WESTERLY — A member of the Westerly Town Council who has worked as a financial planner for 33 years says the town’s police pension plan is one recession away from calamity.
“I believe the police pension will go into critical condition in the next economic downturn,” Philip Overton told his fellow councilors recently.
The pension is 67 percent funded, meaning that if the entire Westerly Police Department retired at once and could immediately collect their pensions, the town is estimated to have saved 67 percent of the total amount to be paid to the current officers and 53 former officers who are currently collecting a pension. Overton called the current status of the fund “a slow-burning fuse on a time bomb.”
The fund will go into critical condition if it is less than 60 percent funded, Overton said.
Mario Celico, council vice president, said the police pension is relatively well funded.
Councilor Christopher Duhamel said the current funding level “is a solid foundation” reached through reliance on the input of Hooker & Holcombe, the West Hartford-based actuary firm, and the bank. If the recommendations are determined to be unsound, Duhamel said the council will direct a change.
According to statistics provided by Kennedy, of 15 towns in the state reporting, only three have a higher funding rate than Westerly’s. Kennedy’s numbers were based on a review of police pension plans posted on municipal websites.
Overton said there is little comfort in comparisons.
“Pension plans need to be funded at 100 percent. This provides the right balance between interest earnings and taxpayer funding. Just because a pension fund can be funded at less than 100 percent does not make it right, and it is a trap that most municipalities have fallen into. It will eventually bite the taxpayers in the behind, as we see time and time again. The idea that the best-run pension plans run with unfunded liabilities is a myth,” Overton said Tuesday.
Kennedy, during an interview Tuesday, said the local police pension “relatively speaking, is doing well.” The accepted best-management practice, he said, is not to fund the pension fully but instead to fully fund the actuarially determined contribution.
“If we have a community standard established for the minimum funded level of the police pension, then we can determine what ‘good’ versus ‘bad’ is,” Kennedy said.
Like Overton, Kennedy is asking the council to study the long-term rate of return projections the pension fund is currently based on.
“I agree with Councilman Overton that we need to have discussion on the long-term rate of return, because it is unrealistically high,” Kennedy said.
Reducing the long-term rate of return comes with a consequence.
“If we decrease the long-term rate of return, the obligation will increase. That means that if we all know why the obligation increased and understand that, we can make the proper adjustments to get us to a higher-funded level,” Kennedy said.
The fund is currently based on a 7.5 percent long-term rate of return, but Overton said the actual return over the past 10 years has been closer to 5.4 percent. Using the 7.5 percent rate of return, the unfunded amount of the plan is about $25 million.
“But that is defective, it’s too high,” Overton said, referring to the higher rate. Based on recent actual returns, Overton said the unfunded liability could be closer to $50 million, which he called “a pretty frightening number.”
The good news, according to Overton, is that the plan can be repaired without a painful immediate effect on taxpayers. To accomplish the repair, Overton is calling for increasing the town’s annual contribution by 2.5 percent every year for the next 30 years. The current contribution is about $1.7 million. Overton is also calling for lowering the anticipated rate of return to 6.5 percent.
“It took decades to get the pension plan into the condition that it is today. It’s going to take decades to repair it without damaging Westerly’s taxpayers,” Overton said.
Councilor Jack Carson agreed the council should study the pension fund but said residents should not interpret the situation as being an emergency. “I do agree completely that it’s an issue that perhaps has been neglected,” Carson said.
Officials are reviewing bids for the actuarial job. Celico said Hooker & Holcombe has held the position for decades.
Westerly Police Officer Anthony Alicchio, president of the local International Brotherhood of Police Officers union, declined to comment for this article.
Overton said pension funds play an important role in municipal government operations.
“They allow us to attract high-caliber police employees who put their lives on the line every single day for the good of the community,” Overton said.