Findings of the
State of Connecticut
Task Force To Study The Funding Practices Used To Finance Municipal Retirement Systems

             During its data gathering stage, the Task Force used the services of an actuarial consultant, instituted a state-wide survey, conducted a public hearing, and met with representatives from rating agencies, and the investment, banking, and actuarial communities. This is a complete list of the Task Force’s findings grouped by the following four categories:

• General Findings
  
• MERF - Municipal Employee Retirement Fund
  
• POB - Pension Obligation Bonds
  
• Survey Findings

General Findings

·         There are no Federal or State requirements for funding of municipal pension plans in accordance with actuarial determined levels.  Statutes do not require towns to fund their pension plan; governance of pension funding is left to the individual entity.

·         Municipalities with a funding level of 40% and under are considered to be severely underfunded.

·         Although the problem of Unfunded Pension Obligation is significant in size, only (13) thirteen of the communities that responded to the survey have pension plans that are 60% or more unfunded.

·         The underfunding in some municipalities became apparent with the implementation of financial reporting in accordance with Generally Accepted Accounting Principles (GAAP).

·         Implementation of the new Governmental Accounting Standards Board (GASB) pronouncements will provide heightened awareness of how municipalities report this liability.

·         Pension Fund liabilities will probably be reduced as investment results of 1995 and 1996 are factored into the plans.

·         Actuarial assumptions used in valuing plan assets and liabilities have an effect on funding levels.

·         Underfunded plans tend to use more liberal assumptions.

·         Most of the underfunded municipalities do not make contributions equal to actuarially recommended levels.

·         During the municipal budget process, future pension liabilities are not always given priority.

·         Very few towns (36 out of 169) have defined contribution (DC) plans.  By their very nature, DC plans are fully funded annually (many towns offer voluntary DC plans in addition to their defined benefit plan).

·         Pensions are subject to collective bargaining under the Municipal Employee Relations Act (MERA).

·         Factors such as fiscal distress, political factors (situation), and a municipality’s history or culture of not funding long term liabilities are some of the principal reasons for a plan’s funding status.

MERF - Municipal Employee Retirement Fund

·         In some states participation in a Municipal Employee Retirement Fund (MERF) plan is mandatory; Connecticut’s municipal employees are not compelled to join a state system.

·         Towns participating in MERF are considered to be fully funded due to MERF funding requirements.  When a municipality joins MERF they agree to make annual payments in accordance with plan requirements.  They also agree to fund the unfunded past service liability on a regular amortization schedule.

·         In Connecticut, MERF is a “take it or leave it” situation.  The lack of choice in plan design may be a deterrent to a municipality’s consideration of joining MERF.

POB - Pension Obligation Bonds

·         There is disagreement as to whether Pension Obligation Bonds are allowed under current State statute.

·         Pension obligation bonds allow municipalities an opportunity to freeze their past pension obligation and allow for funding future obligations on an on-going basis.

·         Rating Agencies do not consider POBs as a creation of new debt.  The unfunded Pension Benefit Obligation is already a credit factor and is inherent in the entity’s credit rating.

·         Rating Agencies are initially credit neutral on the issuance of pension obligation bonds.  The issue of Pension Obligation Bonds is not viewed as a negative sign by two rating agencies.  (Moody’s and Standard & Poor’s)

·         The issuance of POBs would be viewed negatively if the debt was structured in a way to merely achieve short term budget savings.

·         Rating Agencies consider pension liability a soft liability with a flexible payment schedule whereas bonding creates a hard liability with a fixed payment schedule.

·         The issuance of POBs lessens management’s flexibility because the municipality must make the debt payments or be in default.  The town loses the option of pension payment deferment for the purpose of budgetary flexibility.

·         Dollar cost averaging of investments is not achievable, as money is not contributed over a multi-year basis, but on a lump sum one-time basis.

Survey Findings

·         Analysis of the benefit structures of both overfunded and underfunded plans indicates that municipal plans tend to be very similar in benefit formulas and service requirements.  Most of the benefit formula plans have a similar equation which is a percent times final average earnings times years of service - (%xFAExYOS).

·         Typical retirement age in general employee plans is higher than in the police and fire plans.  The benefit formula for general employee plans is lower than for police and fire plans.

·         In seriously underfunded plans, the main cause of the underfunding does not seem to be due to benefit formulas or levels.  There is a weak correlation between plan design features and a plan’s funding status.

·         The definition of  “final compensation” is an important determinant of  the size of the liability.

·         Municipalities found the investment section of the survey the most difficult to answer.  Many of the questions in this section of the survey were left blank.

·         Knowledge of pension investment returns by the towns is limited in nature; many municipalities do not have good reporting information on their investments.

·        Some municipalities provide cost of living adjustments (COLAs).   The COLA and the plan’s definition of Final Average Earnings (FAE) are two factors which may determine whether a plan is richer than another.  The town’s pension liability will be impacted by the COLA.