County pension fund underperforms

By Susan Vaughn - April 12, 2007

The Duke's County Contributory Retirement System is No. 16 out of 35 underperforming local pension systems in the state whose funds could be taken over by the state under legislation proposed by Governor Deval Patrick. The funds would be put under the control of a state trust.

The governor's proposal is part of a budget package aimed at increasing financial assistance to cities and towns. Included in the legislation is a new target date for the local pension systems to fully fund their pension plans and to produce a new minimum rate of return on their investments. The target for full funding is currently 2028, based on 1994 legislation. Gov. Patrick has proposed a new target date of 2023.

The Dukes County treasurer who is in charge of the local fund, like many other officials with small pension systems, is not happy with various aspects of the proposal. Since the legislation is still pending in committee, Dukes County treasurer Noreen Mavro Flanders said nothing has changed yet, but she said the governor's proposal came to the municipalities without warning.

"This legislation makes the rules of the game very, very different," Ms. Flanders said. "I don't like the rules being changed midstream."

The Dukes County retirement system's average return on its fund from 2001-2005 was four percent on a list prepared by the Massachusetts Public Employees Retirement Association Commission (PERAC) showing the average performance and levels of funding for all the state's 106 separate pension systems. Under Gov. Patrick's proposal, only those systems earning 4.79 percent or less over the five years would have to be taken over by the state fund. The amount is 2.25 percent less than the state's average for the time period.

Municipalities with underperforming funds must budget millions of additional dollars each year to catch up with future obligations to their retirees. The plan aims to reduce that burden by allowing them to earn higher returns from the state pension fund.

The state pension fund's rate of return was 16.7 percent in 2006, growing to $46.7 billion, making it one of the top-performing large public pension funds in the country. In 2005, it returned 12.8 percent, compared with a median return of 7.5 percent for the 78 local systems on their own for that year. Because of negative performances in 2001 and 2002, the state pension fund's average annual return from 2001-2005 was 7.04 percent, the basis for the new proposal.

So far, the governor's proposal, now House Bill 3749, has gone through only the Public Service Committee hearings last month at the state legislature and is still in committee.

Yesterday, Michael DeVito, director of strategic planning at PERAC, said the pension bill is still in the committee and he does not know when it will be voted out. He said PERAC has not taken a position on the bill.

Ms. Flanders said the county's pension fund "has done well enough" and is on schedule to be fully funded by 2023. The 2006 calendar year audit is still being compiled, but she said the county system's estimated rate of return for last year is expected to be 14.8 percent, up from 7.75 percent in 2005.

Although the county fund had returns of about 17 percent and 10 percent in 2003 and 2004, losses of over 5 percent in 2001 and 2002 brought the five-year average down to the 4 percent average. Last year's higher rate would bring the county system's average from 2002-2006 to 8.1 percent, Ms. Flanders said. The county system's annualized rate of return from 1985-2005 was 8.12 percent, according to the PERAC annual report.

Also under Gov. Patrick's proposal, municipalities must have an 80 percent funded ratio, the money needed to cover future payments to retirees. Many of the targeted towns are below that level. The Dukes County system's ratio is estimated to be 67 percent for last calendar year, Ms. Flanders said.

Municipalities have been allowed to put their pension funds into the state fund, and many, including Dukes County, have been doing so. Ms. Flanders said the county's retirement system has been putting money gradually into the state fund over the years, a total of $45 million of its $55 million fund. "We may put the rest in anyway," she said, "but nothing is required yet."

Echoing the sentiment of other small communities' pension holders, Ms. Flanders said, "Systems of our size are not allowed to invest in riskier investments." The smaller boards are restricted by the PERAC from certain types of riskier, high-return instruments that the state can invest in, such as hedge funds or real estate portfolios.

Dukes County's retirement fund includes 16 municipal units and Gosnold and has about 1,000 members, including retirees, Ms. Flanders said.

"We pay out pensions of $300,000 a month," she said. Dukes County's retirement fund paid out average salary benefits of $34,000 for active employees and $14,000 for retirees, according to PERAC'S 2005 annual report.

PERAC also requires all local retirement fund units to put an appropriation into the state system to pay down their unfunded liability. The amount is based on the size of a unit's payroll, Ms. Flanders said, thus the different towns and units within the county's system pay different amounts into that fund.

The Dukes County retirement system's total appropriation for 2006 was $3.6 million, according to Ms. Flanders. Included in that amount is $3 million for the pension fund, $405,000 for a reserve fund, and $190,000 for early retirements, she said.