Conservative strategy to fund town employee benefits
Published 5:09 am, Thursday, October 11, 2012
First Selectman Gordon Joseloff's administration plans to use during the next budget cycle one of the most conservative funding strategies for public-sector pension and health-care plans in Connecticut, a plan enthusiastically endorsed by the Board of Finance.
In a unanimous vote last week, the finance board moved to recommend that the town fund its employee pension and retiree health-care plans using an expected 6.125 percent rate of return, or "discount" rate, for the town's employee-benefit funds' assets. That rate is a compromise of two funding plans suggested last month by finance board members: Tom Lasersohn had recommended using a less-optimistic 6 percent rate of return, while Avi Kaner, the board's chairman, had called for a 6.25 percent rate. Both Kaner's and Lasersohn's proposals were more cautious than the 6.5 percent rate recommended by Becky Sielman, a principal at the town's actuarial firm, Milliman.
"I think we have balanced in our recommendation affordability and a sound assessment of the current situation in this country where returns from investments are way below where they had been," said board member Brian Stern.
Using a lower expected rate of return is intended to reduce the town's risk of underfunding its pension and retiree health-care plans. The health-care obligations are also known as Other Post-Employment Benefits. While higher pension and OPEB fund contributions could require the finance board to further increase the town's property tax rate, Board of Finance Vice Chairwoman Helen Garten expressed confidence that a lower discount rate would not overburden taxpayers.
"We don't want to have enormous gyrations in the tax rate," she said. "We looked at that in setting the discount rate. "We're well aware that [economically] things are still not good."
Town officials have not yet disclosed the cost of using a 6.125 percent discount rate. Adopting a 6.25 percent discount rate would have involved the town making a total annual required contribution of $19.327 million during the current fiscal year to its pension and retiree health-care funds, according to projections calculated by Milliman.
Westport currently uses a 7.5 percent discount rate. The town's pension funding in its current budget totals approximately $9.1 million, while its OPEB fund allocation this year accounts for about $8.7 million.
A 6.125 percent discount rate appears to be the most conservative discount rate for municipal employee-benefit funds among Connecticut municipalities given a top-tier AAA credit score by the rating agency, Moody's, according to November 2011 data compiled by Sielman. New Canaan, where Conrad formerly served as finance director, has a 6.5 percent rate. Greenwich and Darien, respectively, use rates of 7.75 and 7.5 percent. West Hartford, a client municipality of Sielman, has adopted an 8.25 percent rate.
"It's a conservative approach by a conservative board," Kaner said of the 6.125 percent rate.
The cautious approach recommended by finance board members is informed by fluctuating investment return rates for Westport's pension fund in recent years. The fund posted return rates of about 10 percent in 2006 and 7 percent in 2007. The fund's rate of return then sank in 2008 to -21 percent. It bounced back with an approximately 18 percent return rate in 2009 and 12 percent rate in 2010. The pension fund performed less well in 2011, with a return rate of 1.6 percent. Those rates beat blended benchmarks every year, except in 2011, when it missed the blended benchmark by 1.3 percentage points.
Based on a 6.25 percent discount rate, Westport had an unfunded pension liability of about $37 million and an unfunded OPEB liability of about $98 million, as of July 1, 2011, according to Milliman. Using a 7.25 percent rate of return, the town's unfunded pension liability decreases to about $10 million, while its unfunded OPEB liability falls to approximately $84 million.
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