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Vice Mayor expresses concerns about Sanibel’s pension funding

By Staff | Dec 23, 2008

After being named City Council Liaison to Sanibel’s Employee Pension Board, it is clear that Vice Mayor Kevin Ruane is taking his responsibilities seriously.

At last week’s City Council meeting, Ruane reported on his recent experiences at several Pension Board meetings and expressed his concerns about a reported $7.3 million unfunded liability in the city’s pension accounts, which are separate for general city employees and police department personnel.

According to Ruane, who is an accountant by trade, the city’s guaranteed employee pension plans operate under an assumed 7.5 percent annual return on investment. However, after reviewing a recent actuarial experience report, it was determined that the actual 10-year experience yielded only a 6 percent annual return on investment.

Ruane said he called a special meeting with the Pension Board to review the mid-year report, and to discuss the possibility of lowering the assumed rate of return to 7 percent, 6 percent or 5 percent, and to determine how much each percentage point would ultimately cost the city in increased contributions. According to the preliminary report, prepared by Foster & Foster Actuarial Consultants and dated Dec. 4, 2008, the city would need to chip in an additional $781,000 each year if the assumed rate of return was lowered to 5 percent.

Although actual returns for the past several years generally met or exceeded the current 7.5 percent assumption, yielding an 8 percent average annual rate of return over the previous ten years, last year’s economic woes contributed to an expected negative rate of return for the year ending Sept. 30, 2008 of -13 percent, lowering the averaged annual rate of return over 10 years to 5.7 percent.

Admitting that he had only one interaction with an actuary over the course of his accounting career that he did not find pleasant — “They use a different kind of math than I do,” said Ruane — he told the Council that he was assured by the actuary present at the special meeting that the 30-year outlook for the pension fund was positive at current assumptions, when factoring in long-term market experiences going as far back as the Depression.

The current $7.3 million unfunded liability would, by these actuarial calculations, equal zero by 2038. “But that’s only if all of their many assumptions are met,” stressed Ruane, making reference to a 1999 city employee buy-out that further accelerated the city’s pension obligations and was not accounted for in the actuarial assumptions made prior to that time. “The City is ultimately responsible for funding these guaranteed pensions, no matter what the experience in the fund.”

Ruane told the Council that the Pension Board had decided to wait for the publication of the annual Actuarial Report, which is due to be presented to the Council in March 2009, before making any decisions on lowering the assumed rates of return in the Pension Fund.

“There will be additional information in the annual report that will help in making the necessary decisions,” said Ruane, adding that state-mandated changes currently taking place will also have an effect on overall pension funding.

Ruane told the Council that there were a number of options available to the City as far as pension funding is concerned.

“It’s time to start thinking outside the box,” he suggested.

Mayor Mick Denham replied that perhaps it was time to take a look at employee contributions as well as the city’s contributions, citing continually escalating city funding, while employee contributions have remained at or near level.

“I hope that would be considered,” said Denham, expressing a desire to lessen the city’s pension-funding burden by distributing contributions more equally between the city and its employees.

Sanibel resident Jim Hanlon urged the Council to focus not only on pension funding sources, but also on the number of city employees.

“[Staffing] is another set of assumptions working against the city,” said Hanlon.

Denham replied that the City was continuing to thin out its staffing whenever possible, as well as lowering salary expenses.

“We did go through a wage freeze,” said Denham. “There were no cost-of-living increases. This is a problem that was a long time in the making and it will take a while to make changes.”

Ruane also said that he would continue to monitor the city’s pension funding while urging all parties involved to begin thinking in a different way.

“I’ve inherited this, and I’m trying to get my arms around it,” he said, adding that he would do his best to keep Council and the public updated.