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Town of Palm Beach Town Hall

Our Town with William Kelly: Town pension plan on path toward recovery

The Town’s pension plan is rebounding after stumbling through years of disappointing investment returns – including a disastrous stock market performance in 2015.

The Retirement Board of Trustees replaced the plan’s asset advisor and nearly half of its portfolio managers following the $23 million market loss six years ago.

Ed Carter, chairman pro tem of the retirement board, recently credited a retooled investment strategy, and the Town Council’s decision to pump extra money into the retirement fund, for the turnaround.

In 2017, the council decided to devote $5.42 million to the plan each year to help shrink a large unfunded liability.

The $5.42 million payments are in addition to the mandatory annual financial obligation determined by the plan actuary. The actuarial requirement was about $11.8 million for the year that ends Sept. 30, according to the Finance Department.

As of May 31, the plan had a total value of $286 million – $56 million more than a year ago and a $94 million gain over the last five years, Carter said.

Carter said the $5.42 million discretionary payments have been vital to the brighter outlook.

But most of the gain over the past year came from a strong investment performance. Year-to-date market returns were at 16.8 percent, Carter told the council on July 13.

“It could be one of the best market performance years in probably a decade, in a very turbulent market,” he said. “In essence, this year we did outperform the market.”

The numbers aren’t final because the fiscal year doesn’t close until Sept. 30.

By comparison, the plan yielded a 5.6 percent average market return during the previous year that ended Sept. 30, 2020.

Plan actuary Pete Strong, of Gabriel, Roeder, Smith & Co., determines the plan’s funding status after the close of each fiscal year on Sept. 30. Actual experience is compared to plan assumptions about investment returns, retirements, terminations, deaths and wage increases.

As of Sept. 30, 2020, the plan’s unfunded liability stood at $94 million – down from $100 million a year earlier. Unfunded liabilities are debt obligations that do not have enough funds set aside to pay them. A pension liability is calculated over the amortization period of the plan which, in Palm Beach’s case, is a hybrid of 15 and 20 years.

Measured another way, the plan as of Sept. 30, 2020 was 72.7 percent funded over the amortization periods. In September 2016, it stood at 68.4 percent, which meant it was only two-thirds funded and sliding in the wrong direction.

“We were in quite a pickle,” Council President Margaret Zeidman said.

It is not uncommon for pension plans to be funded at less than 100 percent. There seems to be a general consensus on the council that Palm Beach’s plan needs to be at least 80-85 percent funded to be considered in a healthy range.

Councilman Lew Crampton asked Carter if “you would agree that 85-percent funded is a safe space.”

Carter replied, “It’s safer than where we are today.”

If the market returns were to continue at the current pace, the plan 10 years from now would be 92 percent funded, Carter said. But, if returns were to average 5 percent over the next decade, the plan would be 86 percent funded.

In 2000, it was funded at above 100 percent. But the stock market has changed since the 1990s.

Returns on plan investments from 2000-2020 averaged 4.84 percent – far less than the 8 percent annual assumption rate that was then built into the plan. To address that problem, the retirement board, with the council’s blessing, is gradually lowering the assumed rate of return to 6 percent in 2024. For the year that ends Sept. 30, it stands at 6.6 percent.

“For a long time we had artificial expectations which we didn’t meet,” Carter said. “That is the principal reason why the unfunded liability grew too large.”

Even a 6 percent assumption may prove too optimistic, he said. Lowering the rate forces the town to invest more money into the plan to make up the reduction in return assumptions. But the more realistic target helps pay down the unfunded liability sooner, Carter said.

During the next decade, the town will pay a required distribution of between $16 million and $22 million a year into the retirement fund, Carter said. The fund is managed by professionals under the oversight of the retirement board, whose members are appointed by the council.

Pensions are paid to 447 recipients, including 35 employees who are in the deferred retirement or DROP program, and 68 beneficiaries, according to the town.

Councilwoman Julie Araskog asked Carter what safeguards are in place to protect the plan from any future market losses.

“In general, there is no protection,” he replied. “All you can do is diversify your investment portfolio … we hope that over time the portfolio will grow and that with that growth there is less liability to the taxpayers.”

Zeidman credited the retirement board for digging the town out of a pit. “We were in a hole in 2015,” she said. “You have done a tremendous job.”