The Board of Selectmen that the Town commit to annual funding of our pension at what is called by our actuary the Actuarial Required Contribution (ARC). In making this recommendation they have provided a plan as to how to do this with a minimum impact on the taxpayer.
Before getting into more detail, let me give some perspective. Though we hear and read stories in the media about municipalities throughout the country facing enormous challenges with regard to their pension liabilities, Brookfield’s funds are in reasonably good shape. Our assets stand at about 80 percent of our liability (there are many variables that go into determining our status and any report is just a snapshot at a particular point in time so when I say “about” I am allowing for these variances).
Though we are in a reasonably good place it does not mean we should not be concerned. Institutional investors are looking more closely at this metric and more importantly how we are managing our commitment. A determination that we do not have a plan or the plan is inadequate could result in a downgrade of our credit rating. That would increase our costs of borrowing. Currently we are anticipating going to market within the next year or two for somewhere between $12 and $15 million. This is for projects already approved and in process such as Road improvements, Kids Kingdom, Sewer and Water Projects (the last two, Sewer and Water projects are paid by the users). It is estimated that a downgrade in our credit rating could add as much as $2 million to the cost of borrowing for these projects.
The RBAC spent considerable time in evaluating the concerns and issues surrounding the challenges the Town faces in coming to terms with its obligations and does not make this recommendation lightly. Because the issue is somewhat complex, below, I will try to answer some of the questions I have heard and know are on people’s mind:
Who is covered by the Town’s pension plan?
Both union and non-union employees are covered by the pension. The Town’s Pension does not cover Teachers. They are covered by a State plan. There are currently 159 active employees and 91 retirees who are eligible for benefits under the plan.
What are the benefits?
There is some small variation in benefits based on the specific bargaining unit. In general terms, participants earn benefits based on years of service, average earnings in their last few years of employment and a multiplier of either 2 percent or 1.75 percent depending on the union.
So for example: an employee who has worked for the town for 30 years and retires when their average salary was $70,000 would receive an annual pension payment of (30 years x 70,000 x 2 percent) $42,000.
How is this paid for?
There are two primary sources of contributions to the funds. The employees contribute 5 percent of their salary and the Town makes a contribution from its annual operating budget.
What is the status of our pension funds?
Up until 2005 our pension liabilities were fully funded. In part because of changes in benefits implemented at that time as well as the investment conditions that ensued the existing funds are insufficient to meet the calculated liability.
So what does that mean? Using various assumptions about future investment returns, changes in employment costs and other economic variables, our actuary calculates a figure that represents the current value of the earned pension liability of our employees. This is compared to the value of our investment funds to come up with a figure that is then used to determine how much we need to put into our funds in order to meet our future commitments.
It is not an exact science and because of the variables, it represents a snap shot at a point in time.
As of January 2012:
Pension Liabilities $37.5 million
Value of Assets $29.1 million
Shortfall $8.4 million
The actuary calculated at the time, the town’s contribution should be $1.750 million. The budget for the current fiscal year is approximately $913,000. The RBAC noted, and you can easily see, that failing to fully fund the obligation is only delaying the inevitable and will make it harder to achieve.
Why fund 100 percent of the Required Contribution?
I know I mentioned it above, but it bears repeating. The ARC is a key metric used by the investment community to evaluate the Town's financial stability and its commitment to meet its fiduciary obligations. If we are failing to meet that commitment it could lead to a downgrade of our credit rating. This could cost taxpayers millions of dollars in additional interest costs for projects already approved.
Perhaps most important though is that we need to stop kicking the can down the road. This cost represents an expense we as a Town committed to. These are benefits prior leaders agreed to, sometimes in part for smaller salary increases. I am not going to defend or condemn. Our responsibility is to fulfill our obligations. Not funding the full required amount does nothing to diminish the cost; it only delays it and most likely increases it.
What is being proposed and why?
The Board of Selectmen has taken two actions. The first addresses the current year’s pension contribution. The second is to help address the ongoing challenge and bridge the current budget contribution to a time when the budget can include the full funding.
The first resolution is to use funds from our fund balance to make up the difference between the current required contribution ($1.75 million) and the current budget of $913,000. The intent is to be able to bring the contribution up to the 100 percent current year Actuarial Required Contribution level and make that contribution by December 31. The reason to do so before the end of the calendar year is because the pension accounting is on a calendar year not a fiscal year.
The second resolution is to create a special fund to be used as a source of revenue in future budgets to help supplement the subsequent annual increases to the pension fund.
It works this way: it is expected that the actual cost of $1.75 million will remain relatively stable, so if we increase next year’s budget by $250,000 the base budget will be approximately $1.15 million. The Town will use $600,000 from the special fund to bring the funding for 2013 up to the full amount required. We will take a similar action in the following year bringing the base amount to $1.4 million and use $350,000 from the special fund. In the following year we will need to increase the budget to the full amount of required funding.
This proposal allows us to get to the full funding without causing a major spike in the budget in one year, which would either cause an increase in taxes or a significant cut to other line items that would impact programs and service. By spreading the impact out over three years, we believe the impact on the tax rate will be minimal.
Where does the money come from to fund this plan?
In the year ending June 30, 2012 the Town had more than $1.1 million in its fund balance that was in excess of the agreed upon guidelines of 7.5 percent of its annual operating costs.
The first resolution uses part of these funds to achieve the funding target.
As for funding the special fund, the town is currently anticipating receipt of funds from the assignment of its claim on the Legion Insurance Company. This claim arises from that company’s bankruptcy. The anticipated payment will be well in excess of the funds needed to provide this bridge account.
Some may argue that these funds should be put in the fund balance or in some way returned to the taxpayers. In fact this is what is being done. At some point we have an obligation to fund these pension liabilities and doing so at the 100 percent of the Actuarial Required Contribution will save us increased interest costs. Using these funds to supplement our tax revenue is keeping the tax rate down while we increase our budget.
Why don’t we just change the pension plan?
The benefits we provide, for most of the Town’s employees is subject to negotiation. Any change will need to be part of those negotiations. Additionally, the liability noted above is already earned.
I hope you find this helpful. If I did not answer some of your questions I hope you will reach out and let me know your thoughts or concerns and I will try to respond to them.