OCEAN CITY — The Ocean City Mayor and Council learned the town’s combined employee pension plans are in healthy shape at nearly 90 percent funded, but made some recommended adjustments in the calculations to help ensure they continue to move in the right direction.
The council on Tuesday got a lengthy review of the status of the town’s two employee pension funds, including one fund for general employees and another for public safety employees. The presentation was long and detailed, but boiled down to its simplest terms, Ocean City’s two pension funds are generally in good shape at roughly 90 percent funded, but small changes were recommended to move the funds to 100 percent funded or better.
Town employees invest in their own pensions upon retirement through contributions from their salaries. The town also contributes to the pension funds each year to ensure the balances are stable and strong enough to support the level of funding needed to pay employee pensions for the long haul.
Ed Koebel of Cavanaugh MacDonald Consulting presented the town’s five-year pension review to the council on Tuesday. Koebel said the funds were generally healthy at about 90 percent funded, but recommended a combination of small changes in the town’s pension policy to ensure they keep heading in the right direction. There are certain assumptions made in regards to employee contributions through salaries, anticipated retirement rates for current employees and even expected mortality rates for retired employees who are aging and still in the plans.
After presenting the economic assumptions and the mortality, service and compensation experience of active and retired members of the pension plans, Koebel recommended a series of adjustments that would result in a roughly 2.2 percent increase in the town’s estimated contributions, or a little over $100,000. The proposed changes would not impact the pensions currently being received by retirees or the contributions of active employees, but would result in an increase in the town’s annual contributions to the funds.
“We take a look at assumptions versus what actually occurred,” he said. “There are no changes proposed for your plans including no increases or reductions in the employee pensions.”
Koebel explained Ocean City has always made its state contributions to its employee pension funds even during times of economic peril, such as the recession about eight or nine years ago. He said other jurisdictions and even private companies were not always able to do so. As a result, Ocean City’s pension plans are funded at around 90 percent while some neighboring jurisdictions had dropped to as low as 70 percent.
“While public pension plans across the country have gotten worse, Ocean City’s two plans have improved,” he said. “The town has made its required contributions every year and that hasn’t happened across the country.”
Koebel said the study looked at a wide variety of factors and determined the proposed adjustments would help keep Ocean City’s plans moving toward 100 percent funding in the future, perhaps sooner rather than later.
“We looked at how long and how much you’ll pay these folks,” he said. “We have to make certain assumptions and we have to make sure those assumptions are reasonable. If we get too aggressive with the assumptions, we’re going to create losses. Conservative assumptions will result in gains in the plans.”
Koebel explained the dynamics of any employee pension plan are related to the number of employees ready to retire and begin collecting pensions compared to the younger employees who are just getting started in contributing to their pensions. He said Ocean City, like other entities, has to continually look at striking that balance.
“There are people who are just 25 to 30 years old in these plans and they might be in this plan for another 60 to 70 years,” he said. “We have to make sure the funds are there to cover that.”
Koebel explained a variety of factors went into the recommendations including real and potential retirements, which would move employees from salaries to pensions. He said there were fewer retirements in the general employee pension plan than anticipated with 62 expected and just 39 actually retiring. As far as the public service employee pension plan, the actual number of retirees almost perfectly matched the expected number of retirements.
Another key indicator is employee salaries and Koebel said Cavanaugh MacDonald was recommending Ocean City officials resist the temptation to keep increasing salaries other than step increases in an effort to reduce the long-term impact on the pension plans.
“Part of salary growth is inflation, but there is also merit-based growth and we’re recommending a drop in those rates pretty significantly,” he said. “We like to think each year an active employee is going to get a pay raise and we have to make certain assumptions on that. There will be gains and losses each year and we just try to smooth out those losses and gains.”
Councilman Wayne Hartman pointed out the proposed policy adjustments appeared to be an attempt to accelerate the effort to get the town’s pension funds at 100 percent at the risk of shorter-term impacts on the plans.
“It seems like we’re taking assumptions that lessen our liability,” he said. “We’ve lessened our risk by assuming the blue-collar mortality table. We’ve lessened our risk and taken every step possible to lower our liability and it concerns me. I wouldn’t want to put this liability on future generations.”
Mayor Rick Meehan pointed out the town’s long-standing policy of continually contributing to the pension plans has positioned it to reach the 100 percent goal quickly while others are scuffling along at 70 percent.
“The assumptions are based on the history,” he said. “It’s a look at it in its entirety. We have always funded both plans at the recommended amounts and if we continue that policy, we’re moving faster than ever toward funding our pension funds at 100 percent. Because we’ve been aggressive with this, we’re at 90 percent and others are stuck at 70 percent.”
However, Hartman said he wasn’t entirely comfortable with judging the town’s success with its pension plans compared to the grades of some of its neighbors.
“We’re looking at this compared to our peers around the country,” he said. “That’s like worrying about the neighbor’s kids. I’m worried about our kids.”
Koebel said whatever policy adjustments were made, it wouldn’t change the town’s obligation to make annual contributions to the funds.
“Even if you were at 110 percent funded, you couldn’t take an off-year,” he said. “You still have to put in a contribution from the town every year. That’s built into this. It’s your funding policy and it has allowed you to have a healthy pension fund balance.”
Koebel said there shouldn’t be any concerns with Ocean City’s pension funds currently at 90 percent because of the dynamics of the current active employees paying into the fund and the retirees who have long since stopped contributing and have started to collect.
“This is long-term,” he said. “It’s okay to be at 90 percent. If you just had retirees left in this plan, there would be reason for concern if you were at 90 percent, but you have young employees who are paying into this and will do so for a long time.”
The council voted 5-0 with Councilmen Dennis Dare and John Gehrig absent to approve the recommended policy adjustments and the additional $100,000-plus to the two employee pension funds.