Selectman Answers Questions on Pension Policy

Selectman Howard Lasser fields questions about new proposed pension funding policy.

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.

Steven DeVaux September 10, 2012 at 11:50 AM
Danbury negotiated and changed. Some municpalities are now closing pensions, locking the payouts into annuities and limiting future inflation. Brookfield didn't even go there.
Longtime Brookfield resident September 10, 2012 at 03:45 PM
Howard - Thanks good information for all to have - I do think we need to look at the pension and its benefits to see if they are in line with todays economic culture. I had my pension plan cancelled this year and recieved a lump sum payout. My pension plan was a very good one but my employer just could not keep funding. So when would negotiations for next labor contracts take place and why cant this be a topic of discussion as I think we need to align pension beneifts more in line with private sector
John Mainhart September 10, 2012 at 07:33 PM
I oppose any plan to set aside money that might be used for the future bacause our leaders have a tendency to determine need for those funds and they have a different definition of need than do many citizens. I like pay as you go especially in very uncertain times like the one we are facing fo the next five to ten years.
David Propper September 10, 2012 at 09:08 PM
John, While I agree with your statement if those future needs are not specified, targeting funds for explicit specific needs is prudent, and in this case important to our credit rating (I hope I didn't misunderstand your post). According to people we put in charge of these matters, the funding of our pension liabilities is a specific area that the credit agency review prior to setting our rating. I hope you agree that maintaining an high credit rating is fiscally prudent for our town. Bringing this to a personnel level, this behavior is common to most individuals. We put away money for emergencys, our childrens' education, and retirement. So long as those funds are targeted for specific purposes (and I believe that this money is put in accounts specifically for pensions), that is fine by me.
Rob Gianazza September 10, 2012 at 10:26 PM
The one thing that is repeatedly missed is the reason we aren't fully funded as we once were. 2008 made a huge impact on the funds and devalued them considerably. Since we do not have a crystal ball, nor can we predict the future, why would we want to put money into a fund that may continue to lose value? Wouldn't it be more prudent to invest in these funds while the market is in an up swing? If we were to invest a lump sum as suggested, what is to prevent that investment from being devalued by another downturn in the market? I'm not saying we shouldn't be fully funded, I just question is the is the best time to attempt to reattain that goal?
Howard Lasser September 10, 2012 at 10:52 PM
You ask a good question and each of the responsible comments here deserve some response. However, the issues you raise are the subject of negotiation. Because I have some input into those discussion I do not think it prudent to discuss my views in this forum. If you would like to contact me privately I would be glad to share my views as well as discuss the issues relative to your concerns.
John Mainhart September 11, 2012 at 11:52 AM
It is prudent yo put away my money for a future emergency but since all governments are changing and the money is not theirs, but ours, I see a significant difference. God love you.
Melissa Y September 11, 2012 at 12:20 PM
"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" - The "Town" is the taxpayer. This systems is outdated & archaic. The company I worked for 3 years ago switched from pension to a 401k, maybe a similar format can be implemented. Why do I have to pay for someone elses retirement? No one is paying for mine! I am young too..I will never see a dime of SS after paying into it fo years.
Ken September 11, 2012 at 02:09 PM
Thank you for a very informative article. Pensions are difficult to understand. However, if I understand this article correctly even if there are negotiated future changes to the current pension structure such as freezing the current pension liability and replacing with a defined contribution plan the existing pension liability of $37.5 million would remain as a frozen in place liability that would have to be paid out at a future date? This article also uses the term 'current value' of our liability is $37.5 M. Does that mean this is the net present value of the liability? If this is the NPV of the plan does that mean if we wanted to end the plan by a lump sum payout to vested members we would have to pay out the full $37.5M?
Rob Gianazza September 11, 2012 at 02:09 PM
"Two primary sources of contributions to the funds." The operative word is funds. These contributions are invested into funds, for growth purposes. They are managed by Town officials. Since 2008 these funds are no longer valued as highly as they once were. If the funds suddenly gain in value, then we will be more closely aligned with fully funded. If the funds lose value, we will further away from fully funded. That's about as rudimentary as I can describe it. Pouring tax dollars into the fund is a stop gap measure. Like running a hose into the ocean trying to fill it up. Waiting for the tide to come back in will prove to be far more effective. As for outdated and archaic, well these are the contracts that were negotiated. As Howard indicated, right, wrong or indifferent, these agreements were made and must be honored. Future negotiations may be able to alter our future obligations, but it is difficult to predict what can be accomplished at the negotiations table.
Howard Lasser September 12, 2012 at 02:07 AM
The issues are a bit more complicated than presented. The amount of the liability will change each year depending on a number of variables key among them is years of service of the eligible individuals. Other variables are actual salary actions, investment returns, and assumptions on future returns as well as inflation. As for the future, all of the ideas expressed in the posts here should be considered when we take up any planning for future compensation plans. As noted previously I do not think it wise to discuss negotiations in public, but if anyone is interested in further discussions please contact me directly. I am interested in your ideas and would be happy to share my thoughts.


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