OCEAN CITY — The good news is Ocean City will be able to cover shortfalls in its employee pension fund from COVID-related factors without going to the general fund, but concerns remain on the consistent losses on market investments that help fuel the fund.
At Tuesday’s work session, Finance Director Chuck Bireley presented some shortfalls in the employee pension fund. He explained the town actuarial-recommended contribution to the pension plan is about $103,000 over budget, meaning the city would have to increase its contribution to the pension plans to reconcile the desired fund balance.
Bireley said the town’s enterprise funds, those self-sustaining funds such as water and wastewater, or transportation, or even the airport of golf course, would be able to absorb the shortfalls, but the town would still be on the hook for about $60,000 to reconcile the pension fund balance. However, the town has a grant from the county that is about $62,000 over budget, which will be used to fund the pension contribution overage.
It’s complicated to be sure, but in simplest terms, town employees invest in their own retirement pensions through contributions from their salaries over their years of service. 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.
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 Committee, 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.
Ocean City’s two pension funds, one for public safety employees and one for general employees, are typically very strong in terms of percentage funded. Of course, 100% is ideal, but that’s essentially a pipe dream. However, Ocean City’s pension funds percentage-wise are typically in the mid- to upper 80s, while the national average is in the low 70s.
What is concerning, however, is the town is not achieving its desired returns in terms of investments made with the pension funds, investments that should allow them to grow and inch closer to the 100% mark. The pension committee makes assumptions based on market conditions and sets a goal for return on investment in the stock market, for example. That target return on investment rate is set at 7%.
The committee and town actuary then direct the fund manager to make investments in the market to achieve that desired 7% return. Granted, 2020 has been an anomaly in terms of market investments largely because of COVID-19, but Councilman Mark Paddack pointed out the current fund manager has consistently fallen short of reaching that 7% return on investment goal even when the economy is booming and suggested the town shop around for a new investment counselor.
“The town’s pension fund has been declining for years with the current fund manager,” he said. “I get that this was a tough year, but there is still a track record for lost revenue. If we throw out the last quarter of 2019 and the first two quarters of 2020, we’ve never reached that 7% return on investment. When was the last time a request for proposal (RFP) was put out for a new fund manager?”
Councilman John Gehrig agreed and said maybe setting the bar at 7% could be too high. He said by lowering the assumptions on expected rate of return for the pension fund investments could help the town better manage the funds.
“No one wants to be short,” he said. “I know there were challenges this year with COVID, but lowering the assumption by a half a point should be considered at some point. I know it’s a lot of money, but it’s something we should at least plan to do.”
However, Bireley cautioned against lowering the expected rate of return on investments.
“By reducing the assumed return on investment from 7% to 6%, that would be $9 million on the public safety side and $6 million on the general employee side,” he said. “That’s $15 million and using it to cover shortfalls would practically wipe out our fund balance.”
In many years, the town’s pension funds come in over budget, but Gehrig said the town’s policy has been to dump the overages back into the general fund, rather than keep them in the pension funds for a rainy day, such as the current COVID situation.
“At times when we’ve been up, we put the money in the general fund,” he said. “We need to reverse that policy. We should have funds set aside for those inevitable bad years.”
Councilman Tony DeLuca and others suggested putting out an RFP for the pension fund investment manager firm to see if the town can do better on its pension fund investments.
“I’d like to hear the process for an RFP,” he said. “I know it would have to go to the pension committee. I think it might be a healthy practice to compare.”