Sam Gurwitt Photo
Interim Finance Director Myron Hul.
After months of pension-related Legislative Council battles and campaign talking points about the Hamden’s looming financial burden, officials heard good news on Wednesday: the town’s pension investments performed well in 2019.
DAHAB Associates Consultant Thomas Donegan presented the numbers at a Hamden Municipal Employees Retirement Board meeting on Wednesday. The fund’s market value, as of Nov. 30, was $172,885,267. That means the town is approaching the end of the calendar year with a 17.1 percent rate of return on its investments. The quarter to date saw a 3.3 percent rate of return, and the fiscal year, to date, saw around 5 percent.
“You don’t need me to tell you that these are really good numbers, and a really strong year so far,” Donegan told the board.
Hamden’s pension success is the result of a year of growth on Wall Street.
Since the beginning of the calendar year, the S & P 500 has grown by about 25 percent. As a result, the 9 percent of the pension that is invested in a Vanguard 500 Index portfolio, which includes stock from each of the companies in the S & P 500 index, grew heftily.
A Brown Advisory portfolio saw even greater growth, with a year-to-date rate of return of 34 percent. 20 percent of the town’s pension is currently invested in that portfolio, which ended November with a market value of about $35 million.
Donegan also highlighted the high growth of the fund’s fixed-income portfolios (portfolios invested in bonds). This year, he said, saw surprising growth in the bond market, with the Barclays Bloomberg Aggregate (an index based on bonds) up 8.8 percent on Nov. 30 from the beginning of 2019. The pension’s two fixed-income portfolios tracked that growth, both ending November with a market value of almost $26 million.
When interest rates drop, bond values increase. In 2019, the Federal Reserve dropped interest rates below 2 percent, which helps explain the value increase of Hamden’s bond-invested portfolios.
On Wednesday, the Federal Reserve announced that it does not anticipate dropping interest rates any further in 2020. That means the target range will most likely remain between 1.5 and 1.75 percent.
Donegan said that in the long-term, the Barclay’s Aggregate is unlikely to continue growing as much as it did in 2019.
On Wednesday, Donegan recommended that the board draw down the fund’s Vanguard 500 Index portfolio by $2 million for payouts to pensioners. The board voted unanimously to carry out his suggestion.
Hamden’s pension remains approximately 40 percent funded. According to a Segal Consulting report on the 2017 – 2018 fiscal year, the town had almost $458 million in net pension liabilities as of July 1, 2018. Segal has not yet completed its 2019 actuarial valuation of the Hamden pension, so a more up to date number is not yet available. Using the 2018 liability estimate, that means the town must pay somewhere in the vicinity of $287 million into the pension before it is fully funded. The number, however, is a very rough estimate, as future payments must be determined using the current actuarial value of assets, which differs from the market value, and has not yet been calculated by Segal for 2019.
According to Interim Finance Director Myron Hul, the town paid about $16 million into the fund from the 2019-fiscal-year budget. The town originally budgeted $22.6 million for the pension in the 2019 fiscal year, which was 100 percent of the actuarially required contribution (ARC, the amount that town must pay each year to be on track to full funding). The state, however, only required 70 percent of ARC in 2019, and the town has met the state’s requirement. In the spring, the council voted to divert funds from what was allocated for the pension to cover other operating expenses (read more about that here and here). Hul said he has not yet closed out the books on the 2019 fiscal year.
So far in the current fiscal year, Hamden has paid $11 million into its pension fund, said Hul. The town budgeted $19.21 million this year, which is 85 percent of ARC, and is the amount the state requires.
At the same time that Hamden contributes to its pension, it must also draw funds out of it to pay current pensioners. All told, with payments in, out, and with interest on investments, the fund’s market value increased from $164.6 million in July, 2018 to $172.9 million on Nov 30, 2019. That’s a net increase of $8.3 million.
These numbers illustrate the problem with the continued underfunding of the town's pension. Despite an annual return well above historical norms due to an unusually robust stock market, the plan's assets increased only $8M from $165M to $173M. And as the article notes, that's without taking into account what has happened to the plan's liabilities, which haven't been calculated yet. Those liabilities increased $6M in FY18 and $10M in FY17. If a similar pattern prevails this year, that means we could be looking at anything from a net gain of only $2M to a net LOSS of $2M. So despite investment returns way above normal that will not be achieved on an ongoing basis, it's very likely that we're essentially treading water. What happens when returns revert to historical norms or we have a bear market?
So yes, good news in that we achieved returns well above average that are enabling us to tread water. Bad news in that because of our continued underfuding of the pension, we likely need returns well above average just to tread water, and those returns are unlikely to hold.
The only way out here is to fully fund the pension. We couldn't afford to do it last year despite committing to do so. The budget for this year shows that we again cannot afford it. And that number is only projected to go up. What's the plan for making sure we can afford it?