nothin Can Daryl Jones Turn $3M Into $592M? | New Haven Independent

Can Daryl Jones Turn $3M Into $592M?

Thomas Breen Photos

Jones (at left): Hire fund manager. Agrawal: Don’t.

A new city government working group is considering investing a small sum in the stock market in hopes of eventually earning back at least a hundred million dollars that it owes to its public employees.

The working group, which met Tuesday morning in the controller’s third-floor conference room in the Hall of Records, has put itself in charge of managing a trust that will pay out the city’s other post-employment benefits” (OPEB), a term that refers to all the perks retirees have been promised in addition to their pensions.

The monetary challenge facing the group, which hasn’t finalized its membership, its scheduled meeting dates or even its name, is enormous.

It must find more than half a billion dollars over the coming decades to prevent OPEBs from eating up a bigger chunk of the operating budget. But it’s starting off in an even worse spot than the city’s two cash-strapped pensions, because this fund has almost no money to grow a sizable investment portfolio.

New Haven offers a generous package of OPEBs to most retirees and their spouses. But the city has barely saved up any money in advance for those growing yearly payouts.

So far, New Haven has saved only $2.9 million for the bill that’s eventually coming due.

In the short term, the city’s auditors say that means New Haven is $166.6 million short of where it should be. And that’s just to pay off the retirees who’ve already qualified for benefits.

Factoring in all the current employees who are racking up their years of service, the city will eventually owe an estimated $592.2 million in OPEBs.

That $590 million tells us it’s a major deal, and we do need to be prepared for it,” said Mohit Agrawal, chair of the independent Financial Review and Audit Commission (FRAC). In the past, FRAC has warned that the city didn’t have a plan in place” to address OPEBs sufficiently.

Pay As You Go

Christopher Peak Photo

Controller Daryl Jones and Budget Director Mike Gormany (at left and right) meeting with new group about building a trust fund for retiree medical expenses.

Without any backup savings, the city is stuck on a pay-as-you-go” model.

That’s not uncommon: The state as a whole had $17.9 billion in total OPEB liabilities last year, according to a consultant’s report. But it means retiree benefits will continue to suck up a larger portion of city budgets each year.

New Haven is currently using operating expenses to cover the benefits for roughly 2,800 employees who left the job long ago, according to a recent count.

OEPBs count towards the city’s total medical expenditures, which are expected to rise to $81.7 million this fiscal year, marking a 65 percent increase from a decade ago. This year, 12 cents on every dollar of municipal spending will go toward medical bills for current and former employees.

Laurence Grotheer, the mayor’s spokesperson, said that spike in medical costs is unsustainable.” He said the administration is reviewing its collective bargaining agreements, focusing in particular on the police union contract that’s currently in arbitration.

Generally, to qualify for OPEBs, a city employee must have worked for 25 years. There are some lower thresholds for employees who started work after they turned 55 years old or who can’t continue to work because of a job-related injury or an incapacitating disability.

As long as a retiree notches those years of service, the city has generally agreed to reimburse for Medicare Advantage plans and all prescription drug costs until age 70 and to buy a term life insurance policy for around $20,000.

However, the exact perks differ for each collective bargaining unit.

A couple unions have already seen their OPEBs being phased out altogether, including Local 287’s school custodians, Local 3429’s school aides, and Local 424’s public-works employees like trash collectors and street sweepers.

Others have held on to OPEBs by agreeing to help defray the costs.

A Start On Savings

Thomas Breen Photo

Contract election site for AFSCME Local 3144, which agreed to defray retiree benefits with an employee contribution.

In the last three years, budget officials have upped their long-term investments and government workers have started to chip in toward OPEBs. New Haven remains far short of what’s needed; the new city board is supposed to close the gap on the unfunded liability.

My understanding is that the city decided to create this oversight body to monitor the funds and make decisions about investments,” said Westville Alder Adam Marchand, the vice-chair of the Board of Alders’ Finance Committee. It’s just the beginning of making provisions for those future benefits. It’s the smart thing to do.”

Former Mayor John DeStefano inaugurated the OPEB Trust in December 2010 with a $225,000 infusion. But for the rest of his time in office, the payments kept getting smaller: $50,000 in 2011, $25,000 in 2012, then just $15,000 for the next four years.

For each of the last three years, Mayor Toni Harp has put $405,000 into OPEBs. Her most recent budget said it was necessary to begin [the] long-term process to fund [this] unfunded liability.”

Several unions have also agreed to set aside a small portion of their paychecks to cover the costs.

Local 71’s blue-collar mechanics and plumbers, Local 884’s secretaries, Local 1303 – 467’s nurses, Local 1303 – 464’s attorneys, and Local 3144’s supervisors will all be reserving 1.25 percent of their paychecks for OPEB starting mid-next year. Police officers have been paying that amount since their last contract was signed.

Currently, the $2.947 million in the OPEB Trust is earning a nominal amount of interest. Auditors calculated a 0.36 percent rate of return last year.

Controller Daryl Jones wants to put that money into the stock market, where it can conceivably start generating bigger gains. At Tuesday’s meeting, he asked his staff to put together a request for qualifications to hire a fund manager.

We need to start growing the fund,” he said. It shouldn’t be sitting in the bank. Let’s put it to work.”

Investment Choices

Jones and Gormany at an April hearing before the alders.

Jones said he wants to emulate Norwalk’s success in paying for OPEBs, which he compared to running [the trust] like a pension.”

FRAC’s Agrawal argued the right financial move for New Haven will depend on the city’s willingness to put more money toward retiree benefits, contributing the multi-million dollar amounts that Norwalk has followed through on every year.

Norwalk established a trust fund for OPEBs in 2007; its employees began contributing their share the following year. The city did away with promising full medical insurance for retirees in 2012, instead offering a cost-share option or nominal stipends to any future employees, said Robert Barron, Norwalk’s city’s chief financial officer.

Since then, Norwalk has aimed to put in its actuarial determined employer contribution,” contributing $14.8 million in 2016 – 17, an estimated $15.3 million in 2017 – 18 and a budgeted $16.1 million in 2018 – 19.

The fund manager Callan invested the money for pensions, 401(a) accounts, and retiree medical benefits in the markets, Barron said. As of this summer, Norwalk’s trust had $80.6 million in assets, about half of what its actuaries estimate it needs for OPEB, he added.

Most communities [in Connecticut] have been pay-as-you-go’ because it’s very expensive to start funding this in pieces,” Barron said. But we talk about generational equity. You don’t want people 20 years from now paying for the cost of employees that were providing services [today]. It’s also about the ability of people 20 years from now, when we’re all retired, to pay that tremendous liability. You need to have those invested funds built up to make it affordable.”

Agrawal questioned whether New Haven is willing to make the same long-term commitment.

It’s really worth asking what the purpose of funding for OPEB is if it’s at a level that low,” he said. No one is really talking about funding OPEB in the same way that we have a 30-year plan to fully fund the pensions. To do the same with OPEB, that would make our required funding levels much higher. We would almost have to double how much we are saving on a year-by-year basis.”

Agrawal suggested that the city has two different options, depending on how much it wants to invest in OPEB.

If funding will remain static, he recommended keeping the money as a cash reserve to provide liquidity in emergencies. Or if funding will increase, he recommended investing the money in a low-cost index fund that tracks the stock market to earn returns without the cost of hiring advisors.

With an index fund, you basically pay almost nothing on your fees and let it grow with the market,” Agrawal explained. I wouldn’t even think about hiring an investment manager for $3 million.”

New Haven is currently putting together a long-term plan for meeting all its obligations, Grotheer said. The mayor’s finance team plans to submit its five-year budget projections by January 2019, he said.

The Trust With No Name

Paul Bass Photo

Someone’s meeting on Tuesday morning.

An untraceable flyer posted in the city clerk’s office last week was the only official notice local government gave that it’s thinking of moving the money into the stock market.

At Tuesday’s meeting, Jones said that the working group’s membership and name are still being determined. Jones said the city’s collective bargaining units are still working together to figure out how they will select two employees to represent all the unions, and the mayor hasn’t decided her three appointees either.

It’s probably not egregious, but it would be nice if the board had a name,” said Thomas Hennick, the Freedom of Information Commission’s public education officer.

Click on the links below to read other stories about the city’s structural deficit and ideas for closing it.

Hey, Buddy, Can You Spare $30 Million?
If City’s Broke, Can MARB Fix It?
Fixing the Budget: Fire Choices
Builders’ Tax Breaks Reconsidered
Can Building Boom Fill The Gap?
Old Debt Plugs Old $10M Shortfall
Police, Fire Chiefs: Overtime Budgets Unrealistic”
Record Bond Sale OK’d; Discipline Vowed
Like Hartford, New Haven Scoops & Tosses”
S&P Downgrades City Credit Rating
City Will Refinance Debt To Avoid Takeover
Mayor Open To Idea Of Fewer Top Cops
City Ends Policy As It Begins To Pay Off

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