Abstract: A substantial number of the City's long-standing, loyal employees are nearing retirement age, and the City must ensure their pensions are secure, supported by a properly managed and funded retirement plan. The City pension fund lost money in the last fiscal year, and it has significantly underperformed comparable indexes for the past ten years. Furthermore, current estimates of future performance (for actuarial purposes) are, as acknowledged by the City's own plan advisor, inflated beyond reasonable expected returns. If the fund's future returns simply match historical performance over the past ten years, the City will need to contribute ever-increasing amounts to the fund each year. This will either constrict future City budgets or require tax increases.
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I shine a light on the following:
*Losses this past fiscal year were significant, while the benchmark was up 5.6%
*The past ten years showed pension fund returns lower than the benchmark.
*Alderman Sanders asked about increasing contributions to pension fund in the budget in BMA work session, and Patrick Lawton obfuscated in his answer. I heard no discussion of the difficulties the fund faces at the either the FAC or the regular BMA meeting.
*The expected returns from the pension fund are overstated, but lowering the expectations to a realistic level would clearly reveal the gap the City will need to fill in order to honor its commitments.
*Due in part to underperforming assets, the RPAC this year voted for changes in the allocation of the funds investments, against the advice of the fund manager.
*Late this year, the actuary will compute the amount the City should put into the pension fund. One estimate suggests it could be as high as two to three million dollars.
*Alternative investments could be considered to try to increase the returns, but that could increase risk or decrease the liquidity of the fund.
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Discussion:
I glanced over the budget prior to the most recent BMA meeting, the public hearing on the budget. My eyes suddenly stopped at the Pension Fund page (p. 110). From the column "FY 20 (year ending June 30, 2020) Estimate":
Pension Revenues Fair Value Appreciation (Depreciation) ($7,327,000); Realized Gain (Loss) $3,645,000, Interest ($97,000), and Pension Expenses Trustee Fees $245,000.
As can be seen, these figures show an estimated net loss for the year of approximately 4 million dollars, or a loss of over 5%. Yet both the S&P index and bond indexes were up well over 5% for the same period of time.
As can be seen, these figures show an estimated net loss for the year of approximately 4 million dollars, or a loss of over 5%. Yet both the S&P index and bond indexes were up well over 5% for the same period of time.
Contrary to what the above figures show, the fund manager's report on returns through June 30 reveals there was a FY 20 loss of only 1.7%. With the information available to me, I cannot reconcile these amounts-- there likely could be timing differences in the accounting entries and/or the reporting, or perhaps the budget figures overestimated the loss prior to the actual returns becoming available. But, either way, both figures are well below the benchmark amount reported by the fund manager for the period (FY 2020), which was a positive 5.8%. Below are the full manager's reports, for the first and second quarter of calendar year 2020.
I saw no reference in this year's public budget to additional City payments into the pension fund due to these losses, but perhaps I missed it in the extensive amount of material provided. Nor did I hear any discussion of the pension fund in the Finance Commission meetings on the budget, or in the most recent BMA meeting. This is surprising, as the need for increased payments into the pension fund over the next five years would affect the five-year capital funds budget passed by the Finance Commission and BMA as part of the overall budget.
There apparently was a reference to increased payments to the pension funds in the 2021 budget in the material given to the aldermen. At the July BMA Work Session on the budget, Alderman Sanders asked the following,
Alderman Sanders: I did have a question on these individual budget detail sheets. You had one thing that really stuck out to me was our additional money we were putting into our retirement and our cash balance. It looks like we are adding $828,900 into our retirement and $74,600 in our cash balance plan. I don't know what's going on there, why we are adding so much into those two.
You may listen to that question, and Patrick Lawton's rambling, non-response in the video below. He offered no specifics about the performance of the fund; nor did he address the need for increasing future payments into the fund. These two issues, needless to say ,bear heavily on the discussion of the FY 2021 proposed budget, particularly in light of the proposal in the budget for adding a tournament sports complex likely costing well in excess of $6,000,000, a complex which should be noted, which would have to be subsidized by the City, to the tune of $300,000 per year.
There was, of course, extensive discussion of the returns in the pension funds, as well as the likelihood of future payments into the funds, in the Retirement Plan Advisory Commission (RPAC) meetings on April 1 and August 12. These video meetings are available on the City website. Because I wanted to link to a few discussions in these meetings, I uploaded the audio of the two meetings to YouTube. This file is embedded below.
Gerber-Taylor has been the investment advisor for the pension fund since 1988. Since inception, they report higher returns than the benchmark-- 7.9% versus a benchmark of 7.5%. The bulk of the higher performing years were concentrated in the first years of the fund, when the pension fund was much smaller than it is now. Unfortunately, none of the returns in the reported periods in the last ten years (6.4% per year average overall), beat the benchmark (8.4% per year over the ten year period). This screenshot of performance of the fund is from this year's fund manager report ending 6-30-2020, which is linked above.
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| Click to enlarge and see the fund returns vs. the benchmark- 65% MSCI World and 35% BBGBarc Aggregate Index |
Discussion in the first RPAC meeting centered around the performance of the fund through March 31, which at that point was a negative 14% due to the abrupt slide in the stock market. The causes of the fund's underperformance were discussed, and some changes in the asset allocations were approved at the meeting, which was not the recommendation of the fund manager. With the recovery of the capital markets, the August meeting focused not only on allocations within the fund, but also future expected returns of the fund. The fund manager stated that returns of 7.0% to 7.5% (as indicated in the actuarial reports) were unrealistically high due mostly to the plunge in interest rates and other market conditions. He recommended that the City use a lower expected rate of return, and steadily infuse the pension fund with more money each year, so that the budget hit in one year would not be too difficult.
Some of the members of the Commission suggested alternative investments that could get the fund to perform nearer to the actuarial figure used (7.25%). At one point the fund manager called the pension fund fairly "high beta", meaning wide fluctuations are possible, which in layman terms means "risky". He also stated that a longer meeting with the actuary would be needed before committing to alternative investments such as private equity. Although they could yield higher returns, alternative investments could also mean higher risk and lower liquidity.
A few of the specific points and conversations in the meeting are linked below:
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