OC Officials Weigh Pension Plan Assumptions

OCEAN CITY — Despite having a stellar year with the investment returns in the town’s pension plans, a debate ensued this week over lowering the percentage assumptions going forward.

During Tuesday’s work session, the Mayor and Council got an update on the town’s recent pension committee meeting. Ocean City has two pension plans, one for general employees and a separate plan for public safety employees. While both are healthy, the town and its employees invest in stocks, mutual funds and other assets to grow the pension plans and keep them with solid returns. The pension committee consults with investment consultants, whom advise where best to invest the town’s pension contributions for the biggest bang for the buck.

Ocean City’s stated target goal for return on investment is 7%, but there have been years recently, especially during the pre-COVID years in 2018 and 2019, when that mark fell short. This year, however, the town’s return on investment for the pension funds soared to over 30%. With uncertainties going forward, one of the recommendations from the consultant was lowering the 7% assumption for the pension plans’ return on investment to something lower.

During the meeting, there was a discussion of the challenge in future years of averaging a 7% annual investment return given the pension plans’ current near-term outlook and the market assumptions. A suggestion was made for a study of alternative asset allocation options. The study suggested a more aggressive allocation of the addition of less liquid alternatives will likely be necessary to achieve the desired investment returns.

A second alternative is a reduction of the 7% investment return assumption. Councilman Mark Paddack recommended not reducing the 7% return on investment assumption.

“They’re talking about reducing the assumption on the return on investment,” he said. “That seems like dumbing down the assumption. We had a 30% return in one quarter after we had two years of losing money. We have an obligation to assure our pensions are operating and functioning. I don’t know why one of the options is to reduce the 7% assumption when we just showed we can get a 30% return.”

Paddack said lowering the assumed return on investment left the city just spinning wheels with its pension funds.

“By reducing the assumption, we’re not getting ahead,” he said. “I can’t understand why we would consider dumbing down our assumption.”

However, Mayor Rick Meehan said the town can’t look at the 30% return on investment for one quarter based on fluctuations in the market, which is why the return is averaged over time.

“That’s why we average it over five years,” he said. “That gives us a clear picture of where we are.”

The return on investment for 2021 was over 30%. Due to the smoothing over five years, the actual return on investment average is 7.7%, which is still over the stated goal of 7%. The 30% return in 2021 offset the losses in the prior two years.

In any case, the town’s two pension funds remain in healthy condition, with the general employee plan funded at 88% and the public safety employee plan funded at 84%. The average public-sector employee pension plans are funded at around 72%.

The pension committee recommended a contribution from the town’s general fund of $2.6 million this year, down by about $69,000 from last year. For the public safety employee pension plan, the committee recommended a $4.4 million contribution this year, down by about $5,000 from what was contributed last year.

About The Author: Shawn Soper

Alternative Text

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.