The Brookfield Board of Selectmen (BOS) voted unanimously Tuesday night to recommend that the Board of Finance (BOF) implement a plan to move the town’s pension account toward 100 percent funding within the next 15 years.
In order to do this, the annual contribution to the fund (including the current 2012-13 fiscal year) would have to increase by around $800,000 to between $1.7 and $1.8 million, however the Retirement Benefits Advisory Committee (RBAC) has suggested using the final pending payment on the settlement of an insurance claim and other surplus in the general fund balance to subsidize the increase over three years and blunt the immediate shock to the taxpayer.
The pension fund is currently under-funded by approximately 15-20 percent, or about $8 million, when the future obligation to current town employees is taken into account. Assuming investment earnings, contribution levels and agreements with employee bargaining units remain constant the increased annual contributions laid out in the plan are projected to have the total liability funded within 10 years.
Those would be wild assumptions, however, Selectman Howard Lasser explained Tuesday, as employee contracts are sure to change, the elected officials who manage the fund will change and “over the next 15 years, who knows what’s going to happen in the market.”
If the market is strong over the next 15 years and investment earnings are high, the gap will close faster or the sitting administration can opt to make lower annual contributions. In the inverse, if the market were weak or worse, the timeline would have to be extended unless the contributions were increased further.
Lasser said that he was confident the RBAC’s projected investment earnings were conservative at 6.5 percent, compared with 8.5 percent used by surrounding towns.
While the pension obligations are a very real liability, Lasser also pointed out that the fund as a whole is in good health and could go some 30 years without additional funding before it would be depleted.
Making the Payments
In the proposal put together by the RBAC, that gap in funding for the first three contributions would be subsidized at least partially through the general fund balance, which is expected to soon include income from the pending settlement with Legion Insurance Company in Liquidation, which will be at least as much as the first payment of $892,500.
According to First Selectman Bill Davidson, the BOS agreed to a settlement offer with Legion in an executive session on August 24, however there is a 10-business-day waiting period before the deal is signed. Davidson said that the exact figure of the settlement could not be made public until that time.
Using the settlement payment in this way would allow the town to “approach over a three-year period toward building our operating budget to this number,” $1.7 million, Davidson explained, “And to do so without a huge effect on the taxpayers.”
This method of using one-time payments to soften the immediate tax blow was through three years of diminishing transfers ($400,000 in 2011-12, $300,000 in the current fiscal year and $200,000 for the 2013-14 fiscal year), a portion of which went toward increasing the pension contribution.
Finance Board Chairman Jerry Friedrich met with Davidson on Tuesday to discuss some reservations about making this decision before the November elections, when the stock and bond markets may adjust to election results. By waiting, the town might be able to work off of better projections
Davidson, however, urged Friedrich and the BOF to implement the recommendation sooner than later, as it will be important begin with an increased payment to the fund this fiscal year to get on schedule; neglecting this year will only deepen the shortfall.
Showing measurable progress toward 100 percent funding will be important over the next year, Davidson said, as the town prepares to transfer $10 million in short term bonds into long term bonds.
“If we don’t do this, we would stand a reasonable chance of having our bond rating reduced” , he said, which would result in higher interest payments on that debt.
"That's one of my biggest concerns," Selectman George Walker agreed, "This bond rating and how that could impact us."
The selectmen moved unanimously to recommend that payments be increased over the next three years, supported by the general fund, including an additional contribution of $850,000 in the 2012-13 budget.
The BOF will discuss the proposal at their next regular meeting on September 12.