Lee’s Summit, August 16, 2010 – Last week I received an e-mail from a reader who asked me if I knew about the City of Lee’s Summits policy on retirement contribution and whether or not it was properly funded. The writer stated “The pension fund is also only 76% funded, meaning the city has a $18,600,000 liability.”
First, I want to cover the facts.
The City is a participant in the Missouri Local Government Employees Retirement System (LAGERS). This is like most of the cities in the area, except Kansas City itself. LAGERS acts as the agent to collect, invest and administrate the retirement program.
Lee’s Summit full time city employees do not contribute to this plan, it is funded by the city, based on actuarial tables (prediction of how much will actually be required based on many factors). The current rates are 12.5% of a general employee’s income is contributed by the city, 14.6% for fire department, and 16% for the police department employees.
In reading LAGERS’ Chief Investment Officer’s Report of September 25, 2009 it is clear that the investment strategy used is very conservative. As of the letter the fund had lost 2% for the three year period, gained 2.9% for the preceding 5 year period, and 3.7% for the last 10 years.
Prior to the economic decline in the markets in 2008, the City was 93% funded against the actuarial predictions of the need in future years. Now, as of the end of February 2010 the Funded Ratio is down to 78%, or $18,130, 447 of an unfunded actuarial accrual liability.
If I were to draw a comparison to the unfunded actuarial accrual liability of the Federal Government, then I’d draw the conclusion that Lee’s Summit is in far better shape than the Feds. However, Lee’s Summit does not have the ability to print money and therefore such liabilities may come home to roost as it has happened with many California Cities and CalPERS.
In an article in the Sacramento Bee, David Crane writes “pension costs and pension debt have soared because CalPERS earned less than its expected return over the past decade.” He further makes the point that “As a result, CalPERS projects it will need $270 billion from the state just over the next 30 years.”
The point is that Cities throughout the area, must manage their retirement plans very closely. It is easy to defer the payments and to accept the positive predictions of future earnings. In the future returns will be greater is a common assumption. Ten years ago that would have been the prediction, but if you had to fund retirements between 2008 and 2009 based on the 2000 predictions, the present would have been crippling. LAGERS had a one year loss ending June 30, 2009 of lost 18.4 percent, while the S&P 500 lost 26.2 percent in value – so relatively speaking it did well, but that’s not what pays retirees, the fund pays and the fundamental assumption of the principle to be invested is now lower than anticipated, so all the forward assumptions have to be reviewed.
The Second point I wanted to make is; Why no employee contribution?
It seems odd, in this economy and with the traditional 401K’s and matching funds that we are all faced with (typically the employee puts 6% and the company puts in 3%) why is government so enamored of not requiring an employee contribution?
This seems at odds with the economic realities the rest of us are face with.
The Lee’s Summit Conservative
LAGERS Investment Report: http://www.molagers.org/LinkClick.aspx?fileticket=XMQZco6eo%2fw%3d&tabid=78