City of New Haven chart
Recent history of rising city pension costs.
Thomas Breen photo
Budget Director Gormany: Expect those numbers to keep going up.
City pension payments could jump by 26 percent next fiscal year thanks to a new, more conservative way that the city estimates pension fund investment returns.
While that one-year increase is steep, the city budget director cautioned, it also marks just the beginning of a gradual shift towards more responsible — and costly — city pension budgeting.
City Budget Director and Acting Controller Mike Gormany walked the alders through those pension numbers Tuesday night during a five-hour budget hearing and departmental workshop hosted by the aldermanic Finance Committee on Zoom and YouTube Live.
The city budget director called out the single largest line-time increase in next fiscal year’s proposed operating budget(s): a proposed hike in annual pension fund contributions from $67.2 million to up to $84.7 million.
That proposed increase is driven largely by the city’s and the two public pension fund boards’ decisions to follow the advice of city-hired actuaries and reduce each fund’s estimated rate of return on its investments from 7.75 percent to 7.25 percent.
“As you go down in the rate of return,” Gormany explained, “that increases the employer’s contribution” to make up for money previously budgeted as coming from profitable investments.
Zoom
Tuesday night’s virtual budget workshop.
The public meeting marked the first opportunity for the Finance Committee alders to take a department-by-department look at Mayor Justin Elicker’s two proposed Fiscal Year 2021 – 2022 (FY22) general fund budgets—a $589.1 million “crisis” version and a $606.2 million “forward together” budget.
The mayor and Gormany on March 1 introduced the “crisis” version — which includes a 7.75 percent tax increase, staffing cuts, and closures of the Mitchell Library, East Shore Senior Center, and Whitney Avenue fire station — as a very real possibility if the city does not receive a $53 million boost from the state and Yale University.
But Gormany focused nearly all of his attention Tuesday night on the rosier “forward together” version.
That’s because increased Payment in Lieu of Taxes (PILOT) funding from the state is almost certainly en route to city coffers thanks to reforms championed by the city’s state delegation, Gormany said.
So while the “crisis” version remains in place a “backup budget” this budget-making season, the city is confident enough in a PILOT bump that “we’re all focused on the ‘forward together’ budget as the positive budget that’s going to come to fruition this cycle.”
The alders are slated to host two more departmental workshops and two more public hearings before taking a final vote on next fiscal year’s budget by late May or early June, so that the municipal fiscal document can go into effect on July 1.
From 7.75% To 7.25%, & Then Even Lower
City of New Haven slide
Regardless of which version the alders ultimately amend and vote on, Elicker’s budget proposals present the local legislature with a stark shift in how the city calculates how much it needs to pay into its pensions each year.
The city has two public employee pension funds: the City Employee Retirement Fund (CERF) and the Police and Fire Fund (P&F). The two had a combined total of roughly $700 million in unfunded liabilities under the 7.75 percent rate of return.
With the lowered rate of return estimate, that combined unfunded liability number is now up to $954 million. See here and here for the latest on each fund’s liabilities.
Before Elicker introduced his budgets to the public at the beginning of board, both pension fund boards — which include Elicker and Gormany as trustees — voted to reduce their annual estimated rates of return from 7.75 percent to 7.25 percent.
That’s based on an analysis and recommendations by city-hired actuaries, who took a look at how well each fund’s investments have performed in recent years — and on how much the city should responsibly expect those funds to earn in the coming years based on changing market conditions and their current portfolios of investments.
“We worked with the actuaries and the pension boards to come to an adequate level of funding, knowing that we did have to reduce that rate of return,” Gormany said. “That 7.75 percent was not sustainable going into the next few years.”
City of New Haven data
According to recent pension investment numbers included in this year’s city budget book (pictured above), P&F saw a 7.21 percent return in 2020, a 7.04 percent return in 2019, a 2.21 percent return in 2018, a 13.71 percent return in 2017, and a ‑1.79 percent return in 2016.
In that same time period, CERF saw annual returns of 7.08 percent, 5.57 percent, 7.91 percent, 8.18 percent, and ‑2.68 percent.
The rate of return drop has some heavy fiscal consequences in the immediate short term.
That’s because, since the city is no longer expecting to earn 7.75 percent on its pension fund investments each year, it will have to make up the difference out of its own operating budget in order to reach its actuarial determined employer contribution, or ADEC.
Gormany said that the minimum ADEC recommended by pension fund actuaries and budgeted by the city for the coming fiscal year is $83 million.
City of New Haven slide
The “forward together” version of the budget would see the city contribute even more to the pension funds — more than $84.7 million in total — in a bid towards catching up on over $954 million in unfunded liabilities.
That larger proposed pension contribution represents a 26 percent hike on top of the $67.2 million in pension payments the city is budgeted to make this fiscal year.
It also makes up nearly half of the $38.2 million proposed increase to the city’s total general operating fund.
And it would bump up the pension payment share of the overall budget from 11.8 percent to almost 14 percent.
On top of all of that, Gormany said, higher city contributions to the two pension funds don’t stop there.
While the city and the pension fund boards ultimately settled on an estimated rate of return of 7.25 percent this year, the actuaries actually wanted the funds to go even lower, to 7 percent.
That would have meant roughly $7 million more that the city would have to pay into the pension funds on top of the new proposed budgeted amount.
Pension Task Force Coming Back Soon?
Thomas Breen pre-pandemic photo
Board Prez Walker-Myers, at a December 2018 Pension Task Force meeting.
“Why did the investment advisors push such a large reduction in the rate of return?” Westville Alder and Finance Committee Chair Adam Marchand asked.
“Are they thinking about the economy going down and that affecting the portfolios of the pensions? Because the stock market is performing really well” right now.
Gormany said the actuaries were “looking at [other] pensions and where everyone is as far as a rate of return” when coming up with their recommendations for the city.
While 7 percent is a safer bet than 7.25 or 7.75, he said, the city might ultimately want to get the estimated rate of return that the state uses for its pension funds, which is 6.90.
“I think we need to look at … really incrementally decreasing that rate of return,” Gormany said. “What we end up doing are these large drops, which sort of cost of lot of money to do. We should really look at getting down and getting the pensions to 7 percent, or lower than that. … From a dollar and cents standpoint, that big of a drop is very hard for the city to handle.”
Does the city have a plan over the next three, four, five years on how to bring down the estimated rate of return even further? Board of Alders President and West River Alder Tyisha Walker-Myers asked.
She said she is interested in exploring that very subject soon when she reconvenes the Pension Task Force, which hasn’t met in over two years.
Gormany said the city’s pension boards are very interested in that same question. One solution may be to incrementally lower the estimated rate of return by, say, 0.25 percent every two years over the next five or six years. The city hires actuaries to analyze the pension funds every two years and come up with a new recommended ADEC based off of mortality tables, cost of living adjustments, and estimated rates of return.
“I look forward to working on the Pension Task Force with everybody” on this issue, Gormany said.
Walker-Myers agreed. “I think it’s really important that we take the time to have these conversations. I look forward to working on the Pension Task Force” on this very matter.