OCEAN CITY – A discussion on investments and employer contributions highlighted a presentation on pension plans this week.
On Tuesday, Cavanaugh Macdonald Consulting CEO Ed Koebel presented the Mayor and Council with his yearly report on the Town of Ocean City’s general employees and public safety employees pension plans. While he maintained both pension plans were healthy, Koebel reported an increase in unfunded liabilities and a decrease in investment income.
“Asset returns for the fiscal year end were not that positive,” he said. “Actually, they were -3.6%. Again, we are assuming they are 6.9%. So there was a loss there of over 10% on the investment side of things.”
Ocean City has two pension plans, one for general employees and another for public safety employees. The town, through its pension committee and consultants, invests contributions paid into the accounts in order to grow the funds.
In recent years, the town has been incrementally decreasing its anticipated return on investment from 7% to 6.5%. With investments falling short in four of the last five years, Councilman John Gehrig questioned if the town’s current benchmark of 6.8% was realistic.
“I think from our perspective, this is a major potential problem …,” he said. “I think we need to discuss the investment piece, especially if long-term bond rates are going up.”
Koebel told the council last week that while the town did not report a positive return this year, most public sector pension plans averaged a return between 5% and 6%.
“It just hasn’t been a growing market over the last five years in the public sector area …,” he said. “We’re going to have periods like this. But if you look at the 20-year number, public sector pensions have averaged over 7.5%.”
In his report this week, Keobel noted the general employees pension fund had $70 million in assets and $82 million in liabilities, resulting in an unfunded liability of roughly $12 million. He added that the pension fund was funded at 85.3%, or nearly one percentage point lower than last year.
“The average pension fund in the country, public sector, is about 73%, so still fairly healthy,” he said. “But it has been coming down over past few years.”
Under the public safety employees pension plan, Koebel noted that the fund featured $80 million in assets and $97.5 million in liabilities, resulting in an unfunded liability of $17.6 million.
“You can see a large increase in unfunded liability from last year and the drop in the funded ratio, from 84.3% down to 81.9%,” he said.
Koebel also told the council this week the total employer contribution requirements would increase to $9.23 million. The employer contribution would increase to $3.53 million for the general employees pension fund and $5.7 million for the public safety employees pension fund.
City Manager Terry McGean explained that while an increase had been budgeted, the contribution presented exceeded expectations.
“We budgeted for a certain increase. This is more than what we budgeted for,” he said. “But if you recall, almost two years ago now, we set aside $2.5 million in fund balance to cover highs and lows in the pension. So we will be drawing from that this year to cover that difference between what we need to contribute and what we budgeted.”
At a pension committee meeting on Aug. 16, the committee voted to recommend the town fund the employer contribution of $9,238,426, an amount that is $693,026 over what was budgeted.
Budget Manager Jennie Knapp said that while she budgeted an 8% increase in pension contributions, the general employees contribution ended up increasing by 11.8%, while the public safety employees contribution increased by 20%. She said the shortfall would be covered by the $2.5 million assigned in fund balance for pension increases.
“So the total increase over the amount budgeted is $693,026,” she explained. “We did have $2.5 million assigned for the increase in pension costs. We did use $633,000 of that in the adopted FY23 budget for pension increases, and now we’ll need to use another $687,000. So the total of that is $1.3 million. And the total remaining is close to $1.2 million.”
During council comments Gehrig shared his concerns with the town’s pension fund.
“That reserve is not enough because it goes fast,” he said. “In one year, half of it is gone.”
When asked if the pension fund was earning interest, Finance Director Chuck Bireley said it was earning roughly 5.5% through the Maryland Local Government Investment Pool. Gehrig said that return was better than the rates the town had reported for pension plans in recent years.
“Wouldn’t that be better than the negative 3.6%, the 0% and the 1.5%?” he asked.
Bireley said how the town invested its pension contributions was a decision of the pension committee.
“It’s certainly worth a discussion with the pension committee,” Mayor Rick Meehan said.
After further discussion, the council voted 7-0 to approve a $9.23 million employer contribution to the two pension plans.