A Look at Local Pensions

15 Nov

On September 30, the state auditor (note: this blog likes Schweich) published a report on Missouri Public Employee Retirement Systems (defined benefit plans, aka pension plans). News article here. It focused on 15 large plans, but also gave information on all 89 of the state’s plans. This included several plans of Jefferson County entities, so I thought I would discuss those a bit.

First, a few definitions:

  • Funded ratio – percentage of plan liabilities covered by plan assets. Generally, plans with funded ratios below 80 percent are considered to be at risk of default, though that is a loose guideline that has detractors. The overall funded ratio of Missouri plans in 2012 was 78%. The national average funded ratio is about 74%, according to the auditor’s report.
  • ARC – annual required contribution, calculated by the plan actuary to achieve funding goals. This can be paid by the employer alone or combined with employee contributions.
  • Assumed rate of return – when calculating the amount of money needed to cover future pension payments, plan administrators have to estimate future returns on invested funds. A more aggressive assumed rate of return means less money needs to be contributed to the plan (if you are earning 8% on your investments, you need to contribute less than if you only get 6%). The Missouri State Employees’ Retirement System board recently lowered its assumed rate from 8.5% to 8%, and other plans around the country are making similar moves as it is forecast that future economic growth will be less than in the past. The Show-Me Institute suggests that a safe rate of 4% would be more appropriate. Such a number would lead to much higher calculations of unfunded liabilities.
Here is a spreadsheet of local pension plans covered in the report (click to enlarge):
JeffCo pension plan data from 2014 state audit

JeffCo pension plan data from 2014 state audit

Now of course, there are many other entities in Jefferson County. Many of those not listed here participate in LAGERS, the state-run program for local government employees. One could ask if it makes sense for some of these entities to have their own plan – Antonia Fire got out of the pension business in 2012.

The Arnold police pension plan seems to be in quite good shape. It is almost totally funded, has a more reasonable assumed rate of return, and more than 100% of the ARC is being paid into the plan. The ARC as a percentage of payroll has dropped from 22% in 2006 to 18% in 2012. This percentage seems a bit high still, but the fact that it is dropping suggests that the contributions are becoming a smaller burden on the police budget. However, the plan seems to be slipping a bit in that it was fully funded in 2007 but is starting to develop some unfunded liabilities.

Another item is that police employees are required to contribute to the plan. This question is not covered in the state auditor’s report, but it seems to me that employees should have to pay something into their retirement plan. You can see, though, that none of the fire districts require employees to contribute (see note on Cedar Hill below). This is what happens when firefighter unions are allowed to control the election of board members through voter apathy or a misguided sense of thinking one should vote for who the union endorses. A board member endorsed by the union is unlikely to require firefighters to pay into their retirement plan.

The High Ridge Fire District’s pension is in the best shape among JeffCo fire districts on the list, with a funded ratio of 87% with an upward trend and recent ARC payments over 100%. ARC as a percentage of payroll has dropped and was 12% in 2012. High Ridge also has a defined contribution (401k-style) plan (p. 67), but contributions to it ceased in 2008. Rock Fire is in decent shape, and Saline Valley Fire is improving (Saline Valley also has a 401k-style plan, but it has not been contributed to since 2009 (p. 74 of previous link). But all three have assumed rates of return of 7% or more, so that may be responsible in part for these entities’ good numbers. One would have to compare these plans’ actual return to their assumed return, and that data is not provided in state reporting.

Antonia Fire District’s pension plan funded ratio plummeted from 95% in 2005 to 60% in 2007, and climbed back up to 67% after that. The plan also has unfunded liabilities equal to 88% of payroll, the highest percentage among JeffCo plans. In 2012, the district joined the LAGERS plan (page 17), but the district’s plan would still have workers to support.

Cedar Hill Fire’s numbers look pretty bad in the above table, with a lowest-in-the-state funded ratio of 10%. But the district informs me that this number is the result of an error by the insurance company administering the fund, which has been corrected. Cedar Hill’s funded ratio is now 56%, and the district expects it to be 78% next year. The Cedar Hill plan covers volunteer firefighters only (it is a small incentive – benefits max out at $450 per month). There is a 401k-style plan for paid employees, who are required to make their own contributions.

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