Politics and the City: Worcester mulls shifting pension assets to the state system

Worchester pd_patch

Concerns have been raised about the state of Worcester’s public employee pension fund, prompting at least one city councilor to broach the idea of whether the retirement system’s assets should be transferred to the state.

Now, that’s pretty serious stuff.

The reason for the concern is that Worcester’s retirement system has not been getting the kind of return on its investments for its pension funds that had been hoped. As a result, the city has had to kick in more money from its annual operating budget each year to achieve the necessary retirement funding levels.

The city’s annual retirement contribution has increased from $21.5 million in 2005 to $38.2 million in 2014, according to City Auditor Robert V. Stearns. He also pointed out that the share of the pension costs paid out of the city’s general fund was 5.7 percent of the budget in 2005, increasing to 8.9 percent last year.

Also, because the Retirement Board has had difficulty achieving its investment benchmarks, it has had to lower its discount rate – reflecting what the pension plan’s assets can reasonably be expected to earn over the long term – four times since 2004, when it was 8.5 percent.

In fact, since 2010 alone the board has had to lower the discount rate three times and it now stands at 7.625 percent.

Lowering the discount rate has created another problem – it increased the city’s unfunded pension liability. Back in 2005, the retirement system had an unfunded liability of $162.9 million (79.8 percent funded ratio); meanwhile, in 2014 the unfunded liability increased to $407.8 million (66.8 percent funded ratio), according to Mr. Stearns.

Mind you, the unfunded liability increased even though the retirement system’s participant population (active and inactive employees, retirees and beneficiaries) decreased 17 percent, from 7,365 in 2005 to 6,050 in 2014.

“Although there were increases to the unfunded liability for changes to assumptions related to life expectancy and projected salaries, most of the liability increase was the result of investment performance, including decreases to the discount rate,” Mr. Stearns wrote in a recent report to the City Council.

The fear is that if the retirement system’s investments continue to fall short of producing the returns needed to meet the actuarial benchmarks for the pension fund, even more tax-levy money will have to be used to cover the city’s retirement costs.

That, in turn, would leave that much less money available for public safety education, public works and parks.

“If investment returns consistently fall below the expected rate of return, the higher contributions may become the norm,” Mr. Stearns said.

That’s the last thing city officials want to see happen when they already have to struggle to come up with the money just to maintain existing programs and services.

Councilor-at-Large Konstantina B. Lukes pointed out last week that the Worcester Retirement Board used to have one of the highest rates of return for its investments of all other retirement systemd in the area.

She said that has all changed, however, and the Retirement Board’s investments are now getting annual returns that are less than those managed by the state Pension Reserves Investment Management Board of Trustees, also known as PRIM, which now handles the assets of 55 public retirement systems in Massachusetts.

Mr. Stearns, who is an ex-officio member of the Worcester Retirement Board, pointed out that the local retirement system trailed PRIM’s investment returns by just 0.63 percent over a 10-year period that ended in 2014.

But what is of concern is more recent one-year trends, which showed the Worcester retirement system trailing PRIM in terms of investment returns by 2.24 percent to 3.11 percent, according to the auditor.

In addition, the Worcester retirement system was listed 71 out of 106 retirement systems in the state for 10-year returns, as reported by the Public Employee Retirement Administration Commission in its 2014 investment report.

All of that has Mrs. Lukes wondering whether the city should give some thought to transferring the assets of the retirement system to the state.

She said if the city is able to get greater rates of return through PRIM, and in the process also eliminate the costs of having to hire investment advisers and managers, the need to supplement the retirement system with tax-levy funds would not be as great.

In doing so, however, the city could relinquish all control over where and how its pension fund is invested, according to Mr. Stearns.

“A move of 100 percent of the assets to the state would be a major step, and we may need to seek an independent advisory before putting it to a vote,” Mr. Stearns told the City Council last week.

The auditor said the Retirement Board may consider contracting with an independent consultant to help it sort out the pros and cons of transferring its assets to the state.

Mr. Stearns pointed out that the Worcester retirement system is a long-term investor, with most of its assets having inception years going back five to 15 years. As a long-term investor, he said allocations tend to change little, regardless of market conditions.

He said the Retirement Board has made some recent changes to the retirement system’s portfolio that it feels will improve performance. But that improvement will not show up overnight.

Meanwhile, Mayor Joseph M. Petty is urging caution in response to talk about transferring Worcester’s retirement assets to the state for management.

“This is very complex and people should understand that,” Mr. Petty said. “You could end up losing a lot of money in the transfer (to the state). We would also lose control over how our (pension funds) are invested. The state also invests money in a lot riskier funds than some other retirement systems do.

“This is also a decision for the Retirement Board to make, not the City Council,” the mayor added. “I don’t want to see us interfering with an independent board like that.”

Contact Nick Kotsopoulos at nicholas.kotsopoulos@telegram.com. Follow him on Twitter @NCKotsopoulos

http://m.telegram.com/article/20160313/NEWS/160319651