Idea #268 -- Pension Liabilities/Retirement Board Savings

Idea #268 – Pension Liabilities/Retirement Board Savings

Report Status: Fully Reviewed

Researched by: Anne Helgen

Original Idea as Submitted

Reduce the ~ $10 million we apply to our unfunded pension liability each year, which increases by about 4-5% annually, and will hit about $14 million by 2029. The town is aggressively pouring money into this line item to achieve 100% funding status by 2029 - 11 years before we are legally required to do so. The town has stated that hitting this funding mark by 2029 will enable it to then address its "Other Post Employment Benefits" (OPEB) obligations. That is a commendable goal but only a handful of communities in the state are seriously trying to tackle OPEB. Action at the state level will probably be required to handle this issue, which, unlike pension funding, is not the subject of any statutory funding requirements. If, like AAA Bond-Rated Newton, we extended our goal for achieving 100% funding status on our pension obligation to 2035, we would probably free up millions of dollars per year that could significantly reduce our structural deficit. (Ed. Note: The Belmont Retirement Board extended the amortization to 2031 based on the 2020 actuarial review. Newton’s full-funding date is 2030.)¹

Other ideas included in this report

Idea # 295: Revisit our timeline for paying off our retirement and healthcare funding deficits.
Idea # 237: Invest retirement funds in PRIT as opposed to town self-run. Better investment returns, more secure, reduces expenses on retirement board (travel expenses, management fees, attorney)
Idea # 281: According to warrant committee member, Elizabeth Dionne, she found a way to save $1M by shifting pension plan investment to a state managed plan. Apparently, the town will not only get better returns, it will also save on fees. If you haven't already seen The Buzz interview of Elizabeth, I encourage you to listen. It makes perfect sense to me but it's unclear who can implement the change. I hope our town is looking into this brilliant suggestion.
Idea # 290: This should be no surprise. It costs over a million a year to have the retirement pension fund managed locally. This has been looked at by Dr Epstein and found to be true. Though the SB has no control over the Retirement Board, if you want to save a million dollars a year, you will change that relationship, soon. Its time to stop making believe this isn't an issue. Its an insult. Every dollar of underperformance is a dollar we pay, every year to meet the obligation and schedule. Why is the target completion at 2030, and not 2035 or 2037? You don't seem to be able to grasp this issue because its "out of our hands". It is if you allow it to be. Its our money that they are mis-managing. NEPC has said (and logic tells you), that managing a small fund portfolio is inefficient compared to a very large portfolio. The overlapping, duplicated costs and higher overheads and fees are a problem. I expect your response will be that these costs are not significant. That is not what was found when looked at in the aggregate. If you doubt these numbers, you should be determining them yourselves. Let me restate the number that Mr. Epstein and others have said: $1million on average, per year. If you think that isn't worth addressing you aren't serious about structural reform at all.
Idea # 281: I found this interesting article about an Andover approach to OPEB. something to consider.
https://www.mma.org/andover-and-its-employees-team-up-to-tackle-unfunded-liabilities/

Idea intent

Reduce the amount of pension costs paid annually from the General Fund budget. There are several ideas included in this write up:

Extend the amortization schedule of the unfunded pension liabilities to free up cash.
Shift investment of Retirement Board assets to the MA Public Retirement Investment Trust (PRIT) for strong likelihood of improved investment returns, which would mitigate the size of the unfunded pension liability
Investigate other ideas, such as the unfunded liability trust started by Andover, to offset the pension and OPEB liabilities of the town.

Weighted Final Score: 57 (Financial Impact: 4, Operational Impact: 6, Time Scale: 2, Ease of Implementation: 1)

Background Information

The Belmont Contributory Retirement System (“BCRS” or “System”) is an independent governmental unit that was created in 1938 to provide retirement benefits to town employees and their beneficiaries under the provisions of Massachusetts General Laws Chapter 32. The Belmont Retirement System is a multiple-employer, cost-sharing, contributory defined benefit pension plan covering all employees of the Town, except for School Department employees who serve in a teaching capacity. Teachers are members of the Commonwealth of Massachusetts Teachers’ Retirement System and do not participate at the local level. (Teachers are included in the Town’s “Other Pension Employment Benefits” (OPEB), which are primarily comprised of retirement health benefits). Enrollment in the retirement system is mandatory immediately upon the commencement of employment for all permanent employees working a minimum of 20 hours per week. Employees pay between 5% and 9% of their wages into the System, based on when they were hired. The System provides for retirement benefits up to a maximum of 80% of a member’s highest three-year average annual rate of regular compensation. Benefit payments are based upon a member’s age, length of creditable service, level of compensation, and group classification.

The System is overseen by a five-member board (“Retirement Board” or “Board”). By law, the Retirement Board and its responsibilities are governed by rules and regulations promulgated by the State’s Public Employee Retirement Administration Commission (PERAC). The Board is comprised of two members who are elected by the system participants, the Town Accountant, a member appointed by the Select Board (currently the Town Treasurer), and a fifth member selected by the other four. The Board does not report to the Town Administrator, or the Select Board; nor, is the Board subject to Town bylaws. The payment of pension obligations and decisions regarding the amortization of the pension liability are solely at the discretion of the Retirement Board in consultation with its actuary and subject to the approval of PERAC. Under current state law, municipalities must fully fund pension liabilities by 2040. Belmont’s current liability is currently scheduled to amortize by 2031. However, the estimated annual payments in the budget are determined by the amount of the actuarial liability, which is recalculated every two years, and length of time scheduled for the amortization of the liability, which is determined by the Retirement Board and approved by PERAC.

Impact on the General Fund Budget

Payment of pension obligations is a non-discretionary component of the Town’s operating budget and included in the Town’s fixed costs before appropriating operating expenditures. Every two years an actuarial review solicited by the Retirement Board forecasts total pension obligations based on information known and estimated at that time. Based on these actuarial calculations, the Retirement Board determines the projected annual amount necessary to pay current retirees (the “normal” cost) and the projected amount necessary to fully fund the unfunded pension liability (the “payment on projected unfunded actuarial accrued liability”), as well as the date the current unfunded liability will be fully funded. The Town is then obligated to fund these amounts – the “actuarially determined contribution” -- based on the schedule set by the Retirement Board and approved by (PERAC). In reality, the payment schedule is in place for the next two years after the actuarial report is prepared, after which time the actuarial accrued liability and the actuarially determined contribution are reset with a new actuarial analysis. In FY22, the General Fund budget includes normal costs of $2,331,374 and an amortization payment of $8.827,932, a total of $11,263,933. These numbers include enterprise and housing trust pension obligations.

Future actuarial analyses might differ significantly from the current actuarial analysis. The altered analyses could stem from plan experiences that differ from the assumptions used to conduct the analysis, including different economic or demographic assumptions, different investment return assumptions, changes in salary and benefits assumptions, and changes in provisions or applicable law.

Impact of Actuarial Changes to the Pension Liability and the General Fund Payment Schedule

The chart below shows the changes in the total pension liability over the past four actuarial cycles. Pension obligations—the present-day value of forecasted benefits paid to eligible beneficiaries—have increased in each of the cycles. Pension assets—the available funds to meet these obligations—have also increased. Pension asset values are a result of contribution payments made by employees to the plan, contributions made by the Town, and income from investment of the funds. The unfunded liability is the difference between forecasted benefits owed to employees and the assets the system is projected to have available to fund those benefits.

Ideally, pension assets would increase faster than pension obligations and result in increasingly lower liabilities. However, each component of the pension system is based on complex calculations that change with each biennial review. The table below underscores how pension obligations are not a static value but have increased in each of the last four cycles due to changes in the assumptions used to calculate the liability. These assumptions include number of plan participants, salaries and salary increases, changing economic environments, expected retirement patterns and longevity, etc. and the rate at which the estimates are discounted to present value. The amount available to pay for the obligations—the pension assets- change based on the contributions of active participants, the contributions made by the town, and expected investment returns net of costs. Pension obligations can also be affected by changes in the plan, for example, small changes such as the 2018 increase from $12,000 to $13,000 in the retirement base eligible for cost-of living adjustments, and larger ones, such as the Pension Reform Act of 2011 (Ch. 176) enacted by the Massachusetts Legislature, which affected new members after April 1, 2012. An extension of the full-funding date can also impact General Fund pension payments, as well as the rate of growth in those payments, particularly in the first two years of the amortization schedule.

Belmont Retirement Systems Profile

2014, 2016, 2018, 2020 Actuarial Reports

Actuarial Date	1/1/2014	1/1/2016	1/1/2018	1/1/2020
Total Obligations	$150,911,920	$165,850,771	$183,043,747	$200,829,546
Pension Assets	$77,213,290	$91,177,286	$106,445,674	$121,340,803
Unfunded Liability	$73,698,630	$74,673,485	$76,598,073	$79,488,743
% Funded	51.2%	55.0%	58.2%	60.4%
Annual Growth Rate in Town Payments to Plan	6.97%	6.96%*	5.75%	4.45%
Date of Payment in Full	2027	2029	2029	2031
Discount Rate	7.75%	7.40%	7.40%	7.15%

Does not include teachers who are members of the Massachusetts Teacher Retirement System (MTRS) and do not participate in the Belmont Retirement System.

*6.97% first two years, 4.45% thereafter. Amortization growth rates are the rate of growth of pension payments in the General Fund budget.

Source: The Segal Group, Inc., Belmont Contributory Retirement System Actuarial Valuation and Review as of January 1, 2014, 2016, 2018 and 2020. Includes Town of Belmont, Belmont Municipal Light Department, Water and Sewer, and Housing Authority pension obligations.

The chart also shows how difficult it is to fully amortize the unfunded liability when total obligations are increasing. This is illustrated in the graph below, which shows that, while total assets have grown from investment income and Town contributions, unfunded pension obligations –the orange portion of the chart—do not reflect a net reduction commensurate with payments made by the Town. In 2018 and 2019, the Town contributed $18.5 million to pension assets. However, the actuarial unfunded liability went up, not down, as total obligations increased based on new actuarial information and calculations. As a percentage of the overall obligations, the funded portion of the liability increased slightly from 58.2% to 60.4%.

Exhibit I includes the current amortization schedule, based on the BCRS 2020 actuarial review.

Factors to Consider

The Segal Group, Inc. has been the System’s actuary since the 2014 review. Each actuarial review evaluates all of the relevant factors and assumptions to determine the current value of pension liabilities owed to beneficiaries.

Of the many factors and assumptions that make up actuarial reviews, the section below focuses on several that can have a significant impact on the overall liability and therefore the net liability affecting the General Fund budget.

Breakdown of Eligible Participants and Salary Increases Used in Calculating Pension Obligations

The number of participants, type of participants and salary assumptions impact the current payment of retiree benefits (the “normal” cost), as well as the expected benefits to be paid in the future. As the number of participants increase and average salaries increase, so does the current value of estimated payments to be made. An increase in active participants leads to an increase in pension obligations will increase over time as these employees age and eventually access benefits. The number of retiree participants impact the General Fund budget because the Town pays those benefits on a current basis. If more employees retire sooner than expected, the annual “normal cost” General Fund expenditures will increase.

The chart below breaks out participants by type. Since 2016, the number of total participants in the System has increased by 7.8%. This increase is primarily driven by the 2018-2020 increase in School Department non-teaching participants, as well as a higher number of inactive participants (primarily former employees who are owed benefits).

The ratio of non-active participants (retirees plus former employees, i.e. those owed money by the System but not paying into the System) to "active” participants paying into the System remained relatively flat in the past three actuarial reviews. However, a number greater than one indicates that active participant contributions may not be able to keep pace with retiree benefits. An increase in this ratio can indicate that investment returns will likely be increasingly relied on to meet future obligations.

The table also shows the 2016-2020 increases in the total payroll and average payroll. The actuarial review estimates the growth rate based on historical data as well as current and market expectations and adjusts for any differences in actual vs. assumed rates in the subsequent biennial review. Increases or decreases in total payroll and experience can have a significant impact on future liabilities.

Belmont Contributory Retirement System Data

Fiscal Year	2014	2016	2018	2020	% Change FY16-20*
Number of School (Non-Teaching) active participants	159	159	164	205	28.9%
Number of Municipal active participants	299	301	303	293	-2.7%
Total Active Participants	458	460	467	498	8.3%
% Increase Year over Year		4.4%	1.5%	6.6%
Number of Retirees	346	348	354	351	0.9%
Inactive Participants	164	230	254	270	17.4%
Total Active and Inactive Participants	968	1,038	1,075	1,119	7.8%
% Increase Year over Year	n/a	7.2%	3.6%	4.1%	n/a
Non-Active Participants/Active Participants	1.14	1.26	1.30	1.25	n/a
Total Payroll ($million)		$25.0	$26.4	$29.7	12.5%
Average Payroll		$54,416	$56,521	$59,557	9.5%

*Please note that the percentage changes include only the past three cycles. In FY16, the BCRS upgraded its systems and made adjustments based on a review of prior system entries. The 2014-2016 growth in participants does not necessarily match to actual increases in new members from 2014-2016 and therefore has been excluded from the growth percentage.

Note: Active participants are current employees making payments into the retirement system. Inactive participants are employees who no longer work in Belmont but to whom retirement benefits are owed. Does not include teachers who are members of the Massachusetts Teacher Retirement System (MTRS) and do not participate in the Belmont Retirement System.

Discount Rate

Actuarial liabilities also change from review to review due to changes in the discount rate used to express future pension liabilities in today's dollars. As a plan’s discount rate goes down, the liability—and therefore the amount needed to be funded—increases. Conversely, if the discount rate goes up, the pension liability decreases, as returns are expected to represent a higher portion in funding the liability over time.

Since 2013, PERAC has recommended a decrease in the discount rate in each actuarial cycle based on independent long range capital market projections. For 2021 reviews, PERAC generally recommended a discount rate of 6.75-7.15% or below. It is likely that the discount rate recommended by PERAC will continue to decline.² The discount rate used in the BCRS 2020 actuarial review was 7.15%. The System’s upcoming 2022 actuarial review will be based on December 31, 2021, financials.

An independent audit of System’s 2018 and 2019 financials by Powers & Sullivan LLC included calculations showing the impact a 1% increase or decrease in the current discount rate would have on the System’s total liabilities as of 12/31/2019, as shown below. A 1% change in the discount rate is unlikely, however, lower discount rates have contributed to increases in actuarial liabilities in the BCRS 2016 and 2020 actuarial reviews.

Discount Rate Sensitivity		12/31/19 Total Pension Liability ($000)
1% decrease (6.15%)		$98,927
Current Discount Rate (7.15%)		$76,746
1% Increase (8.15%)		$58,037

Source: Powell & Sullivan LLC, Belmont Contributory Retirement System, Report on Examination of Basic Financial Statements, December31, 2019 and 2018, https://www.mass.gov/doc/belmont-retirement-board-private-audit-report-years-ended-2019-and-2018/download. Numbers were calculated using a 2029 full-funding date and will vary from other charts herein. Does not include Enterprise fund or Housing Trust pension payments.

Exhibit II includes discount rates used by communities with similar debt ratings, as well as other communities comparable to Belmont.

Extension of the Date for Full Amortization of the Unfunded Pension Liability

The State requires towns to fully fund pension liabilities by 2040. PERAC recommends complete amortization of the unfunded liability no later than 2035 to allow flexibility in the event of a market downturn similar to the one experienced in 2008. Almost 80% of PERAC members plan to fully amortize pension liabilities by 2035.³ However, some systems, like Hingham, have a longer amortization date, but front load the amortization. This provides flexibility to increase the rate of repayment to accommodate actuarial changes over time.

The rate of repayment that a town must make is considered along with the end payment date. Some retirement systems set an annual fixed rate of repayment (in Arlington’s case, 6%) per year.

Since 2016, the Retirement Board has extended the full-funding date twice: in FY16, the time allotted to fully amortize the Town unfunded pension liabilities schedule was extended from 2027 to 2029 and, in 2020, the Retirement board extended the date from 2029 to 2031. The table below shows the amortization payment for 2022 scheduled as of each of the last four actuarial cycles. This shows the changes in this one payment from Review to Review as the amortization schedule is reset every two years and underscores how the outer year “savings” projected in one review may not necessarily be realized due to changes in net pension liabilities and other factors, such as the relative length of repayment.

As a result of the 2016 review, an amortization schedule was set that showed that six years later in FY22, the town would pay $815,000 less than previously scheduled in 2014. The 2018 review reset the amortization based higher actuarial obligations and without an extension of the date of repayment, resulting in a $425,000 increase in the Town’s 2022 payment relative to what was forecast in 2016. In 2020, the projected 2022 amortization payment decreased by $140,100—after a 2-year extension from 2029 to 2031. Note that the Town’s 2022 payment is higher than scheduled in 2016 despite two extensions of the final repayment date in 2016 and 2020.

Nonetheless, the 2020 Review’s extension of the final payment to 2031 allowed for a reduction in the annual rate of growth in payments (from 5.75% to 4.45%). The extension likely mitigated a payment increase for the General Fund budget that would have taken place had the final payment date remained 2029.

Actuarial Cycle	2014	2016	2018	2020
Unfunded Pension Liabilities ($000)	$73,698.6	$74,673.5	$76,598.1	$79,488.7
Amortization Full-Funding Date	2027	2029	2029	2031
Scheduled Amortization Payment for 2022 used In each respective Review	$11,803.7	$10,988.7	$11,404.1	$11,264.0
Change in 2022 General Fund Payment	n/a	($815.0)	$425.4	($140.1)
Rate of growth of amortization payments used	4.45%	6.97%*	5.75%	4.45%

*6.97% for the first two years, followed by 4.45%.

Exhibit II includes retirement system amortization dates for communities with similar debt ratings, as well as other communities similar to Belmont.

Investment Returns

Investment results impact the rate at which the pension assets grow and have a direct impact on changes in the unfunded pension liability. Higher investment returns increase the assets available to fund the pension liability. Lower investment rates can contribute to higher amortization and can lengthen the time necessary to fully fund the pension debt.

The table below summarizes 1-, 5-, and 10-, and 36-year investment returns as for PERAC’s 104-member contributory retirement systems. The BRS is below the composite average of the 104 systems in all but the 36-year view. In the past one and over the past five years, Belmont’s investment returns, as provided by PERAC, was in the lowest 10% of all 104 member systems. This is a trend downward from rankings based on 10- and 36-year returns.

The chart also shows the difference between investment returns generated by the Pension Reserves Investment Management (“PRIM”) Board and the BCRS for the same periods, again provided by PERAC. PRIM manages the assets of the Pension Reserves Investment Trust (“PRIT”) Fund (https://www.mapension.com/investments/#prit-fund-core) for public employee pension benefits on behalf of Massachusetts State Employees, Massachusetts Teachers’, and Boston Teachers’, as well as local participating retirement systems throughout the Commonwealth that elect to invest with PRIM, either by transferring all assets or investing a portion of their assets (as Belmont does). PRIM’s investment returns have exceeded BCRS returns in each of the 1-,5-,10-, and 36-year periods benchmarked by PERAC. Over the past five years, PRIM outperformed the BCRS by 0.87% and, in 2020, by 1.31%. For 2020, this difference represents approximately $1.5 million; the cumulative effect of higher investment returns over time is much greater.

	2020 Return	5-Year Return	10-Year Return	36-Year Return
Investment Return-Belmont	11.30%	9.55%	8.75%	9.38%
Investment Return-PERAC Composite Average	12.82%	10.38%	8.93%	9.32%
Difference Between Composite Average Returns and BCRS Returns	1.52%	0.83%	0.18%	-0.06%
Number of PERAC Systems	104	104	104	103
# of Individual Systems Exceeding Belmont's Return	96	95	75	22
Belmont Rank (Highest to Lowest Return)	97/104	96/104	76/104	23/103
Investment Return-PRIM	12.61%%	10.42%	8.97%	9.62%
Difference between PRIM returns and BCRS Returns	1.31%	0.87%	0.22%	0.24%

Note: The PERAC composite average includes PRIM returns.

Source: PERAC 2020 Investment Report, https://www.mass.gov/doc/2020-investment-report/download

System Costs

System administrative costs are included in the “normal cost” portion of pension expenditures in the General Budget. The table below shows the BCRS actuarial administrative expense estimates (assumptions) compared to the actual administrative expenses for 2014 through 2020. Estimated administrative costs are also included in actuarial calculations of the pension liability. Actual positive or negative variances between expected administrative expenditures and actual expenses impact the calculation of the liability. The BCRS has exceeded actuarial estimates in each year between 2016 and 2019. These variances, although small, were included in the negative variances reported in the actuarial reviews for 2018 and 2020 and administrative cost assumptions were increased in the 2020 review.

In the FY22 Warrant Committee Report, the Pension, OPEB, and Debt subcommittee identified rental costs and legal expenditures as two areas of costs that warrant review by the Retirement Board.

Administrative expenses do not include investment fees, which are factored into the discount rate.

Year	Administrative Expense Assumptions	Actual Administrative Expenses
2014	$175,000	$154,000
2015	$182,000	$183,000
2016	$290,000	$322,000
2017	$298,000	$323,000
2018	$233,000	$315,000
2019	$242,000	$315,000
2020	$290,000	n/a

Exhibit III Includes a table comparing fees for similar size systems.

Other Pension and Employment Benefits (OPEB)⁴

In addition to pensions, Belmont provides its employees with healthcare and life insurance benefits upon retirement. These OPEB benefits are managed and overseen by the Town and not by the Belmont Retirement Board. There is no state oversight agency such as PERAC monitoring the status of compliance with OPEB funding. The Town provides OPEB benefits to teaching staff; in contrast pension benefits are provided to teachers by the State.

The Town pays OPEB benefits for retirees on a “pay-as-you-go” basis, meaning the Town makes payments out of the current budget to cover retiree health costs in real time as they are incurred. The FY22 budgeted amount for retiree health benefits is $2.1 million. Although the cost each year of current retirees’ OPEB benefits have been fully and adequately covered by the Town over the years on a pay-as-you-go basis, the projected OPEB benefits earned by Town employees on an actuarial basis substantially exceed the reserves set aside at of FY22.

As of the June 30, 2021, actuarial report, the Town’s unfunded OPEB liability was $91,339,148. This unfunded liability is lower than the unfunded liability of $95,366,839 as of the prior report dated June 30, 2019. The discount rate was reduced to 6.25% in the 2021 review from 6.5% in the 2019 review. The liability decrease is largely the result of net of several factors including a change in the discount rate offset by updated per capita costs, contributions, future trends and Medicare plan enrollment.

In the 2010s, the Town initiated an OPEB funding policy and created an “OPEB Trust Fund” to begin to fund OPEB obligations owed by the Town to retirees. The annual contribution is calculated using a formula that considers both the Town’s reserves and the level of the unfunded liability. Although the Town’s policy not intended to make significant reductions in the liabilities, the policy provides an initial framework and is acknowledged favorably by rating agencies. The OPEB Trust has a balance of approximately $6.2 million and is managed by the Town Treasurer. The actuarial OPEB liability is valued every two years by an actuary and provides the Town with disclosure information needed for the audited financial statements in accordance with GASB accounting Statements 74 and 75.

In FY21 and FY22, the Town budgeted $50,000 from Free Cash into the OPEB Trust to contribute toward the Town’s portion of the unfunded OPEB liability. This lower contribution is the minimum contribution permitted under the Town’s OPEB funding policy and is significantly lower than the Town’s FY20 contribution of $552,695.

Summary

The Town’s FY22 pension contribution of $11.3 million represents a large portion of the Town’s general fund operating budget. As of 1/1/20, the Belmont Retirement System was 60.4% funded, which means the Town does not currently have the actuarial assets to cover expected pension obligations and must amortize the difference through General Fund payments to the System. In addition, the Town pays more than $3 million in current town and school retiree health insurance benefits annually. Both pension and OPEB obligations are recalculated every two years.
In spite of large annual General Fund contributions to the pension fund by the town and two extensions of the full funding date, actuarial pension liabilities have grown by almost $5.8 million between 2016 and 2020.
Belmont’s pension obligations are expected to increase in future actuarial reviews, including the 2022 review underway.
- The discount rate is expected to continue to decrease, based on long term capital markets outlooks and PERAC guidance⁵. This will perhaps have the greatest impact in increasing actuarial pension liabilities in the foreseeable future.
- The impact of the pandemic on the 2020 assumptions is yet to be known, although anecdotally, there has been a reported increase in retirees. Higher than expected payouts in the near future leave fewer current assets available to benefit from investment returns farther in the future.
- For the 2022 review, it is anticipated that the System will report increases in total participants, as well as higher payroll and average salaries, based on recent employee counts and contractual obligations.
Investment returns, as reported by PERAC, are near the bottom of PERAC’s 104 member systems.
- Improving investment results will help lower overall pension obligations and positively impact the General Fund budget. Segal notes that the need for cash from the investment portfolio to meet benefits is particularly true as the system matures (i.e., more participants are receiving benefits than there are participant contributing to the system). ⁶ The BCRS ratio of non-active (i.e., retiree and others) to active participants paying into the system was 1.25 in the 2020 review. The greater need for cash modestly dampens investment returns.
Maintaining Belmont’s AAA rating is a priority for the town. The S+P’s 2020 credit opinion for Belmont identified its large pension and OPEB costs as a risk, given the agency’s expectation that it these obligations will increase.⁷ In their opinion, Belmont’s “actuarially determined contribution is determined on weak underlying assumptions and methodologies”, putting Town at risk of unanticipated escalations in town contributions. Since the date of the opinion, the 2020 BCRS actuarial review increased total liabilities and extended the date of funding by two years. At the time of the opinion, Belmont was using a 7.4% discount rate; S+P viewed 6.5% as a sustainable discount rate to mitigate market volatility. We note that the amortization dates Massachusetts towns with similar debt ratings are generally in the 2029 to 2031 range.
The $1 million savings referenced in the idea texts at the beginning of this write up might have erroneously been interpreted as direct savings to the General Fund budget. However, the $1 million in savings referenced should refer instead to estimates that compare PRIM returns to BCRS returns. This does not directly impact the budget by $1 million; instead, the analysis was done to estimate the cumulative impact over several years of lower investment returns on pension asset levels.
While extending the full funding date often appears to “save millions”⁸, the actual impact on the General Fund budget has been modest in an era of rising pension liabilities and declining discount rates, as shown above. The 2016 and 2020 extensions of the full funding from 2027 to 2031 helped smooth General Fund payments and, in 2020, the extension reduced the percentage growth in General Fund pension costs. However, forecasted “savings” in the later years are somewhat illusory since the amortization schedule for the outer years changes with each biennial reset of the schedule; the “savings” forecast in the prior actuarial assessment does not necessarily come to fruition. Most retirement boards do not use repayment date extensions to maximize current savings in the current period as such extensions reduce the flexibility to manage the obligations by 2040 if market conditions change.
Lastly, the SCIG did not have time to adequately review the suggestion regarding Andover’s program to reduce pension and OPEB costs (see further reading below). This is a collectively bargained program through which employees contribute to offset pension and OPEB liabilities. Further research is needed to assess the viability and impact of such a program in Belmont.

Recommendations

The Retirement Board acts independently from the Town and sets expectations with the actuary. Many variables contribute to the pension costs and no one variable contributes directly to reducing the General Fund budget. Some actuarial assumptions are outside of the Board and the Town’s control, such as demographic trends and economic assumptions. However, factors that can be changed or controlled--small or large--can, over time, mitigate the impact of rising pension costs on the General Fund budget.

The SCIG recommends action on the following:

**1 – Investment Returns and Investment Fees **

BCRS’s subpar investment returns relative to other Massachusetts contributory retirement systems should be unacceptable to the Retirement Board, employees, retirees, the Town, residents, and the Select Board. BCRS one- year and five-year returns have been in the bottom 10% of all 104 PERAC members and in the bottom 27% when averaged over the past 10 years. The cumulative impact of this variance affects the Town’s net unfunded pension liabilities and the pace at which the Town can fully fund these obligations. Pension obligations are expected to continue to rise, discount rates are expected to continue to decline, and, as the System matures, investment income will be increasing relied on to offset decreases in employee contributions.

The Retirement Board independently determines investment strategies and asset allocation, chooses investment managers and sets policies for how investment returns will be recognized. PRIM, the state’s pension investment management firm, has consistently outperformed the BCRS.⁹ PRIM, due to its size, benefits from a lower fee structure and broad access to diversified investments. In addition, PRIM provides professional management beyond the capability of most municipal retirement boards, which, like Belmont’s, are typically comprised of retirees and have limited professional investment expertise. Towns that contract with PRIM to manage pension assets can reduce investment management risk while still retaining local control of retirement plans and actively managing retiree benefits.

The SCIG supports and reiterates the Warrant Committee recommendations, as follows:

The Warrant Committee recommends that the BRS Board make an annual presentation to the Warrant Committee and the Select Board that will include the status of the System and a comparison of the investment performance of the BRS to that of PRIT. BRS returns should consistently outperform PRIT to justify ongoing active management by the BRS Board of assets that are not already invested in PRIT.
The Warrant Committee recommends that the Town engage the BRS Board in active review of two ways to reduce the Board’s administrative costs, all of which come out of the Town’s General Fund – moving Board staff from leased space to Town-owned space and utilizing the Town’s labor counsel, rather than keeping separate counsel on retainer.
The Warrant Committee recommends that the Select Board and the Warrant Committee receive an update from the BRS Board when the next draft actuarial report is prepared, prior to the BRS Board formally adopting that report being formally adopted and sent to PERAC.

The SCIG also notes that the Select Board appoints one member and the Town Administrator have oversight of the Town Accountant. The SCIG recommends that the Select Board and Town Administrator take a more active role in communicating Town concerns and proposed actions to the two representatives of the Town on the Retirement Board.

Lastly, the SCIG recommends increased transparency on the part of the Retirement Board. This would include posting updated minutes and annual investment returns on the BCRS website and allowing time for public comment at Retirement Board meetings.

**2 – Personnel/Salaries and Benefits **

The Select Board/Town Administrator and School Committee each participate in negotiations related to the hiring and compensating of employees. Salaries and benefits currently represent over 75% of the net operating budget and negotiated collective bargaining contracts drive compensation levels and increases for more than 85% of the total town and school employees. The addition of benefits-eligible employees not only adds to current budgeted payroll but also creates long term retirement and pension obligations, which are often overlooked in the hiring process.

The SCIG recommends that the Select Board and School Committee actively work together to mitigate rising retirement liabilities by implementing the following recommendations, several of which were also recommendations of the Financial Task Force II.

Align the terms and conditions in collective bargaining terms across town and school unions, in particular with respect to the employee/employer split for health insurance premiums.
With each contract negotiation, evaluate and report the impact of prospective collective bargaining terms on retirement and pension costs.
Develop a template to assess the all-in cost –including retirement costs--of hiring benefits-eligible employees to determine whether increasing headcount is more cost-effective than outsourcing or contracting for the service.

Next Steps

Select Board to contact Retirement Board to schedule a date to review 2021 investment results and set a timeframe for future annual reviews of investment results.
Town Human Resources Director and School Director of Human Capital to identify differences in contract terms and identify area that can be aligned.
Select Board and School Committee to develop a template to compare the all-in cost/benefit/cost effectiveness of hiring a new benefits-eligible employee vs. outsourcing. This would include projected retirement costs and be used in considering the addition of personnel.

	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Employer Normal Cost	$2,256	$2,331	$2,409	$2,489	$2,572	$2,658	$2,746	$2,838	$2,932	$3,029	3130	3234
Amortization	$8,527	$8,932	$9,356	$9,800	$10,263	$10,749	$11,257	$11,789	$12,346	$12,928	13129
Total Actuarial Contribution	$10,784	$11,264	$11,765	$12,288	$12,835	$13,407	$14,003	$14,627	$15,278	$15,957	$16,259

	2019 Rating	Full Funding Date	% Funded	Discount Rate Assumption	Actuarial Review Date	Non-Active/Active Ratio
Debt Rating of Aaa
Belmont	Aaa/NR	2031	60.4%	7.15%	1/1/20	1.25
Brookline	Aaa/AAA	2030	59.6%	7.20%	1/1/20	1.91
Concord	Aaa/NR	2029	88.6%	6.75%	1/1/20	0.89
Hingham	Aaa/AAA	2035	70.4%	7.40%	1/1/20	1.00
Lexington	Aaa/NR	2030	80.4%	7.25%	1/1/20	1.03
Newton	Aaa/NR	2030	57.4%	7.25%	1/1/21	1.20
Wellesley	Aaa/AAA	2030	77.7%	6.00%	1/1/21	1.13
Winchester	Aaa/AAA	2029	80.5%	7.25%	1/1/21	1.16

Debt Ratings below Aaa
Arlington	Aa1/AAA	2033	54.5%	7.00%	1/1/20	1.20
Marblehead	NR/AAA	2039	62.3%	7.15%	1/1/20	0.90
Milton	NR/AAA	2026	82.6%	7.00%	1/1/21	0.89
Needham	NR/AAA	2033	65.6%	65.6%	1/1/20	0.96
Watertown	Aa2/AAA	2023	91.7%	91.5%	1/1/20	1.14

Retirement System	# Participants In System	Actuarial Estimate of Administrative Costs	Actuarial Year
Arlington	1,792	$453,000	1/1/20 Report
Belmont	1,119	$330,000	1/1/20 Report
Hingham	1,203	$144,740	1/1/20 Report
Lexington	1,535	$275,000	1/1/20 Report
Needham*	1,225	$375,000	1/1/20 Report
Watertown	1,130	$340,000	1/1/20 Report
Wellesley	1,474	$275,000	1/1/21 Report
Winchester	847	$180,000	1/1/21 Report