OCEAN CITY — The good news is Ocean City employee pension fund remains strong, while the bad news is the town continues to take losses on the market investments that help fuel it.
The Mayor and Council last week got a lengthy review of the status of the town’s two employee pension funds, including one for general employees and another for its public safety employees. The presentation was long and detailed, but boiled down to its simplest terms, the review showed Ocean City’s two pension funds are in solid shape with the general employee’s pension funded a little over 86% and the public safety plan funded at around 82%.
Of course, 100% is the ideal, but that lofty number is largely a pipe dream for most jurisdictions including counties and cities. Nationally, the average is around 73%, so Ocean City is doing much better than many of its colleagues in terms of funding levels for its pension plans.
What is concerning, however, is the presentation revealed the town is not achieving its desired returns in terms of investments made with the pension funds, investments that should allow it to grow and inch closer to that ideal 100% mark. In its simplest terms, 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 enough and strong enough to support the level of funding needed to pay employee pensions for the long haul.
The town’s employees contribute to the pension plan through contributions taken out of their paychecks over their careers with the city. The town matches those contributions and then the Pension Board, working with the actuary and financial advisors, make investments in the stock market, for example, to help the fund grow larger for the employees upon their retirement.
Actuary Ed Koebel of Cavanaugh MacDonald presented an overview of the town’s pension plan last Tuesday, although no action was required of the council. Instead, it was a broad overview of the status of the pension plan and recommendations are forthcoming, perhaps at the next work session.
Koebel explained the pension plan is reviewed and changes are advised based on certain assumptions over five years. For example, the pension plan makes certain demographic assumptions including mortality rates for those receiving benefits before mortality. If Ocean City’s retirees, most of whom receive benefits for life, live longer than the assumptions, there is a greater strain on the pension plan. Other demographic considerations are salary increases, cost of living adjustments and the number of employees retiring in a given year versus the number of new employees taken on.
Another leg of that stool, and perhaps the most important, is the return on investment of pension plan funds in the markets. Koebel said Ocean City’s pension plan assumes a return of 7% in its investments, a target that town has not reached in recent years. For example, the pension fund investments only returned 1.5% in 2019. While the investments did return 8.7% in 2018 and 9.7% in 2017, the pension fund investments also took a 3.5% loss in 2016 and a gain of only 5.6% in 2015. Councilman John Gehrig questioned if the 7% return on investment goal was too lofty considering the recent performance.
“I think we need to adjust that 7%,” he said. “We need to know what it’s going to cost us to maintain the 80%-plus funded ratio. We don’t want that to keep going in the other direction.”
Gehrig pointed out the pension plan is currently funded around 86 percent, dropping from the 87 percent in the last review, largely because of the poor return on investments. He also pointed out the pension fund came in considerably higher than what was anticipated the last time around, but that windfall was not reinvested in the pension plan.
“We have a shortfall,” he said. “We either fund it from the budget, or we have to raise the rate. In 2017, we had a surplus of $350,000 and we had a big debate. When we have a good year, what should we do with that surplus? We voted to put that $350,000 in the general fund. Now, we’re probably going to need to put money in because it has gone the other way. Now, we’re on a four-year losing streak. Do we need to adjust our assumptions?”
For his part, Koebel said it might be a knee-jerk reaction to change the assumption on the return on investment and reminded the council it should be looked at as a five-year average.
“Not necessarily,” he said. “We don’t look at it every single year. You should still be in that 7% range over time. These are long-term assumptions. You don’t want to make changes in them every year. That defeats the purpose of the pension fund. You have to let your investment work. Some years will be up and some years will be down.”
Nonetheless, Gehrig pointed out at 1.5% last year, the investment return is nowhere near the assumed 7%.
“We’re not even close to that number,” he said. “We’re on a losing streak. We’re getting our tails whooped. It’s one thing to be on a losing streak when times are tough, but times are pretty good right now.”
Councilman Mark Paddack agreed and pointed to a robust economy and healthy market in terms of his own personal investments.
“The last three years, we’re showing losses,” he said. “In my own investments, I haven’t shown a loss in 10 years. The assumption of a 7% return on our investments is too high in my estimation as well. We’re dealing with taxpayer money here. I don’t know what the magic number is, but 7% is probably too high.”
Koebel reminded resort officials the town’s pension fund is very stable and should be for years to come despite the short-term losses in return on investments.
“You are able to pay your retirees for years to come,” he said. “You have $60 million in the pension fund right now. If you didn’t put in another dollar, you could pay the beneficiaries for the next 20 years.”
Councilman Matt James agreed the healthy pension fund was beneficial to the town, but also voiced concern about the short-term losses in return on investment.
“Our bond rating is so good because our pension fund is strong,” he said. “When I see a loss in the last three years, that concerns me because people all over are growing money.”
Gehrig warned against the town resting on its laurels with a healthy, stable pension fund without keeping an eye on the investments.
“To say we’re in good shape leads to carelessness,” he said. “I’m not concerned with how we compare to others. We were 87% funded and now we’re 86%. We took a loss in a market that has been very favorable.”
Council Secretary Mary Knight agreed the pension fund investments bottom line bore more scrutiny.
“We need to look at why we are in the negative in what is such a vibrant market,” she said. “I think we need more information on this.”
Councilman Dennis Dare pointed out the town cannot be willy-nilly with the market investment from the pension fund.
“The bottom line is that $60 million belongs to the employees,” he said. “We can’t lose sight of that. It can’t be used for any other purpose than paying benefits.”
Gehrig said he was happy the pension fund is in such solid shape and didn’t want to hold the actuary’s feet to the fire in what was just a review of the plan, but continued to voice concern about the investment return.
“Look, we’ve done a great job in getting to that 87%, but the challenge is the last five years we have had losses,” he said. “We need to go on a winning streak. I don’t want to sweep this under the rug because the trend is going backward when we should be going forward.”
Mayor Rick Meehan pointed out the town has it pension fund in the great shape it is in because of following the recommendations to the actuary, the pension board and town’s finance and budget officers.
“We have always funded the full amount recommended by the actuary to stay on track for the 10-year amortization,” he said. “We’ve been very aggressive with it and that’s why our fund is so strong.”