Hamden Pension Avoids Losses … And Gains

Hamden paid more into pension fund in 2019 than ever before — and still ended up with an increased future burden.

On the other hand, the days when assets begin to climb and unfunded liabilities dwindle are now in sight, if all goes according to plan.

That’s the upshot of Hamden’s newly crafted audit, presented at the most recent meeting of the Hamden Employees Retirement Board..

Henry Nearing of Segal Consulting presented the findings of his 2019 actuarial valuation of the town’s pension to the board at the meeting last Wednesday.

His report shows that even though the town contributed $15.9 million to the fund in the last fiscal year, the town’s unfunded pension liability increased by about $6.5 million, in large part due to an underpayment by $6.7 million into the fund.

As of the 2018 valuation, Hamden had a total pension liability of $457.7 million. Of that, about $165 million was funded.

The new audit shows an increase in total liabilities to $464.4 million, of which still $165 million was funded as of July 1, 2019 (using the actuarial value of assets, not the market value). The pension’s funded ratio decreased from 36.03 percent to 35.55 percent. Though the unfunded liability increased, as it has done for the last few years, it did so by a slightly smaller margin than last year’s $6.9 million increase.

Segal uses an actuarial model to analyze Hamden’s pension, meaning it smooths out fund amounts based on an average of previous years’ returns on invested assets in order to keep abnormally good or bad investment years from skewing the long-term outlook of the fund. That means there is a market value of assets and an actuarial value of assets. The market value of assets is the amount the town currently has in the bank. The market value of the fund’s assets increased to $167 million, from $164.5 million in fiscal year 2018. Most analyses, however, are generated using the ​“actuarial value of assets,” which is an adjustment to the market value of assets to make sure that fluctuations in the market don’t skew the numbers that are used to generate future projections. The report shows that the actuarial value of Hamden’s $167 million of invested pension assets is $165 million.

In market-value terms, total income topped what the town paid out in benefits by $2.5 million, resulting in a corresponding increase in market value of assets. Income totaled $29.7 million: $15.9 million from the town’s contribution, $2 million from employee contributions, and $11.8 million from investment returns. The town paid out $27.2 million in benefits to pensioners.

Though the fund’s market value increased by $2.5 million, that increase was due in large part to a good investment year. While the market value of investment income totaled $11.8 million, the actuarial value of that income, generated using a smoothed-out rate of return based on previous years, totaled $9.5 million, partly explaining the difference between the market value of assets ($167 million) and the actuarial value of assets ($165 million). The actuarial value of investment return is generated using experience from the last five years, explained Nearing. Based on the previous five years, the ​“actual” rate of return on invested assets was 5.95 percent, while this year’s market-value rate of return was 7.41 percent. The investment returns of four and five years ago were very poor, while the last three years have been quite good, Nearing said. That means that next year, the actual rate of return will likely increase because it will no longer take into account the bad investment returns of five years ago.

While the actuarial value of assets remained relatively stagnant from 2018 to 2019, the unfunded liability increased because total liability increased and town paid $6.7 million less than it was supposed to, which would have offset that liability increase. On a market-value basis, unfunded liability increased from $293.1 million to $297.3 million. On an actuarial basis, unfunded liability increased from $292.8 million to $299.3 million — $6.5 million.

“The major part of that increase is because the full ARC was not contributed,” said Nearing, referring to the actuarially required/recommended contribution (ARC). The ARC is the amount the town must pay into the pension each year in order to fully fund it by 2044. 2044 is 30 years after the town floated a $125 million pension obligation bond to inject cash into the pension to keep it from becoming insolvent. When the town floated the bond, it kicked into effect a state statute that requires town pension contributions to ramp up to ARC over the course of a few years.

In the 2019 fiscal year, the town’s ARC was $22.6 million, and the town budgeted that much in its 2018 – 2019 budget. State statute, however, only required that the town pay 70 percent of its ARC. After contributing that 70 percent — $15.9 million — the town stopped contributing in order to pay for overages in other parts of the budget. In the spring, the Legislative Council fought a number of late-night battles over whether to divert funds allocated for the pension to other expenses. In the end, the council ended up transferring about $2.4 million of pension-allocated funds to pay for overages in utility bills, police and fire overtime accounts, and the town’s Connecticut Municipal Employees Retirement System (CMERS) bill. (In 2007, the town switched all employees into CMERS, which is the state’s pension plan for municipal employees, and it now has annually increasing payments into that system). Read more about those transfers here and here.

The remaining $4.3 million covered various other accounts, according to Mayor Curt Leng and Interim Finance Director Myron Hul. Leng said that both revenues and expenses ended up coming in lower than projected in the 2019-fiscal-year budget, and that the $4.3 million originally budgeted for the pension helped the town end the fiscal year in the black with about a half-million-dollar surplus. He said the $4.3 million covered various expense overages and revenue shortfalls.

A Step Forward, And A Long Way To Go

Since the injection of cash from the pension obligation bond in 2015, the actuarial value of assets has not changed — in fact, it has decreased slightly. In 2015, it was $167.6 million, which decreased steadily to $164.9 million in 2018. For the first time, this year reversed that trend, increasing the actuarial value of assets by a little under $200,000. From 2015 to 2019, market value of assets increased from $163.6 million to $167.1 million.

“I feel that stabilizing the fund is a very small step forward,” said Leng.

Assets have remained the same because town contributions have not been large enough to offset payouts. Every year, benefit payments will continue to increase as more people retire and existing benefit payments increase with inflation. Next year, Nearing projected payments to reach $29 million. They are projected to reach $40.5 million by 2034.

“We’re still in sort of a negative cash-flow position where there’s more benefits coming out of the plan than contributions coming in, but investment return is helping offset quite a bit of it,” Nearing told the board. He said he strongly recommends that the town start to pay its full ARC.

“Contributions below the actuarially recommended contribution, or ARC, may be the most significant risk that the Plan currently faces,” Nearing wrote in his report. Underfunding is the reason the town now faces $300 million in unfunded liabilities, he explained. For decades, the town underfunded the pension. In 2013, just before the injection of pension obligation bond-cash, the fund was 14 percent funded and creeping rapidly toward insolvency.

In the 2020 fiscal year, the report explains, the ARC is $23.2 million. The town must contribute either 85 percent of ARC or $3 million more than last year, whichever value is lower. 85 percent of ARC is $19.7 million, and $3 million more than last year is $18.9 million. The mayor budgeted $19.2 million for payment into the pension in 2020. That number is based on 85 percent of a previous, slightly lower projection of what the 2020 ARC would be. In 2021, the town must pay 100 percent of its ARC, which is now projected to be $23.6 million for the 2021 fiscal year.

Last spring, the pension was a contentious topic among council members. Former Majority Leader Cory O’Brien fought to prevent transfers from pension-allocated funds because he said that the town must start paying its full ARC in order to get its finances under control. He said he thinks it’s a good thing that Hamden will be forced to pay its full ARC next year.

“Doing better is not doing good enough,” he said. ​“It’s time that we actually start doing good enough to make a difference.”

Part of the rest of the increase in ARC over last year, Nearing’s report shows, is due to a 2 percent increase built into the model to account for revenue and budget growth. Most of the rest of the ARC increase is due to underfunding the pension in the 2019 fiscal year. If all goes as planned and the town pays its full ARC every year starting in 2021, ARC will gradually grow to $32.7 million by 2044, when the pension is supposed to reach full funding. After that, it is projected to drop to under $1 million, and will pay only for small administrative expenses.