Hamden’s Pension Fund Is Down With Coronavirus

In one of the last public meetings before Hamden shut down its town buildings and public meetings, a consultant for Hamden’s pension board delivered some bad, though expected, news: Hamden’s pension fund has taken a hit from coronavirus.

After a year of impressive growth, Hamden’s fund lost $6 million in February after stock markets began to tank over fears of the effects COVID-19 will have on global markets.

“Simply put, there’s no place to hide,” said David Lee of Dahab Associates as he presented the numbers. Everyone is talking about the virus, he said, and that’s affecting the stock market, and consequently, pensions.

The $6 million loss means a 3.5 percent reduction in the fund’s balance. The numbers Lee presented are up to date as of the end of February. Since markets have continued to decline since March 1, the fund has probably lost significantly more value in the first week and a half of March. On Thursday, the S&P 500 Index dropped by 9.5 percent. Overall, the stock market posted its worst day since 1987.

2019 was a good year for the pension. It grew steadily throughout the year, and by November had seen an overall rate of return of 17.1 percent on its investments.

Now, the balance is plummeting. The stock market’s decline is not just the result of coronavirus, said Lee. A dispute between Russia and Saudi Arabia has driven oil prices down, hurting the American oil industry. That, in turn, affects other industries, and has helped to destabilize the stock market.

Hamden’s pension is not in as bad shape as those in other towns, said Lee. Only half of the fund is invested in stocks, which are plummeting. The other half is invested in bonds (30 percent) and real estate (20 percent). Those markets continued to grow, or remained stable, in February, offsetting the effects of the volatile stock market.

“We have enough in this portfolio to weather through this storm,” he said.

Lee said that Hamden’s investments are relatively conservative in comparison to other towns, meaning it has invested more in low-risk investments like bonds. Bonds are more dependable because their rate of return is the interest rate that was set when they were issued. Though they do still have risk associated with them — the issuer can go bankrupt — they are much safer than stocks. Stocks, on the other hand, have the potential to yield much higher returns. However, as the last few weeks have shown, they can also tank, rapidly reducing the balances of investment portfolios.

Hamden’s two bond-invested portfolios grew by 1.5 and 1.6 percent, while its stock portfolios posted significant losses. The largest of its stock portfolios, a Brown Advisory portfolio, dropped by 8.1 percent in February. A Vanguard 500 Index portfolio dropped by 8.2 percent, tracking the S&P 500.

Timing

Whether the stock market’s downturn will have a long-term effect on the contributions Hamden must pay into its plan will depend on the timing of the virus.

Each year, the town has an ​“actuarially required contribution” (ARC, sometimes referred to as an actuarially determined contribution). That is the amount that its consultants’ models say the town must pay into the fund in a given year in order to be on track to full funding by the end of a 30-year period. After Hamden issued a $125 million pension obligation bond in 2015, state law required that it ramp up its annual payments until they met the ARC after a few years.

In the current fiscal year, the town must pay 85 percent of ARC, or about $19 million. In the next fiscal year, Hamden is legally obligated to pay 100 percent of ARC, which is projected to be $23.6 million.

ARC for any given fiscal year is determined in the pension audit from the previous fiscal year. That means the 2020 fiscal year’s ARC is set, but the 2021-fiscal-year ARC will not be determined until the next audit comes out. ARC depends on numerous factors, and one of them is the state of the pension fund and how much its assets will grow through investment returns.

Henry Nearing of Segal Consulting said the audit, and ARC, are based on the pension’s situation as of June 30. That means that if the market recovers by the end of June, the town shouldn’t see too much of an increase in its ARC in the next fiscal year.

If the market does not improve by the end of June, however, that could mean an increase in the ARC payment for the 2020 – 2021 fiscal year. The town would have to make a larger contribution into the fund to offset investment losses or lack of growth. At that point, unless the state decides to cut Hamden slack, the town will be required to pay the full ARC.