Waste, abuse found in Hampden County retirement board audit won’t mean higher costs for communities, state official says | #retirement | #elderly | #seniors
By one financial measure of the state’s retirement systems, Hampden County is close to the bottom.
It’s a data point some have wielded in criticizing the Hampden County Regional Board of Retirement in the wake of a recently released audit that examined the system from 2014 to 2017, raising questions about the board’s spending and business practices.
“Of the 105 governmental retirement systems, the Hampden County Regional Retirement System ranks at the top of the list for unfunded liability. Only eight other systems are worse,” Hampden Select Board Chairman Don Davenport said at a Feb. 22 meeting.
Davenport and others have noted the system’s low funded ratio — the value of a system’s assets in proportion to its pension liabilities — in discussions about the findings of the audit. Released in late February, auditors with the Public Employee Retirement Administration Commission identified issues such as questionable spending on “scam” website services and a “highly unusual” contract that paid over $250,000 in health insurance premiums to two part-time attorneys over three years.
But the auditors’ findings, Davenport told The Republican this week, “do not specifically relate to the unfunded liability” — though he believes they “do point to continued mismanagement, waste and abuse of retiree’s funds.”
John Parsons, executive director of the state retirement commission, agrees the issues his auditors uncovered haven’t had an impact on the system’s ranking. Parsons said the issues are serious — but that they are “not jacking up” costs for towns and other members of the Hampden County Regional Retirement System.
So, what does a system’s funded ratio say about its performance, and the performance of the board charged with its management — and what factors influence the figure?
Parsons likens a system’s funded ratio to a homeowner paying off a mortgage. “When the funded ratio reaches 100%, a system is considered ‘fully funded,’” he said. And when a system is fully funded, it has enough assets to pay the pensions of current and future retirees.
A system with a low funded ratio can find itself saddled with pension debt payments. Over time, it can face running out of money to pay out benefits — unless members of the system, like towns and regional school districts, increase their contributions.
Several variables determine a system’s funded ratio, Parsons said. Any misspending by a board adds to the bottom line, but the main driver is historical unfunded liability.
Retirement systems once funded pensions on the go. But a 1990 statute put the state’s 105 retirement systems on a paying schedule to meet any unfunded liabilities. That meant every retirement board began funding its system at a different starting point.
For the Hampden County system, the starting point was low. The state retirement commission’s 2019 annual report shows the Hampden County system’s funded ratio below 40% in 1997. It didn’t approach 60% until the mid-1990s.
The turn of the century saw a significant upswing: the system’s funded ratio rose to about 80% in 2000 before declining over the two decades that followed.
The system’s funded ratio stood at 49.1% as of Jan. 1, 2020, with an unfunded liability of $370.6 million, according to the commission’s most recent annual report. The system is not expected to be fully funded until 2036.
The town of Hampden is currently paying $603,730 into the Hampden County system annually, according to interim Town Administrator Bob Markel — and the payment is slated to increase by $103,000 in fiscal 2022.
“When I talked to PERAC, they said: You’re at 49% because the communities, over the years, have been under-assessed and the cost-of-living assessments were too large,” Markel said.
Now, he said, towns like Hampden and others in the system are facing 8% annual increases in order to catch up in funding the system.
Highs and lows
Shrewsbury’s retirement system has the highest funded ratio in the state, at 93.4%, according to the commission’s data. It is scheduled to be fully funded by 2024. An actuarial study put Shrewsbury’s unfunded liability at $9.7 million as of Jan. 1, 2020.
The system’s funded ratio started low, as in Hampden County — about 40% in 1987 — before climbing to around 100% in the late 1990s, according to state data.
Like many Massachusetts towns, Shrewsbury has limited resources to provide a range of essential services, said Gregory Gatsogiannis, executive director of the Shrewsbury system.
“Fortunately, the town and the retirement system have always had a very good relationship and have worked together within the Town’s budgetary constraints to make funding the retirement system a priority,” Gatsogiannis said in a statement. “We can’t overstate the importance of the town’s commitment to consistently provide appropriation funding to the system, in certain years going so far as to vote additional funds in excess of what was required.”
The system’s investments have also produced consistently strong returns, he noted, offering credit to West Bay Shore and New York-based financial planner Dahab Associates Inc., which the board has retained for a number of years.
“In terms of interacting with Dahab, I would liken it to an application running in the background of your computer. They are always there in the background, running their processes, analyzing investment managers and market trends,” he said. “If there is an issue they will inform us, if the board has a question, they are very quick to respond.”
The board has also worked to keep its operating expenses low, he said.
But the Shrewsbury Retirement System was not immune from the market crash in 2008. According to annual Public Employee Retirement Administration Commission filings, the board’s assets dropped from $67.3 million at the beginning of the year to $48.9 million by the end of 2008.
In the face of that challenge, Gatsogiannis said Shrewsbury remained committed to the retirement system and continued to support an aggressive funding schedule with increased yearly appropriation payments to the system. That, in tandem with strong returns, have allowed the system to fully recover.
In Springfield, officials say market and economic conditions, including the 2008 market crash in 2008 and city budget constraints, have left the city’s retirement system with the lowest funded ratio in the state.
Unlike the Shrewsbury and Hampden County systems, Springfield’s funded ratio remained relatively low even in the boom years of the late 1990s.
Timothy J. Plante, the city’s chief administrative and financial officer, said the retirement system lost 28% of its assets in the Great Recession. The system also faced increased costs from two early retirement incentive programs in 2002 and 2003 to help cut staff in a budget crisis.
In addition, the city years ago had a “budget friendly” schedule of retirement appropriations, with increases of less than 5% annually. That was insufficient for the system’s needs, he said.
The total unfunded liability in Springfield is $938 million, and the system is just 28.9% funded, officials said. It’s a slight increase from 2018, when the pension system was only 27% funded.
The estimated “fully funded” year is 2033, according to state records.
The city’s proposed retirement budget for the next fiscal year is $85.2 million, a 9.2% increase. The allocation has grown by $34.7 million over five years, Plante said.
The Springfield retirement system comprises city employees, school employees, water and sewer employees and the Springfield Housing Authority. The employees also contribute funds to the system.
City Councilors have long lobbied for higher allocation for the pension system, with Councilor Timothy Allen calling the situation in 2016 “a fiscal year time bomb.”
‘We are very proud’
Since the audit’s release in late February, the Hampden County retirement board has pointed to the overall picture of the system’s assets, which increased 32% during the three-year period the auditors examined.
The system has about 3,100 active members and 1,700 retirees.
“The Hampden County Regional Retirement Board has a fiduciary responsibility to oversee the Hampden County Regional Retirement System, a role that is taken with utmost seriousness by the board members and staff,” the board said in an earlier statement, issued on letterhead bearing the names of Richard M. Theroux, its chairman and treasurer, and Executive Director Julianne Bartley. The other board members are Laurel A. Placzek, Patricia C. Donovan, Karl J. Schmaelzle and Patrick E. O’Neil.
A page recently added to the board’s website, from a link labeled “Financial Information,” carries a statement noting that the audit by the state commission is “is not the only audit that the board has had.” It points to a 2019 review by the firm Powers and Sullivan, which offered the opinion that “the results of its operations and changes in its financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America.”
The statement, which is unsigned, continues: “Finally, I want to assure all of the active and retired members of the Hampden County Regional Retirement System that the assets of the system for the last 10 years have exceeded the board’s assumed rate of return.”
The statement notes that the system’s total assets stood at $456 million at the end of 2020, up from $224 million in 2011, adding: “As a board, we are very proud of this more than doubling of the assets for this 10-year period of time. This will help to ensure that the board continues on its current funding schedule which has been established to have the system fully funded by June 30, 2036.”
In explaining that the spending issues raised in the commission’s audit are not the primary drivers of Hampden County’s unfunded liability or rising costs for the towns, Parsons also noted that the system’s investment money is in the state’s Pension Reserves Investment Trust.
Run by the state treasurer’s office, the pooled trust invests the assets of the state teachers’ and state employees’ retirement systems, as well as the assets of municipal, county, authority and district retirement systems that choose to join.
About 100 of the state’s retirement boards invest some or all of their assets with the state fund, which represents more than 300,000 beneficiaries.
For Davenport, that means the system’s success in asset growth is thanks to the trust — not the retirement board.
“Any growth in assets is the result of investments by the state … and ever increasing contributions by member units and members as mandated by state law,” he said.
Parsons, meanwhile, said the findings by his auditors still point to problems.
“I’ve been here eight years,” he said of his work with the state’s retirement commission. “Collectively, this is the most serious audit that I’ve dealt with in my time here.”
The Republican’s Peter Goonan contributed reporting.