Luzerne County Manager C. David Pedri appeared exasperated at last week’s retirement board meeting when fresh analysis determined the county’s employee pension fund contribution must increase.
“We’re trying everything we possibly can here, and we’re still paying more,” Pedri complained. “I don’t understand what it’s going to take for us to finally put less into it from the general fund.”
The county currently pays $13 million — $9.3 million from the general fund operating budget and the rest from outside funding for human service agencies and other departments, said county Budget/Finance Division Head Brian Swetz, who also sits on the retirement board.
With the new analysis, the county contribution will increase approximately $1.2 million, which equates to $750,000 from the general fund, Swetz said.
A total $85.9 million in public funds have been pumped into the county pension system to keep it stable over the last decade, or since 2008, a review of county records show.
Pedri told his fellow board members he had expected good news, or at least no change, because the administration and council had agreed to use $8.6 million from last year’s one-time revenue windfalls to shift pension fund subsidies back on a current schedule, correcting a decade-old deferral problem that caused the fund to miss out on investment earnings.
The administration also plans to pay this year’s subsidy in installments instead of one lump sum at the end of the year to get the money into the fund faster, he said.
Shoring up is necessary to close a shortfall that emerged years ago, when investment earnings and employee contributions stopped keeping pace with obligations for future pensions that are guaranteed by law.
Under the actuary’s new calculations, the shortfall — officially called the “unfunded liability” — has grown from $75 million to $95 million.
The plan is 72 percent funded, which means it’s currently equipped to pay 72 percent of future obligations. It was a more favorable 77 percent funded using the old forecasting.
The two main drivers: People are living longer, and the fund’s future investment earning target was set too high, said actuary Greg Stump, of Boomershine Consulting Group LLC.
The retirement board had dropped this target, known as the “assumed return rate,” from 7.5 percent to 7.25 percent in 2015, with the understanding it eventually may need to be lowered more.
That day has come, said Stump, who convinced the board to reduce it to 7 percent on Wednesday.
Reducing the assumed return rate forces officials to contend with higher taxpayer subsidies sooner, rather than continuing to compound losses due to unrealistic expectations.
Investment adviser Richard J. Hazzouri, of Morgan Stanley, said his team is projecting an average return around 7 percent over the next 25 years, with more dismal short-term gains around 4- to 5 percent the next five years as increased volatility is expected to return to the market.
“This is going to be a very challenging environment to navigate through,” Hazzouri said.
Hazzouri said he will continue to seek savings, increase pressure on money managers and explore options for more aggressive investing to maximize gains without jeopardizing the fund, which was valued at $235.2 million the end of March.
Riskier investments can drastically boost gains, but their potential losses would be more extreme, Hazzouri said, expressing a reluctance to “stick our necks out too far” as a result.
The fund’s current allocation is 41 percent bonds, 47.8 percent stocks, 8.3 percent alternative investments and 2.9 percent cash, his report showed.
“Sounds like we’ve got to put our seat belts on,” board member and county Councilman Eugene Kelleher said after Hazzouri’s market report.
Grasping for alternatives, Pedri asked what would happen if the 7.25 percent assumed rate was kept until the county’s outstanding debt is repaid about a decade from now.
Refinancing reduced the county’s debt repayment by $5.3 million this year, or a total $20.76 million. Repayments will increase to $24.9 million in 2019 and to $26.1 million in 2020, remaining around that amount through 2028 and culminating with a final bill of $11.1 million in 2029, officials have said.
The cost of benefits won’t change, Stump said.
Some other pension fund overseers are not paying enough attention to projections, relying instead on outdated mortality tables and investment return assumptions, he said.
“You’re going to pay now, or you’re going to pay more later,” Stump said.
County officials had expected to pay retirees until age 72 to 75 when the pension plan was created in 1946, and the average is now in the mid-80s, largely due to innovations in treatment for heart disease, cancer and other medical conditions, Stump said. Many pension plans are dealing with this issue, he said.
“Unfortunately pensions cost more now,” Stump said.
He said he expects the county subsidy will remain about the same for the next 16 years.
Four of five members board members voted for the 7 percent assumed return rate, with several indicating they must to do what’s best for the fund: Kelleher, Swetz, Councilman Chris Perry and employee representative John Evanchick Jr.
Pedri was the lone no vote, saying he can’t place additional burden on the general fund. He said 8 percent of the combined 14 percent in county real estate tax increases since the January 2012 implementation of a home rule structure were tied to pension fund subsidies.
“Moving us to 7 percent now all but guarantees there’s going to be a tax increase — if not in 2019, then definitely in 2020 — and so council needs to know that,” Pedri said.
Kelleher questioned how much the fund’s shortfall would have been reduced if prior commissioners had not decided around 2009 to start delaying the annual pension subsidy until the following a year. Debt inherited from the prior government structure has added to fiscal challenges, he said.
Reach Jennifer Learn-Andes at 570-991-6388 or on Twitter @TLJenLearnAndes.