The unfunded liability in the Town of Palm Beach’s retirement plan increased by $6 million last year, largely due to investment losses in a volatile stock market.
As of Sept. 30, the plan was 75 percent funded, which means it had an accrued unfunded liability of 25 percent, or $91 million dollars, over its amortization period of 25 years.
The plan is currently on a path toward recovery and is closer to 80 percent funded, Dan Stanton, chairman of Palm Beach’s Retirement Board of Trustees, reported to the Town Council at its May 9 meeting. But he said the investment outlook remains cloudy due to uncertain conditions at home and abroad.
Stanton said the market was difficult for most asset classes in 2022. The Covid 19 epidemic, war in Ukraine, political unrest, inflation, higher interest rates and recent bank failures have combined to create considerable instability.
“There is so much uncertainty in the world,” said Stanton, who is a Palm Beach Civic Association director. “It’s been a difficult environment since the beginning of 2022. I would say we have a little bit more of a defensive posture as a result of recent market conditions.”
The plan’s funded status and the amount of the town’s annual contractual contribution is based on an annual actuarial valuation on Sept. 30 of each year. The actuary is Peter Strong with the firm Gabriel, Roeder, Smith & Co. of Fort Lauderdale.
Historical perspective
The town’s retirement plan was more than 100 percent funded in 2000 after years of huge returns in the booming 1990s stock market. In the following years, it lost ground as returns fell short of expectations. By 2017, after a particularly bruising investment year, it was only 64 percent funded, with an accrued unfunded liability of more than $100 million, according to Stanton.
In response, the council followed the retirement board’s recommendation that it hire new investment advisors to help revamp its portfolio and boost market performance. Over time, there was a partial recovery.
In an extraordinary move, the council also began making voluntary annual budget contributions of $5.42 million into the pension fund for the purpose of shrinking the unfunded liability. These contributions are over and above the town’s annual contractual obligation, which varies from year to year (it was about $11.5 million for this budget year).
Stanton said the $5.42 million payments are crucial to the plan’s health. He called on this council and its successors to resist any temptation to curtail or halt them.
“It’s critically important, for whoever is sitting in the seats you’re sitting in now, to make sure this doesn’t stop,” he told the council. “If we stop doing that, this town will live to regret it.”
Investment return assumptions
The retirement plan assumes an average annual rate of return on future market investments for long-term planning purposes. For many years, the assumed rate of return on investments was 8 percent for many public pension plans, including Palm Beach’s.
But, since the 1990s, 8 percent has proven unattainable over the long term. During the 20-year period that ended in 2017, Palm Beach’s actual rate of return averaged closer to 4 percent, according to the town’s actuaries.
Investment shortfalls, including actual losses, are “smoothed” into the plan over a period of years so they are easier for annual government budgets to absorb. That is how the 4 percent average return on investments led to an accrued unfunded liability that at one point exceeded $100 million.
Palm Beach has responded by gradually lowering its assumed rate from 8 percent to 6 percent over a period of 10 years. It’s currently at 6.4 percent and will drop to 6.0 percent for the year that begins Oct. 1, 2024, Stanton said.
The lowered rate puts the plan on a sounder footing because its assumptions about investment returns are closer to actual market performance. But it also forces the town to devote more money into the plan to make up for the downsized investment expectations.
Since 2018, the plan’s total investment portfolio has fluctuated between $218 million and $308 million, according to Stanton. As of March 31, it had gained $30 million since Sept. 30 and stood at $266 million in assets with about $350 million in future obligations, Stanton said.
“The process of the town becoming underfunded was years in the making,” said Stanton, reflecting on the years from 2000 to 2017. “The road to being closer to fully funded will also take years. But progress has been made and the actions of both the Town Council and the retirement board will help in staying on the path that is needed.”
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