(Sept. 12, 2014) The city’s pension funds posted strong investment returns this year heading into some major methodology changes next fiscal cycle, according to a recent presentation by the city’s actuarial advisor.
“This is a real good year to be an actuary in the public sector,” said Ed Koebel of Cavanaugh Macdonald Consulting. “A lot of the plans have finally been able to realize all the losses that occurred in the market back in 2008-2009.”
The values of city’s pension trust funds – one for general employees and the other for public safety, who have a different retirement criteria – are dependent on both the city’s contributions to them, as well as the investment return the funds generate.
Simply put, the city’s annual contribution to the funds is amortized based on the funds’ values relative to the projected retirement expenses for all the employees covered by the fund. If the fund loses money in investments, the town’s contribution will go up, and vice versa.
To keep contributions relatively stable form year to year, investment gains and losses are typically “smoothed” over a five-year period. Over the past five years, the city has gradually assumed all of the sudden loss that the plans experienced in 2009, when investment returns dipped to between $8 and $10 million in the red.
Now that these losses have been fully compensated, and market returns are rising, the funds’ positions have drastically improved. The public safety trust is valued at $49.1 million, versus roughly $57.2 million in projected retirement liability, for a funding ratio of 85.8 percent.
The general employees plan is valued at $48.6 million versus $53.6 in liability, for a funding ratio of 90.7 percent. These ratios are an improvement over the 78.4 and 85.2 percent numbers, respectively, from a year ago.
More important for the short term – and the city’s upcoming budget – is a reduction in the city’s annual contribution to the plans, from around $5.7 million last year to $4.6 this year.
This reduction is not entirely due to investment adjustments. As Koebel explained, any re-assessments of the assumed conditions for the plan will produce positive or negative effects on the funds’ relative value.
The only major losses for the city this year were in the “mortality” category – meaning that the city assumed additional liability for retirees not dying off as fast as had been expected.
“Great news for them, bad news for the system, unfortunately,” Koebel said.
On the other hand, premature departure of employees before retirement, or lower-than-expected raises, will create a relative gain.
Under the current funding methodology, the plans have accrued roughly 6 percent in additional liability each year – although this year, at least, actuarial gains offset that hike.
“It’s the nature of the cost method the city uses, which is projected unit credit,” Koebel said.
In short, the projected unit credit method accrues future liability, and assigns annual payments, based on the time remaining in the amortization schedule. With investment interest compounding over time, benefits become more costly as an employee ages given that there’s less time to earn return on the funds set aside.
Under upcoming policy revisions by the Government Accounting Standards Board – the national regulatory agency for pension funds – all municipalities will have to calculate using an alternative method, known as entry age normal. This creates a more level funding schedule.
“The liabilities are comparable to the unfunded accrued liability [currently]…but the way they get there is a little different,” Koebel said.