The unfunded liability in Charleston’s older pension plan for firefighters and police officers jumped more than $40 million over one year, but the city’s treasurer says it’s likely “a one-time event.”
The unfunded liability is limited to police and fire department employees hired before June 1, 2011, whose pensions are handled through the city’s “legacy plan.”
Between July 1, 2014, and July 1, 2015, the legacy plan’s shortfall increased from $277 million to $318 million, according to an actuarial study prepared by Gabriel, Roeder, Smith & Company.
The police pension plan went from being 10.1 percent funded to 9.3 percent funded. The firefighters’ plan dropped from being 8.4 percent funded to 7.8 percent during the same time.
Even though the deficit is an estimate, it’s “based on valid information,” said City Treasurer Vic Grigoraci.
Grigoraci said part of the higher deficit is because the interest rate on the plan’s assets has dipped to 4.5 percent from 5 percent. The interest rate is determined by factors such as relative size of the current plan’s funds, its assets and benefits.
Also, employees and retirees in the pension plans are living longer — which means the number of employees receiving retirement benefits exceeds the number of those contributing to the plan.
“It’s not pie in the sky,” Grigoraci said. “They know how many members are in the plan now [and] have a good assumption that so many will die or become disabled.”
As of Sept. 30 of this year, there were 121 active and 134 retired police department employees included in the legacy plan. There were 134 active and 140 retired fire department employees. There are 39 disabled police and 41 disabled fire employees.
Before the recent study, the data table used to determine previous life expectancy assumptions was outdated, and the expectations about how long people would live were based on data from 1994.
The most recent study uses data from 2014, “with projected generational mortality improvement,” according to the study.
Grigoraci said the outdated life expectancy figures might have contributed to the deficit increase this year, but he didn’t know how significantly.
Charleston City Manager David Molgaard said he was taken aback by the deficit spike.
“We were using the actuarial assumptions provided to us. They’re the basis of everything we were doing to this point,” Molgaard said. “I understand why they have to make those corrections from time to time, but it seems like this was a larger, radical correction that … should have been attended to on a more incremental basis.”
Police and fire employees who were hired before 2010 contribute 8 percent of their compensation to their respective legacy plans. Those hired after Jan. 1, 2010, pay 9.5 percent, Grigoraci said.
Of those paying 8 percent, most of it — 6.5 percent — goes to a “benefit payment account,” which is used to cover benefits and expenses on a “pay as you go” basis.
The remaining 1.5 percent is assigned to an accumulation account that can’t be used for benefits until the plans are fully funded.
Because the employee contributions do not finance pension benefits, the city pays the difference.
When the Charleston City Council passed a 0.5 percent sales tax increase in 2014, it created a New Pension Reserve Fund, where revenues from that tax are assigned.
Mayor Danny Jones said he doesn’t know if the $40 million deficit increase is a one-time occurrence, but he said the legacy plan “will not go broke” due to, in large part, the pension reserve fund.
“It will keep us from ever turning completely upside down,” Jones said.
The reserve fund brings in between $6 million and $7 million annually, and funds are transferred out as needed, to pay for pension benefits.
The city will transfer an estimated $2.6 million from the fund to cover benefits for the current fiscal year.
The city assigned another $8.5 million from the general fund for those benefits, which means it will spend roughly $12 million for police and fire pension benefits this year.
City Finance Director Joe Estep said the sales tax revenue is expected to increase over time.
“At this moment, we’re bringing in significantly more than we’re required to pay out, so that balance in the reserve fund is going to build up,” Estep said.
In 2024, when the pension reserve fund is expected to peak, it is projected to have a balance of more than $26 million, Estep said.
“Every year after that, the pension benefits paid out will be greater than [the earnings],” he said. “With our current assumptions, it appears as though we’d have enough money to pay those benefits through 2034.”
The legacy plans are projected to be 100-percent funded by 2046.
Reach Elaina Sauber at firstname.lastname@example.org, 304-348-3051 or follow @ElainaSauber on Twitter.