OCEAN CITY – Economic uncertainties have left the Town of Ocean City’s pension fund investments falling short of the stated goal after thriving for several years, resort officials learned this week.
During Tuesday’s work session, Council President Matt James provided a recap of the Ocean City Pension Committee meeting from last week. Ocean City has two pension plans, one for the general employees and a second one for public safety employees.
While each are currently healthy, a review of the most recent pension committee meeting this week revealed some of the stalwart investments were not performing to the town’s expectations for a variety of reasons. The town, through the pension committee and its consultants, invests pension funds paid into the account by employee contributions into stocks, mutual funds and other assets in order to grow the funds and ensure they are available when employees retire.
In recent years, the state goal for the return on investment of the pension funds has been set at 7%. However, because of the volatility of the markets, the Mayor and Council earlier this year decided to incrementally reduce the anticipated return on investment in the pension funds to 6.5%. Currently, the town’s return on investment in the pension funds is around 6.9%, which is just around the previous goal of 7%. But there is reason for concern in the flattening of the returns after a couple of less-than-stellar quarters.
James said pension fund consultant David Esham of Morgan Stanley reported to the committee the current instability of the markets has created challenges in meeting the investment goals for the pension funds.
“The consultant said this year has been difficult for equities both domestically and internationally and the worst year for bonds in over 40 years,” he said. “He discussed inflation and global inflation forecasts. He said Morgan Stanley believes the consensus earning forecasts are too high.”
James said at least two of the pension fund investment groups were underperforming and the committee voted unanimously to look into switching to a different investment group.
“Esham reviewed the third quarter performance reports for the pension plans,” he said. “He discussed the individual fund performance and reviewed the watch list. He discussed the Loomis Large Cap Growth Fund, which has failed its quarterly review twice in a row and three of the last four quarters, which puts it in the search category. If they were to fail again next quarter, it would make them a candidate for replacement. He thinks that will be unlikely because the fund appears to be outperforming this quarter, so we will continue to monitor it.”
Councilman John Gehrig voiced concern the pension fund investments appear to be flattening, which could ultimately result in a greater contribution from the town’s general fund to keep the pension funds healthy. Of course, 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 to maintain a healthy level.
Earlier this year, the council, anticipating a down cycle in the pension investments, set aside $2.5 million in the general fund balance as a “rainy day” account of sorts if the investments fell short. Gehrig suggested if the pension fund investments were falling short of the expectations, funds could be drawn from that rainy day account to offset the difference and keep the pension funds at healthy levels.
“So, are we still at 6.9%?” he said. “Are we getting the yield on those bonds? You know how I feel. Instead of losing money, let’s use our reserves. I still think the 6.9% is too high. The long-term is flattening. Even when the market was going up 30%, our return was still less than 7%. Even if the markets don’t go down and come in flat, that’s still a loss based on our expectations.”
James said while the pension fund investments were at the very least flat if not growing, the town’s other investments were performing well.
“Our cash has been earning pretty good interest compared to what we’ve been getting with the pension investments,” he said.
Gehrig said he was less concerned about the peaks and valleys in the pension investments than the overall larger picture.
“I’m not worried about a sharp drop and sharp increase after that,” he said. “If it’s just a steady flattening, that’s a big concern for us. Our funding percentage can continue to decline pretty rapidly. I’m not saying let’s reduce our estimates to 4%. During a period of uncertainties, we might have to take the wins where we can get them.”
City Manager Terry McGean said the current pension fund investment returns were not merely a snapshot, but a view of the larger picture.
“We do average the pension returns on a rolling average over five years,” he said. “We were lucky in that we did have extremely high returns. Those are now averaging out with lower returns. We’re at 6.9% but we’ve already agreed to phase that down to 6.5%.”
McGean said because of the volatility in the markets, the town and the pension committee would continue to closely monitor investments.