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

The recommendations are segregated into two different categories. “Preventive measures” may be beneficial for all Connecticut municipalities particularly those who are somewhat underfunded but not yet severely underfunded (60% or more).  “Solutions” address some of the concerns being faced by those Connecticut communities whose municipal retirement systems are considered to be severely underfunded.

PREVENTIVE MEASURES

General

·   A State set of guidelines for retirement plans may be beneficial.

·Generally Accepted Accounting Principles (GAAP) requires municipalities to have a valuation of their retirement systems done once every two years.  Require towns to file these annual (biennial) valuations with State as part of on-going fiscal monitoring process.  It would allow the database to be maintained on an on-going basis.

· If plan is underfunded, municipality should develop a strategy to bring funding to the required levels over time using the normal annual budget process whenever possible.

·Stratford has adopted an ordinance that mandates a phased-in actuarial funding over a period of time; this could be used as a model.

·   Education -- Schedule workshops for municipal officials in the following areas: investment strategies; clear explanation of fiduciary responsibilities; role of consultants in retirement systems; actuarial assumptions; issues related to collective bargaining matters; Defined Contribution vs. Defined Benefit plans.

MERF - Municipal Employee Retirement Fund

·         Encourage participation in MERF.

·         State Employees Retirement Commission should study the MERF plan provisions to ascertain whether any revisions thereto including alternative benefit structures and increased flexibility would increase its attractiveness to municipalities. This should include the study of the establishment of new state plan.

Investments

·         Consolidation of local pension funds into a centrally managed system may provide additional investment income for pension systems as well as achieve cost reductions.  Encourage voluntary investment pools for pension assets of small to mid-sized municipalities.  This would maintain administration of benefits at the local level, while investments could be done through the  State or a pooled cooperative program.

SOLUTIONS

General

·         The State Treasurer’s office set up a Pension Fund investment pool similar to the Short Term Investment Fund (STIF) and invest a municipality’s pension assets in a pre-stated allocation plan.

Pension Obligation Bonds

The State’s General Statutes are confusing and imperfect as they relate to the establishment and funding of pension plans, limitations on investment of monies contained in these plans, and the authority for issuing pension bonds.  The several sections contained in various Chapters of the law should be combined.  Some of the current State statutes include Sect. 7-403a, Sect. 7-374b, Sect. 7-148(c)(5)(a).

·         Create a separate section under CGS that will deal specifically with the issuance of Pension Obligation Bonds (POB).  Such statutory authority would provide for issuance of Pension Obligation Bonds under certain guidelines and conditions set by the Office of Policy and Management and the Office of the State Treasurer.   The following criteria should be considered:

1.      POBs are subject to local requirements for the approval of issuing debt.

2.      Covenant when bonds are issued that municipality will pay debt service and fund future obligations in the fiscal year that the commitment is made.

3.      Independent Auditors should monitor the covenants annually.

4.      Extend maturity period on the bonds to thirty  (30) years.

5.      A new category of debt be established for “Pension Bonds”; such debt would fall under the existing statutory debt limits.

6.      Municipality should have option and ability to issue refunding bonds to refund POB.

7.      Restrict bonding to an amount that is determined, by the actuary, to be the past benefit obligation.

8.      Recommend “GFOA Recommended Practice - Evaluating the Use of Pension Obligation Bonds” (Hereby attached as Exhibit G) be used as guide by municipalities that intend to issue POB.

9.      Oversight by the State Treasurer and OPM to ensure that the plan the municipality develops to issue the debt would include the following:

·         Plan assumptions which are reasonable

·         An acceptable and prudent plan to invest the proceeds

·         An acceptable asset allocation and a diversification plan.

·         Oversight and comment on the covenants in the documents, including but not limited to:

a)  an absence of unqualified audit opinion

b)  no material weaknesses in internal control

c)  debt service, reinvestment assumptions

d)  structure of issue

e)  asset allocation plan for proceeds

f)  covenant to remain current with actuarial certification of normal costs

g)  adoption of the four principles of ERISA

h)  Plan to address any balance of past benefit liability