Aided by a positive stock market performance and strategic investments, the city of Mobile can expect a “substantial” reduction in the amount it will pay into the Police and Firefighters Pension Fund in 2015, according to Finance Director Paul Wesch.
Wesch said pending the analysis of smaller revenue sources, the city’s contribution to the fund next year will be anywhere between $4.4 million and $5.1 million less than the $17,273,266 payment the city is obligated to pay in the current fiscal year.
That money can be distributed back into the general fund budget, Wesch said, where it can be allocated toward any number of funds or projects. Yet, because of the changing market environment, the fund cannot guarantee similar savings beyond 2015.
“It will continue to fluctuate,” he said. “There will be a temporary respite next year from what we paid in the past but for the next 14 years the basic amortization will continue to go up.”
Pension fund administrator Mary Berg said the city’s lowered contribution was good news, but more notable was the fund’s performance over the past 12 years.
“We’re doing very well,” she said. “We’re 62 percent funded, which is an 8 percent increase over last year. Our most recent audit showed $147 million in assets, where in 2000-to-2001, we went under $50 million.”
According to a report detailing the fund’s performance in the fourth quarter of 2013, its total market value was $136.77 million, while it enjoyed an impressive return of 19.54 percent over the previous 12 months.
Jimmy Connick, a fourth-generation first responder who serves as one of the Fire Department’s three representatives on the pension board, said the fund today is a far cry from where it was in 1985, when an actuarial report warned it was in danger of going bankrupt.
“The pension is probably in the best position it has been in the history of the fund,” he said. “It’s going to be a good year for the city, and it was a pleasant surprise for us, I think because the market did so well.”
Connick and the board’s longest-serving member, attorney Michael Druhan, explained how the fund nearly reached a breaking point in 1997, when former Mayor Mike Dow reorganized the board and committed the city, through a legislative act, to covering what was then a $2 million to $4 million annual gap.
“The board at that point didn’t pay a whole lot of attention to how much came in and how much went out and the unfunded liability got really out of line,” Druhan said. “The unfunded liability was $40 million and we may have had $30 million in assets. We brought in a new actuary and he has been a big help guiding us. Years went by when the pension wasn’t very big and once we started amortizing the unfunded liability, the city’s contribution went up. We try to smooth it out to help the city not have a huge payment every year and some years the city pays more than required to avoid big hits all the sudden, but it’s getting to a point where city’s contribution is getting smaller.”
Dow said that his commitment to cover the gap was the fulfillment of a campaign promise, but his ultimate goal was to bond out the city’s obligation and have a new administrator, like the Retirement Systems of Alabama, take over the pension. He fell short of getting the number of city council votes to make that happen and since 1997, the city has contributed $167 million to the fund.
“When I was campaigning for office the first time, the fund was eating into the principal and not making enough to cover the gap,” Dow said. “It was identical to what you’ve seen in Prichard and destined to fail. The city had given control of the assets over to the police and fire board and they didn’t realize that it was a failed financial model and the city had to pay into it to survive. We recognized that and put a new team together. Step One was I promised to write a check every year and stick it in the budget to make the fund whole. Step Two was to go to the legislature and write a law to make that payment mandatory. Step Three was to bond it out and turn it over to RSA, but that never happened, so it continues to be a huge burden.
“Pension funds are a plague on cities and counties all over the country,” he said. “They are hard animals to tame but having said that, I think that board has done a conscious, good, hard job. Over the years they have modified it to not be such a heavy burden — doing things such as lowering benefits and increasing the age of retirement — that board has done a superb job, but without that pension fund being bonded out they are rather limited in what they can do. Particularly in bad years that gap has gotten serious and maintaining that payment is a huge burden on city.”
Connick agreed that the city’s pension obligation has been political, but questioned the burden it put on the budget.
“In a bad market year like 2008 the city has to absorb that loss but on the flip side, the past year has been a great market year and the city has a credit,” Connick said. “It would be great if it was 100 percent funded by the market. There would be no political pressure saying ‘the police and fire pension cost the city so much.’ In reality it doesn’t, but it looks like it does. What really does cost the city is the cruise terminal, or the maritime museum, or the civic center or the convention center, and that list goes on and on.”
According to data provided by the city, the average taxpayer obligation to the fund between 1997-2001 was $7.5 million. Over the next six years, the average payment jumped to $12.9 million, while in 2008-2012, the city’s average payment was $15.4 million, culminating with last year’s high payment.
Mayor Sandy Stimpson said “it would make a lot of sense” to try to level the payment out, but his administration has not had that discussion yet.
“It’s not something we can stabilize very much,” he said. “What happens is the trajectory of what it costs the city continues to climb. When they made the deal, they were paying interest only, so each year that goes by there is an increasing payment. Fourteen years from now (when the city’s obligation ends), you’ll go from paying $22 million a year into it to maybe $2 million or $3 million. So that will be a great time to be mayor of the city because all the sudden you have a $20 million windfall. I won’t be the mayor at that point and there are some things to possibly level that out, but it’s real premature to say how.”
Stimpson also said he doesn’t feel like the fund needs to be bonded to an outside administrator.
“That has not crossed my mind. My impression is that fund is being well managed and it’s just the nature of the beast that it is costing more money each year.”
Druhan, who is one of two members of the nine-member pension board who is not a current or former employee of the city, credited the police and fire department’s involvement in the fund for its advancements in the market.
“My experience has been very upbeat in that I’m always amazed at how dedicated to the fund the employees are,” he said. “Not just how we’re doing financially but also keeping up with all the current developments in regulations and law. The board has to be very knowledgeable about investments and it has made large steps in that direction.”
Meanwhile, Druhan said the January 2014 board meeting was just the second month in his 17 years on the board where it was reported that no employee contributors to the pension were withdrawing their own benefits to resign.
“Every month 10-12 people leave and get their money out of the program,” he said. “[At the most recent meeting] the report is there were none. I think that reflects the change of administration and change of leadership, where the employees are glad to stay and work where before, it seemed they were just miserable and wanted to move on. Now, we hope to see more people buying into the program and staying with it.”
The pension currently has about 1,000 employees paying in, who along with taxpayers, are supporting about 700 retirees. Berg said even if the program is ever fully funded by the market, the city will continue to be responsible for as much as $5 million in annual administrative costs.
“The fund has more assets now than ever,” she said. “I never thought we’d see 62 percent funded.”
Annual taxpayer contributions to Police and Fire Department pension fund
October 1, 1997 – $6,863,318.00
October 1, 1998 – $8,433,839.00
October 1, 1999 – $7,224,495.00
October 1, 2000 – $6,478,261.00
October 1, 2001 – $8,888,989.00
October 1, 2002 – $11,647,521.00
October 1, 2003 – $11,022,587.00
October 1, 2004 – $14,478,951.00
October 1, 2005 – $14,288,172.00
October 1, 2006 – $12,149,807.00
October 1, 2007 – $10,572,547.00
October 1, 2008 – $15,303,812.00
October 1, 2009 – $13,733,446.00
October 1, 2010 – $12,683,622.00
October 1, 2011 – $16,503,354.00
October 1, 2012 – $19,022,772.00
October 1, 2013 – to be determined