In response to some recent inquiries about the fund, the pension board would like to provide this information to clarify some matters and answer some questions.

The fund’s investment consultant has run several asset/liability studies over the past five years that indicate, given our investment parameters allowed by state law, the expected rate of return for the fund was approximately 7.4% to 7.6%. They have said that the current 8.0 % was not going to be the standard going forward and that something less than that would be more realistic and should be given consideration. The fund’s actuary also recently ran an experience study that looks at the plan past trends and future expectations going forward and concurred with the expected rate of return being less than 8.0% going forward. With the advice of the fund’s consultant and actuary the board adopted a more realistic rate of return assumption of 7.75%.

The short term effect of lowering the expected rate of return is that it raises your unfunded liability. (From a 36 year amortization period to 115 years for our plan). Everything you have done up to now (benefit-wise, etc.) used to be based on expecting to get an 8.0% return and now you are changing this to 7.75%. The positive effect, longer term, is that as we have returns in excess of 7.75%, more liability will be reduced than we would have at 8.0%. ¼ % does not sound like much, but as noted above, it actually is. Most importantly however, over the long term, this should be a more realistic assumed rate of return going forward. We “took our medicine” now on lowering the expected rate of return whereas other funds which have not done so are perhaps delaying the inevitable or they may have riskier portfolios that allow them to maintain an 8.0% or higher assumed rate of return.

For some background, if you have over a 40 year amortization period to pay off the unfunded liability, you are technically not actuarially sound according to the State Pension Review Board standards. They will then help monitor those funds to see what steps are being taken to get back on track. Not being actuarially sound does not mean pension benefits cannot be paid or that the fund is going bankrupt by any means. It does mean however that the amount of contributions going into the fund is not adequate to meet the benefit obligation over the long term.

State law requires that each plan of benefits adopted by the fund be approved by a qualified actuary. The actuary must certify that the contribution commitment by the firefighters and the City provides an adequate financing arrangement. Our latest actuarial valuation as of December 31, 2005 determined that, beginning January 1, 2006, the annual required contributions by the City were to be 20.752% of firefighter earnings. However, the City’s contributions remained at 18.05%. This resulted in the actual contributions by the City for 2006 to be $11,608,660, which was 87% of their annual required contributions of $13,346,422. This total shortfall in contributions for 2006 was $1,737,762 and so far through 2007, this shortfall has continued to grow to over $2.6 million.

In light of this requirement on the part of the City to increase their contributions into our fund, the pension board had intentions to go to the legislature this past session and introduce a bill, which among other items, would have included additional contributions into our plan by the City. We are told that city management was against this idea and they conveyed that the collective bargaining process was the only avenue to “negotiate” contributions for the pension plan. So the pension bill did not happen.

As a footnote, the “catch 22” we have is that the terms outlining the collective bargaining process note that they are not representing civilians, cadets, and retirees. Furthermore, two representatives from our fund attended the September 2006 Pension Review Board meeting to discuss our plan’s under-funded status. The position letter from the City that was presented to the Pension Review Board was to “wait and see” and that we should first look to the fund’s market returns to resolve this issue. The possibility that this may be taken up through the collective bargaining process was also noted. Several PRB members commented that this was not much of a plan to address the shortfall and that actuarially required contributions by any City should not be viewed as “negotiable”.

We hope this answers some of the questions that have been raised recently. If you have any further questions or concerns, please contact your pension board trustees or staff.

Sincerely,

William E. Stefka
Administrator