(Oct. 4, 2019) A report from the actuary charged with analyzing Ocean City’s employee pension fund led to a three-hour City Council debate Tuesday about why the fund’s revenues were fluctuating.
“We have record stock market performance … and we’re not even close to the numbers—we’re on a losing streak,” Councilman John Gehrig said.
But whether the city is on a losing streak or it just seems that way is difficult to determine, as the data is premature, and any gains and losses are based on expected revenues. Another way to put it would be the city’s pension fund investments did not lose money, but did not make as much as projected.
The city manages two types of pensions: Defined Benefit (DB) and Defined Contribution (DC), the resort’s acting actuary Cavanaugh Macdonald said. The main difference between the two is that a DB pension plan guarantees a specified payment amount in retirement, while a DC plan allows employees and employers to contribute and invest funds over time.
Employers bear the brunt of responsibility and financial risk in a DB plan, because they must pay the benefit regardless of how well funded that pension account is. Employees take more of a risk in a DC plan, but there also is the possibility that it will outperform the DB version.
Before April 1, 2011, all general city employees received DB plans in which employees contributed five percent of their pay to cover a portion of their benefits, payable for life.
After April 1 of that year, new general employees received DC plans in which they could contribute up to seven percent, which the city then matches, in addition to investment options and the ability to roll over lump sums for retirement.
There is a separate Public Safety plan for police, EMS, firefighters and Fire Marshal’s Office, that exempts these groups from the 2011 crossover. They are on a DB plan, with the ability to contribute eight to nine percent of their pay, with the city picking up contributions.
Up until April 1, 2017, the asset return assumption was 7.5 percent, which has since decreased to 7 percent. This means that the actuary believes the return in investment each year will be around this percentile.
The asset returns from 2015 to 2019 were 5.6, -3.7, 9.7, 8.7 and 1.5 percent, respectively.
Macdonald clarified, however, that five years of acturial smoothing meant the city actually had a 4.2 percent return this year. Furthermore, he said it was rare for the actual return to hit the 7 percent threshold.
Contribution requirements for FY2020 went up for both general and public safety plans: $2.2 to $2.4 million, and $3.4 to $3.8 million — $600,000 in total.
“In 2017, we had a surplus of $350,000 that year,” Gehrig said. “…We decided to keep that in the general fund, and not allocate it in the pension, because we’re going to go with what the actuary tells us to do.”
Macdonald clarified that the surplus $350,000 was excess in the general fund budget, and had nothing to do with asset returns.
“Well, whatever it was, we had extra money,” the councilman continued.
“That’s what Martha (former Finance Director Martha Bennett) and I had estimated we would need for pension that year, and then when the actuarial report came in, we didn’t need to fund at that level that’s why we kept it in the general [funds],” Budget Manager Jennie Knapp said.
Gehrig expressed confusion over why the $350,000 of surplus budget money was not allocated toward the pension budget, in case of future losses.
Knapp said all surpluses are kept in the general fund in case it is needed elsewhere, as unexpected expenses were bound to arise.
Gehrig said if the council had put the money in the pension fund it would have prevented losses incurred this year.
“If we had, that does not necessarily mean we would be in a better financial position today as a result,” Knapp countered. “The funds would have been invested and we may have had a good return on investment, or we may not have.
“For instance, if we have money remaining in the vehicle fuel line item, we don’t go buy more fuel. If we need money in the energy line item, I transfer it from another line item where there are excess funds.”
However, Gehrig argued that because of the instability of the actuary’s assumptions, the city should save surplus revenue when returns are above the 7 percent threshold.
“If we’re assuming a 7 percent gain and we went to 9.7 percent, let’s leave the $350,000 in there, so that when a day like today comes we’re in good shape,” Gehrig said.
Knapp countered that the 7 percent was calculated over a period of time, so saving the $350,000 would not always result in a gain.
She also reiterated that the $350,000 was not surplus pension revenue, but excess fund allocations toward the pension budget.
The conversation moved on to the city’s unfunded accrued liabilities.
“I was the actuary then  and we came in and talked to the pension committee and I said we need to go to a closed amortization basis,” Macdonald said. “It was always refinancing, and never closing. So you’re never going to pay it off. We need to close that amortization period and pay it off.”
Actuarial losses are determined by interest earnings, so deviations from assumed retirement age, assumed mortality rate, assumed salary raises and fluxes in the market.
The city had one incremental gain in 2015, but moving forward it was hit with losses.
Gehrig said he could not comprehend why the city had incurred so many losses in the last three years, and asked whether the council needed to lower its assumption rate.
Macdonald said it did not, because the assumption is long-term and the 7 percent range allowed for the city to remain stable in its revenues.
“Going forward, I don’t want to make assumption changes each year, because that defeats the purpose of funding the pension plan over a long period of time,” Macdonald said. “… You got to let your investments work. Some years they’re going to be down, like this year, they will be down, but in other years they may be up.”
“That makes it even worse,” Gehrig responded.
Councilman Mark Paddack and Council Secretary Knight shared similar concerns, pointing to their own gains in investments and retirement pensions.
Macdonald explained the city currently has $60 million in its pension fund right now in order to fund its beneficiaries, which amounts to roughly $3 million per year.
He said if the city decided to cut its investments and made zero gains, it could continue paying retirees for another 20 years.
“We know there’s going to be contributions going in, [and] we know there’s going to be investment earnings,” Macdonald said. “Yes, they haven’t been what we would prefer them to be over the last few years, but we do know that … the long-term nature of the plan is 20, 30 years from now, we’re trying to fund for that plan.”
He said it was normal not to be 100 percent funded in accrued liabilities, and that the national average was around 70 percent, while Ocean City was roughly at 86 to 87 percent.
Rather than jumping from one assumption to another, it would be best to go in small increments, to avoid expounding losses.
“We got time,” he said. “And we got time to get to that “better” number.”