OC’s Pension Investment Return Questioned, Explained

OCEAN CITY — After raising concerns about the return on the town’s pension plan investment portfolio in recent years, resort officials this week got a primer on how the process works.

Last year, a decidedly challenging financial year because of COVID-19, Ocean City was able to avoid going to the general fund to cover shortcomings in the combined employee pension funds through some creative financing. However, concerns were raised on the return on the town’s investments in stocks, mutual funds and other assets which help fuel the pension funds.

Ocean City’s stated target goal for return on investment is 7%, but there have been years recently, especially during the bustling pre-COVID economy, when the pension fund investments have fallen short of that goal. All in all, there have been years when the investments have exceeded the goal, but for the Mayor and Council, the years when the return falls short of the 7% mark raised concerns.

Last year, during the debate about how to reconcile the town’s contribution to the two pension funds, a general employee fund and a public safety fund, the return-on-investment issue was raised and the Mayor and Council questioned if it was time to shop around for a new investment counselor. On Tuesday, Morgan Stanley Senior Vice President and Senior Investment Counselor David Esham laid out the town’s investment policy and the layers of management that go into the investment strategy.

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 enough and strong enough to support the level of funding needed to pay employee pensions over the long haul.

The town’s Pension Committee, or the trustees, make investments from the pension funds to ensure they grow at a rate needed to meet the demand. The pension committee makes assumptions based on market conditions and sets a goal for return on investments in the stock market, for example. That target return on investment rate is set at 7%. Again, however, there have been years when the town’s pension fund investments have fallen short of that goal.

Esham pointed out the 7% goal is an average over time and there would naturally be times when the investment returns fall short of the goal and times when they exceed the goal. He suggested the Mayor and Council take a broader look, rather then focusing on a single year, or even one quarter of a single year.

“It’s a set of guidelines the city and its pension trustees have put together,” he said. “We don’t want the market wagging your pension plan, and you don’t want to make emotional decisions either.”

Esham explained the layers involved in the town’s pension investment strategy including the pension committee, or trustees, the investment consultant, and, ultimately the investment managers.

“Together, they gather all of the information and make recommendations to the trustees, then the trustees report to the council,” he said. “In my experience, the town has taken an aggressive approach, but has also been prudent with the budget. It’s a fine line.”

As the town’s investment consultant, Morgan Stanley oversees the investment managers, which make the tough decisions on how to grow and diversify the town’s overall investment portfolio. The hiring and firing of investment managers is all performance-driven, said Esham.

“They determine how to build your portfolio and try to get to your 7% target with the last amount of risk,” he said. “They try to find asset allocations that get you to that 7% with the least amount of volatility.”

During last year’s debate, some on the council questioned why the town’s investments often fell short of the 7% goal, when their own personal investments were doing so much better.

“The question we often hear is why isn’t this doing as well as my growth fund, or why isn’t this doing as well as the Standard and Poor’s 500?” Esham said. “The problem with these questions is we can’t assume the same amount of risk. We have a balanced portfolio and we don’t have that level of risk.”

Of course, having pension funds at a level of 100% is ideal, but it’s essentially a pipe dream. Instead, municipalities such as Ocean City attempt to nudge was close to that 100% mark as possible. The good news is, in recent years the town has been steadily in the 80% range and the percentage could go higher.

“My guess is we’ll be back in that 90% bucket,” said Esham. “We’re significantly better than most. Most municipalities are in the 70% range.”

Nonetheless, Councilman Mark Paddack continued to hold the consultant’s feet to the fire despite recent growth in the funds.

“You just said the public safety and general employee funds have grown by $50 million,” he said. “How much did we lose in the previous years? There have been times when you guys have never hit the 7% mark. That’s how we got to this point.”

About The Author: Shawn Soper

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Shawn Soper has been with The Dispatch since 2000. He began as a staff writer covering various local government beats and general stories. His current positions include managing editor and sports editor. Growing up in Baltimore before moving to Ocean City full time three decades ago, Soper graduated from Loch Raven High School in 1981 and from Towson University in 1985 with degrees in mass communications with a journalism concentration and history.