OCEAN CITY — A divided council opted not to expand the town’s contribution to its municipal employee pension plans this week after a windfall was discovered, touching off a larger debate about the city’s spending habits.
During Tuesday’s work session, Finance Administrator Martha Bennett told the Mayor and Council the town’s actual contribution to the employee pension funds came in around $369,000 more than what was recommended by its financial consultants and included in the budget. The town budgeted roughly $2.2 million for its annual contribution to the pension plan, but due to a variety of factors including a robust stock market, the actual potential contribution came in around $369,000 more.
To be sure, the windfall is fairly modest considering the combined general employee and public safety employee pension fund liability totals roughly $23 million, but there were some on the council that favored putting the $369,000 back into the pension funds, while others on the council were in favor of putting the windfall into the general fund. That apparent split triggered a larger debate about taking the opportunity to chip away at the pension fund liability or keeping the $369,000 windfall in the general fund for other purposes.
Bennett explained the annual pension contribution is based on certain assumptions on employee salaries, retirements and other attrition and the sound investments made with pension funds in low risk investments. With the stock market climbing seemingly daily, the town did a little better than expected with its investments from the pension funds, which, in part, resulted in the surplus.
“Part of it is due to greater investment gains than anticipated,” she said. “Also, salaries didn’t increase as much as expected. That resulted in a lower contribution to the pension funds than we expected.”
Bennett’s recommended adding the $369,000 to the town’s general fund balance and keeping the pension contribution at the budgeted rate. Councilman John Gehrig, however, said the excess could allow the town to make an even larger contribution to the pension plans this year.
“That is a positive budget outcome,” he said. “The stock market has been on an epic run. If it declines, what kind of pressure does that put on our pension plans. I get nervous about these pension plans. I just don’t believe the market can continue like this. We have an opportunity to get ahead a little bit here.”
Bennett said Ocean City’s amortization schedule for its pension plans is 10 years, which in layman’s terms means the town’s goal is to get its pension plans 100 percent funded within 10 years. At 83 percent, Ocean City is already ahead of the game regardless of any decision on what to do with the excess $369,000. She recommended folding the excess into the general fund balance.
“We’re already very aggressive with doing this in 10 years,” she said. “Most cities do 15 years. Any strengthening of our pension plans is a good thing. I recommend meeting our actuarial goal as planned. We’re already making a meaningful increase.”
Bennett said during the last recession, Ocean City was able to meet its pension fund contributions every year at a time when many jurisdictions were putting them on the back burner.
“We met every contribution through the recession,” she said. “We never took a pension contribution holiday when many municipalities were. That’s very aggressive.”
However, Councilman Wayne Hartman pointed out putting the roughly $369,000 in excess over what was budgeted represented an opportunity to get a little ahead on the pension contribution and perhaps lessen the burden in future years.
“If we don’t take that additional money and add it our contribution, we’re just kicking that can down the road and passing the liability to future generations,” he said. “I’m leaning toward taking the surplus beyond what was budgeted and chipping away at that liability. We have an opportunity to put on more than was budgeted.”
Mayor Rick Meehan said there was likely no right or wrong answer in terms of what to do with the excess $369,000. He pointed out the town has been aggressive in funding its employee pension plans and the $369,000 would not represent a major shift in that strategy.
“I don’t know that there is a wrong way to go with this,” he said. “We have a very aggressive pension contribution strategy. Very few communities are this aggressive. The excess here is such a small percentage that I don’t know how much of a difference it will make in next year’s budget.”
However, Hartman continued to push for adding the $369,000 right back into the pension plan. Hartman said if the $369,000 was added to the general fund, it would likely be spent on something else.
“All we’re doing is pushing this liability down to future generations in Ocean City,” he said. “I don’t care what other communities are doing. I care about what we’re doing. So many times, we have extra money beyond what is budgeted and we find a way to spend it.”
Hartman made a motion to add the $369,000 to the town’s budgeted contribution to the pension fund. Councilman Dennis Dare pointed out doing so would encumber the excess $369,000 and eliminate any possible use as a rainy day fund of sorts.
“Once you make a contribution, it’s no longer the Mayor and Council’s money,” he said. “It becomes the pension’s money. I think we can’t make a decision until we do our financial plan. Once you make a contribution, it’s gone. Watch the news and look at what’s going on in Texas and Florida. It’s still hurricane season and we might need that money for another purpose.”
Councilman Matt James agreed adding the $369,000 to the pension plans would encumber the money, but also agreed it would be best served to continue to chip away at the pension fund liability.
“Once we put it in there, it’s gone, but it’s paying for something we’re going to have to pay for anyway,” he said.
Gehrig said adding the $369,000 to the town’s pension contribution this year was not going to put a big dent in the liability, but it was a good idea to start chipping away at it.
“In the big scheme of things, it’s not going to move the needle very much,” he said. “I just don’t see how it can be a negative to put a little more into the pension plan when we have this excess.”
Council President Lloyd Martin advocated for putting the excess into the general fund for now.
“I do agree funding the pension is a good idea,” he said. “We changed the assumptions and were more conservative this year. I think leaving the money in the fund balance is the right thing to do. We’re in hurricane season and we might not want that money encumbered yet.”
However, Hartman continued to push for adding the $369,000 back into the town’s pension fund contribution. He said with the general employee pension plan funded at 83 percent, any opportunity to improve that should be taken.
“This is like an IOU,” he said. “It’s like having a loan and not paying the interest. We’re going backward on this. That’s all the more reason to put this excess back into the pension plans.”
Bennett pointed out the actual dollars are more important than the percentages at this point. It has been the town’s stated policy to keep a general fund reserve balance at 15 percent of the total budget, but that number has soared in recent years.
“We closed out the fiscal year on June 30 with a fund balance at 25 percent,” she said. “That’s over $20 million. You have to look at the actual dollars and not just the percentages. Of course, our goal is getting to 100 percent, but we did put $2.2 million into the pension funds in the fiscal year 2018 budget.”
Hartman pointed out with the pension fund liability over $23 million, along with an employee health plan liability around $27 million and much more debt tied to capital projects that are bonded, the opportunity to reinvest the $369,000 into the pension funds should be taken.
“We have $140 million in liability and $20 million in reserve,” he said. “I think we need to start paying some bills.”
Bennett pointed out the liability and debt is only part of the town’s financial equation.
“You also have $396 million in assets,” she said. “You’re very strong on both sides. I realize we have debts, but we also have very strong assets.”
After considerable debate, the motion to add the $369,000 windfall to the town’s pension contribution died on a 3-3 vote with Hartman, Gehrig and James in favor, Martin, Council Secretary Mary Knight and Councilman Tony DeLuca opposed and Dare abstaining. The council then voted 5-2 to add the $369,000 to the general fund balance at least until the larger financial plan is completed. That vote had Martin, Knight, Dare, DeLuca and Gehrig in favor with Hartman and James opposed.