$250M In Borrowing Pitched For Pensions

The Harp Administration pitched alders on granting permission to borrow up to $250 million this coming fiscal year to help shore up an underfunded city employee pension fund that is struggling to keep up with spiraling unfunded liabilities.

City finance officials argued the net benefits of a one-time cash infusion for the pension fund will far outweigh the costs of adding to the city’s current debt load.

That was one key area of discussion Monday night during the first public hearing about the mayor’s proposed $547 million operating budget and $79 million capital budget for the fiscal year that starts July 1.

The nearly three-hour Board of Alders Finance Committee meeting was held in the aldermanic chambers on the second floor of City Hall.

The hearing, which brought out around 50 alders, city staffers and members of the public, included a dozen public testimonials expressing concern about a budget that proposes to raise taxes by 11 percent, add a net of 11 new municipal staff positions, and increase the Board of Ed’s budget by $5 million.

Click here to read more about the mayor’s proposed budget, and click here to read a long list of citizen concerns, many of which were expressed on Tuesday night.

“Are you joking?” local philanthropist Wendy Hamilton asked about the proposed tax increase during her 10-minute public testimony, echoing a sentiment she expressed at a recent state Department of Transportation hearing about proposed bus fare increases. ​“Or are you on drugs?”

New Haven residents and budget watchdogs Gary Doyens, Angela Hatley, Ken Joyner, and others each expressed incredulity at the prospect of an increase in property taxes without what they called an adequate appraisal of which city services could be pared back or put on hold.

“Turn this thing down,” Doyens told the alders. ​“Go back to square one.” 

The proposed budget provision that received the most sustained attention from the alders and the public at the hearing was not the tax increase, but rather Appropriating Ordinance #5.

Described on the 309th page of the budget, the proposed ordinance allows the city to issue up to $250 million in pension obligation bonds next fiscal year to help pay down some of the unfunded liabilities in the City Employee Retirement Fund (CERF).

CERF, along with the Police & Fire Pension Fund (P&F), is one of two defined pension plans that the city pays into each year to cover retirement benefits for city employees. The P&F covers pensions for public safety personnel like police and firefighters; CERF covers pensions for all other unionized city employees.

According to Acting Budget Director Michael Gormany and City Controller Daryl Jones, CERF and P&F are each currently funded at around 40 percent.

According to a June 2016 valuation, CERF had unfunded liabilities of around $306 million and P&F unfunded liabilities of around $398 million.

CERF and P&F were each funded at 60.6 percent in June 2008. That number has decreased precipitously over the past decade as the city has struggled to deposit, invest and earn enough money to keep up with the ever-increasing pool of retirees and beneficiaries.

Jones said that 200 employees are currently eligible for retirement, having worked for the city for 30 or more years. He said another 300 city employees are eligible for retirement through the Rule of 80, which allows one to retire if his or her age and years of service add up to more than 80.

In an attempt to keep the pension funds above water, the new proposed budget calls for the city to invest $21.9 million in CERF and $34.6 million in P&F. Those recommendations are exactly the same as the amounts paid by the city into the pension funds last year.

Looking back just five years, however, year-over-year payments into the two funds are far from flat. Since 2012, annual city payments into CERF have increased by over $5 million and annual city payments into P&F have increased by over $11 million.

During Monday night’s hearing, Gormany and Jones explained that the proposed ordinance allows the city to borrow up to $250 million in pension obligation funds. That money would go directly into CERF, bringing its funding level from around 40 percent up to 85 percent.

They said that this money would go only towards CERF and not to P&F, since the amount required to bring both funds up to around 85 percent would require borrowing half a billion dollars. They considered that too much.

Gormany and Jones said that borrowing money to fund CERF up to 85 percent would help reduce the amount of money that the city has to pay into the pension fund each year.

These annual payments to the pension funds are called ARCs, or annual required contributions. Every two years, the city’s actuaries at the accounting firm Hooker & Holcombe determine how much money the city should invest in its retirement funds by looking at a variety of factors, such as the current amount of money in the pension, the city’s payroll, the number of employees eligible for retirement, and estimated life expectancy.

Gormany and Jones said that there are several beneficial knock-on effects to bumping up CERF’s funding level to 85 percent.

The first is that actuaries and rating agencies would view the fund, and thereby the city, more favorably, recognizing that the city would have significant cash reserves on hand to help cover the costs of current and future pension payouts even in the face of a few off years of lackluster returns on investment. They said that the new funding level would meet the definition of ​“fully funded,” which actuaries define as 75 percent or higher. 

They also said that the committee that oversees the investment and distribution of CERF funds would have greater flexibility to put more money into alternative investments like private real estate and private debt. Jones said that these types of alternative investments often require longer-term commitments, where the city would not be able to move its money for eight or nine or ten years. But, after that sustained period, Jones said, the city would be looking at returns on investment that are much better than what is possible with a shorter-term fund.

Gormany and Jones said that a higher funding level, more cash on hand, and the ability to make long-term investments would all encourage the city’s actuaries and pension fund committee to set the recommended ARC payments significantly lower than the current rate of $21 million per year. They said that that number would drop to $19 million per year immediately, and that using those savings to help further pay down CERF’s unfunded liabilities would only drive the ARC payments down further.

The risk, they noted, is that borrowing money means incurring more debt.

Gormany and Jones said that borrowing the money would be worthwhile only if the sum of the increased debt service and the new annual ARC payments is less than the current ARC payments.

“I won’t pull that trigger unless we’re below that amount,” Jones said.

Gormany and Jones said that they will not know for sure just how much that sum of debt service and new ARC payments will be until they consult further with actuaries and the board that manages the pension funds.

But, they said, based on the conversations they have had, that equation will likely work out in their favor. They said that borrowing the money would add another line item to the $67 million in debt service that the city already pays each year on money bonded for its capital projects.

This proposal would simply shift some of the pension fund costs from the ARC payments line item in the general fund budget to the debt service line item in the capital fund budget. This shift would hopefully drive down the ARC payments further and further over time as the city sees greater returns on investment and a larger store of capital on hand for the pension fund.

“This is the first I’ve heard about borrowing $250 million to shore up our pension fund,” watchdog Gary Doyens said during his public testimony. He said that the volatility in the stock market meant that the city should not be so confident that it would be able to increase its returns on investment simply by putting more money into the market.

“How can you afford to supply $250 million that they can go out and bond for,” Ken Joyner asked, ​“when your bond debt now is over $3 billion?”

After the last of the public testimonies, the alders had a chance to express their own skepticism with the proposal to Gormany and Jones.

“This seems like a lot of money to bond,” East Rock Alder Anna Festa said. ​“I mean, a lot.” She asked just how much money Gormany and Jones were actually proposing that the city borrow, considering that the ordinance set $250 million as a cap, not as a requirement.

Jones said that he is not yet sure, that he would have to work that out with actuaries when the appropriate time came to issue bonds. But, he said, there is precedent for the city bonding for well over $100 million.

“We have to see some numbers and understand the advice of our financial advisers,” Westville Alder Adam Marchand said. ​“Borrowing that large sum of money would require us as a board to have extreme confidence in the wisdom of that plan, which I am not yet convinced of. But I am willing to be convinced.”

He also said that he is wary of the proposed budget’s claims that various cost-saving initiatives allow the city to flat fund medical benefits in comparison to last year. He was equally incredulous of the city’s expectations that it would receive a $6.1 million increase in voluntary contributions from partners like Yale University and Yale-New Haven Hospital, and that it would come to an agreement with city labor unions to achieve $3.6 million in savings.

“It seems like you have some pretty high bars to hit between now and the April 19 meeting,” he said in reference to the upcoming hearing in which Jones and Gormany will come back before the Finance Committee to answer questions about specific line items in their departments’ budgets.

“There are some pretty bold features to this budget both on the revenue and expenditure side,” he continued. ​“This body would have to make a recommendation to the full board based in confidence, and having facts, and having faith, more than faith, that it will work. At this point, we don’t know.”