City May Spend $1 million More to Join State Pension Plan

At last Tuesday’s work session, the Council discussed and approved the spending of upto $1 million more to join the State pension plan.

If you can remember, back in July 1 last year, the City joined the Maryland State Retirement and Pension System (MSRP) as participants in the Reformed Contributory Pension Plan. Some of my colleagues and I did not support joining the State pension system because of high cost of joining the plan and other risk factors.

When the City joined the plan, the plan’s actuaries estimated that, to purchase 60% prior service for existing city employees, it would cost the city $1.6 million. The City was aware that the amount was subject to change based on a final actuarial valuation that would take place in late 2014. The City’s plan was to borrow against its reserves the amount necessary to purchase into the plan and then pay the funds back into its reserves over time.

Staff has now found that the final cost of 60% prior service is now $2,631,128, approximately $1M more than we anticipated.

The Council discussed whether we should be paying the extra $1 million upfront or in installments. If the City is to pay upfront. The City’s Unfunded Accrued Actuarial Liability (UAAL), or the amount of assets needed to fund the city’s pension plan into the future, actually decreased from about $4.8m to about $4.7m, because. The City was to receive a credit, however, of 6.2% of payroll for the pooled system’s unfunded liability (about $3.1 million), because the City was not part of the plan previously. Because the MSRP overall valuation has improved in the last year, however, the credit for the unfunded liability has been decreased to 5% of payroll, or about $2.1 million. The improved valuation, however, should decrease the cost of the MSRP in future years.

The City’s current unassigned reserve is about $5.56m, or about 36.87% of the FY 15 expenditure budget. The City decided to dedicate $300,000 of that to design of undergrounded utilities on Route 1. With that and the requested $2.6 million for the MSRP, it would bring the city’s reserves down to about 19.1% of the current FY 15 expenditure budget. Our options at this point are to: 1) Pay the entire cost upfront and extend the length of time to repay our reserves from 5-6 years to 8-10 years, or 2) Pay the amount originally proposed from our reserves and finance the remaining $1m. Doing this over 24 years would cost $2.3 million.

The Council voted borrowing the entire amount from our reserves.