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Retirement funds will get $9.3 million contribution for FY ‘14

(Sept. 13, 2013) The Ocean City government’s contribution towards its trust funds for pensions and other retirement benefits will total roughly $9.3 million for the current fiscal year, the City Council heard this week.

This includes $3.3 million for the public safety employees’ pension fund, $2.4 million for the general employees’ pension fund, and $3.6 million for the fund supporting other post-employment benefits (OPEB) like retiree health care.

“It comes very close to what we budgeted, actually $14,256 less,” Finance Administrator Martha Bennett said.

The city’s contributions to its long-term employee funds have been consistently higher since the 2008 economic downturn, although that rough period is starting to improve. After the investment value of the city’s funds took a nosedive, the town broke up the additional payment necessary to make up for these losses over a five-year period, compounded with anticipated market recoveries.

“This year, after our five years are up, our actual assets will exceed the value we assigned them in the smoothing,” Bennett said. “It looks like we were able to get through that period using that methodology…of leveling our contributions.”

The city has two separate trust funds for pension benefits – one for general employees, and another for public safety employees, who pay into the fund at a higher rate but may retire earlier as is typical with police and fire personnel.

Estimated future pension payouts are paid for in two ways. Firstly, the both the employee and the employer pay a certain amount into the fund on a per-paycheck basis. This is known as “normal cost.”

However, due to changes in the plan or variations in real experience versus the actuarial estimate, the city’s plans gradually accrue additional liability. A portion of this may not be covered by the current assets of the plan, and this net is known as “unfunded accrued liability” (UAL). The city amortizes this deficit over a ten-year period.

The general employees’ trust currently has roughly $7.5 million in UAL: $50.7 million of outstanding liability and $43.2 million in assets, creating a funding ratio of 85.2 percent. These numbers are improved over last year’s 82.4 percent.

The public safety plan, likewise, has $11.8 million in UAL, for a ratio of 78.4 percent, an improvement over 76.6 percent last year.

Given the shorter retirement interval of police and fire personnel, the ratio of pension contributions to total payroll of these employees is higher than the general employee base, at 34.4 percent versus 15.3.

However, this ratio will likely level out as new police officers are introduced into the plan. In 2011, the city decided to eliminate new entrants into the plan and put new employees on a 401(a) individual account system. Earlier this year, however, the city’s Fraternal Order of Police negotiated to have new officers put into the pension pool at a reduced benefit.

The town also has a separate fund for OPEB, with a current value of $15.5 million in assets versus $46 million in projected medical expenses. These are difficult to predict, however, as they hinge on the future health of employees. The city has been able to eliminate some of this risk by offering a high-deductible health plan — as opposed to more expensive Preferred Provider Organization plans — that would come with a city-incentivized Health Savings Account. The city has also enforced a cap to any increases in its insurance premium contributions for retirees, at 3 percent, to guard against the town taking the lion’s share of future rate increases.

The $9.3 million in contributions for FY14 will be made in three installments over the next three months.

“The actuarial valuation says we need to make the contribution by mid-year, which would be December,” Bennett said. “However, we are able to make some of the payments before December and I recommend doing that to get them into the plan for investment as soon as possible.”

The city’s long-term plan estimates assume a rate of 7.5 percent return on investments, although this rate may have to be lowered under more strict accounting requirements, to be phased in next year.

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