OCEAN CITY — Ocean City’s general employee and public safety employee pension plans remain in decent shape, despite a pending recession, resort officials learned last week.
During the June 28 work session, the Mayor and Council heard a review of the status of the town’s pension plans from Ed Koebel of the consulting firm Cavanaugh McDonald for the last five years ending in March 2021. Ocean City has two pension plans, one for the general employees and a separate plan for public safety employees.
Each are currently healthy, but the consultant recommended incrementally decreasing the anticipated return on investment with current economic uncertainties from the existing 7% to 6.5% over the next few years. The town, through the pension committee and its consultants, invests pension funds paid into the account by employee contributions in stocks, mutual funds and other assets in order to grow the funds and ensure they are available when employees retire.
Having a 100%-funded pension plan is ideal, but that is essentially a pipe dream. Ocean City’s pension funds are funded at around 84%, which is better than most jurisdictions. When the investments fall short of the mark set at 7%, the town sometimes has to make a contribution from the general fund of fund balance to maintain a healthy level. Koebel explained the process for making assumptions over a five-year period.
“We project retirement benefit plans out for a number of years,” he said. “What the study does is make assumptions on when folks are going to retire and when folks are going to die. We have assumptions on what the financial situation is. We’re trying to set aside contributions, but we’re recommending no major changes for this year.”
Koebel said the recently-completed study reflected no remarkable changes in the pension benefits the town pays to retirees.
“The number of withdrawals is slightly higher than what was expected,” he said. “We expected retirements at the age of 65 at 32, but the actual number as 25. That means folks are working longer. In addition, we expected the mortality rate at 36, but the actual number was 41. A person at age 60 will likely live another 24 years to the average age of 84. People in the next generation are going to live longer. That costs money.”
The town’s pension benefits reflect the average employee’s salary at the time of retirement, a number that can swing from year to year, according to Koebel.
“What happens often in government is salaries are negotiated, especially with union contracts,” he said. “You might not have an increase in one year, but a big jump in the next year. We’re going to hit the mark in some years but miss the mark in other years.”
Koebel said current economic uncertainties made making assumptions with the pension plans more challenging over the next five years.
“To predict inflation is very hard,” he said. “These are long-term assumptions. We’re looking at inflation over the next 30, 40 or 50 years, and not necessarily what is going on in the moment.”
Councilman John Gehrig said the plan as proposed, including dropping the investment return expectation from 7% to 6.5% over a number of years would actually lower the pension fund balance.
“It’s basically us going into debt,” he said. “We’re going from 84% funded to 81% funded. What is our policy on funding ratio?”
Koebel said Ocean City is doing better than most with its pension fund balances.
“Most public sector plans aren’t any where near 100% funded,” he said. “The average is 72%. It would be nice to be at 100%, but the town is paying for the plan. The town is doing much better than most.”
Gehrig asked if dropping the return on investment expectation was a good thing or a bad thing.
“Is 6.5% the right number?” he said. “What do we expect when financial markets are flat or even declining? What happens on an annual basis when the projections miss the mark?”
Koebel responded it depends on the volitivity of the markets.
“It’s a great question,” he said. “When you don’t hit your mark on investment projections, you have to pay more contributions. The town’s contribution has to go up if the investment assumptions don’t hit the mark.”
Koebel said the town’s current pension funds balances at around 84% are better than most and give the town some wiggle room during unforeseen circumstances such as recession, for example.
“I would hate to see it go below the 50% range, but that’s where some jurisdictions are,” he said. “If you have another 2008 recession, you could dip below the comfort level. If you are in the 80% to 90% range where you are now, you can weather a storm and drop down into the 70% range and build yourself back up.”
Councilman Mark Paddack said the ups and downs of the markets and the subsequent return on investment for the town’s pension plans were challenging.
“I’ve been watching the public safety pension fund for years,” he said. “When you look at a 10-year period, we haven’t matched the 7% assumption. Yes, 2021 was a great year, but every assumption is a recession is coming. I understand we’re looking at this over the long haul.”
Gehrig said if the town’s return on investment in the pension plan funds don’t hit the mark, it requires a larger contribution each year from the general fund or fund balance.
“Are we doing this because it fits in with the budget?” he said. “That’s the bottom line here. I think we should be prepared for missing it.”
Paddack said there have been many years when the town’s investments in the pension plan haven’t hit the 6.5% mark, or the stated goal of 7%.
“This is taxpayer money and employee money,” he said. “There have been a number of years where we don’t hit the 6.5%. This market since 2020 has hit us hard. It has hit our own personal finances hard. The policies are not favorable to middle class Americans right now.”
Gehrig said the town is currently in an enviable position with its pension plan funds compared to other jurisdictions, but that can change in a hurry.
“Right now, we have a cushion,” he said. “I think it’s fair to say we’re going to eat into that cushion. If we have an expanded period of flatness, how is that going to be impacting us?”
City Manager Terry McGean said dropping the return on investment expectation from the current 7% to 6.5% over time would avoid peaks and valleys when the town had to make a greater contribution to the pension funds.
“I feel very strongly that we should attempt to smooth out these changes over years,” he said. “We don’t want to have these wild swings. This is probably one of the most important discussions we have, apart from maybe the budget.”
The council voted unanimously to approve the consultant’s recommendations and lower the anticipated return on investment of the pension funds to 6.5% incrementally over a period of years. In addition, the motion included a two-year review of the plans rather than the five-year review.
