pension a good idea? The proposal was approved by the City Council 23-0 on April 27; historical financial returns support the strategy’s borrow-and-invest math; and City Hall has moved forward on this path. Ryan McGlothlin’s letter to the editor to Fig City News outlines the advantages of this approach. A civic benefit might be achieved by eliminating the annual consternation about the size of Newton’s pension funding during City budgeting – provided the financial markets do not hold negative surprises.
Edward Astrachan’s letter to the editor to Fig City News makes a counter-argument to the bond strategy. A decision on the appropriateness of the City’s decision depends on whether the newly available cash created by fully funding the pension will be put to good use.
The City’s annual budget drama may serve a purpose in forcing the prioritization of spending. What will the City buy with additional near-term freed cash, and will it be valuable enough to justify the costs of more borrowing? Newton’s residents may continue this debate as the bonding plan moves toward issuance next year.
Ed. Note: Adam Bernstein contributed to the reporting and analysis for this article.