Thursday, September 26, 2013
Pension Bond Part of Comprehensive Pension Reform - Will Bring Pension Fund from 14% Funded to Over 40+% Funded in 2014
(From the NH Register)By Michael Bellmore HAMDEN >> The Legislative Council this week approved what could be the single most important step in fixing the town's crippled pension fund. After a study by the Segal Co., a benefits-consulting firm, the council approved a $125 million pension obligation bond. This injection of cash will bring the fund from 14 percent funded to 40 percent funded, from about $50 million to $175 million. Judi Kozak, council president, said approving the bond was the lesser of two evils. "It's not a magic wand," Kozak said. "It just allows us to put the past behind us and move forward." The bond was passed 14-1. (Blogger's Note: this action, in conjunction with Mayor's reduction of current retiree cost of living increase from 3% to 1.59% this year, improved annual pension funding in FY14 budget and the negotiation of contracts with majority of Town bargaining units that has new hires starting in 2017 going from pension plan to a 401K style program are pieces of the Comprehensive Pension Reform Plan produced by Mayor Jackson and his team of nation-wide experts assembled to address this problem.) Republican Austin Cesare agreed that now was the time to act. But, he said, this solution is the result of gaffes by past councils and administrations. He said every year the town has bills to pay, but, for whatever reason, the actuarially recommended amount that should have been paid into the pension fund hadn't been paid in full for years. "Past councils and past mayors have pretty much played games with the pension contribution," Cesare said. "They would not contribute what the actuaries recommended, so as a result we are left now with having to fund the pension fund with no other alternative but bonding." Kozak made it clear that a healthy pension fund is not just beneficial to pensioners, but to the entire town. She said it's "not just the movies and the TV sets that have to worry about ratings." "I do worry about our rating agencies," Kozak said. "If people don't understand how important they are, without good ratings you can't get roads paved, sidewalks done, grants for our projects ... Without a good credit rating you're not a healthy town," Kozak said. And with a broken pension fund, those credit ratings are at risk. "If we contribute a sum of money we could finally have our heads above water," Kozak said. "(Otherwise) our credit rating will go down and so will everything we touch. It's too big a sum of money to think we could get out of this without some kind of help." Kozak said this pension obligation bond finally gives the town a grasp on the situation. It also will force the town's hand to continue adding to the fund to keep it healthy. "This step has made it that we can't fall behind again," Kozak said. "We have to put the money every year in the pension. Pay as you go was really not an option." Chief Administrative Officer Curt Leng said that if nothing had been done to fix the fund, it would have been bankrupt in a matter of years. If that had happened, citizens would have faced a huge tax hike, with significant increases every year to meet the increase in pension costs. Leng said the POB, in addition to previous steps taken to manage the crisis, such as lowering the cost-of-living adjustments given to pensioners every year from a de facto 3 percent to a contractual rate matching the Consumer Price Index, will give the pension fund a chance to heal. Cesare said the bond is obviously a lot of money to be borrowed. "The risk," Cesare said, "is a stock market downturn, but how do you know when that's going to happen, how is it going happen? You really don't." Leng said the town plans on investing the bond carefully over one to two quarters. In order to ensure those investments won't be risky, he said the plan is to invest with 7 percent expected returns, and balance that against the 6 percent interest rate of the bond. The plan, he said, is to be as conservative with the money as possible. He also added that while Hamden's pension fund is a fraction of what it should be, the investment and return of that money has a higher performance than 88 percent of pension funds in the nation. The only problem is that the return on $50 million is negligible when the town has to pay out $1.9 million to pensioners every month. But, with another $125 million in the pot, the hope is, if the town follows the Segal plan, the fund will be able fix itself over time.