Public pensions adopt cost sharing mechanisms

I n s p r i n g 2 01 6, S a n dy Matheson, the executive director of the Maine Public Employees Retirement System, was panicking.

After earning 2 percent t he prev i ous f i s c a l ye a r, record low bond yields and global stock market turmoil were dragging the pension’s returns even lower — and further away from its 6.9 percent assumed annual return.

She modeled government pension payments under a scenario where investments returned 4 percent a year for four years and then 6.9 percent thereafter. The result: government contributions would increase every year until 2032, reaching 21 percent of payroll from 10 percent.

“My hair was on fire,” Matheson said. “(I was) near hysterical at the thought of what’s going to happen if we continue on earning less than our discount rate. We’d just be cutting benefits.”

Matheson, with the help of the fund’s actuarial firm, Cheiron, put together a plan in which the risks of investment gains and losses weren’t just assumed by taxpayers, but shared between local governments, their employees and retirees. Maine adopted t he r i sk- shar i ng pl an f or municipal employees that participate in the system starting the fiscal year than began July 1. Matheson plans to brief lawmakers on extending it to state employees and teachers.

“The goal of the model is to prevent any kind of damage or harm to the plan, due to the volatility in the markets,” Matheson said. “Employer rates have always gone up and down with the market but both employee and employer rates will now go up and down. They’ll share in market risk.”

Most U.S. public pensions were fully funded as recently as 2000, but the collapse of the internet bubble and the Great Recession caused by the financial crisis of 2008 — combined in some cases with years of contribution shortfalls and unfunded benefit increases — resulted in pension debt exceeding $1 trillion.

Between 2003 and 2013 the cost of making required pension payments almost doubled, according to a 2017 report from the Pew Charitable Trusts.

In response, some pensions have adopted formal cost-sharing mechanisms, adjusting contributions or benefits, instead of making unplanned benefit cuts or contribution increases. Almost 30 defined benefit pension plans in 17 states use cost-sharing mechanisms to manage risk, according to the Pew report.

Some states, such as Illinois and New York, have constitutional or statutory prohibitions on changing retiree benefits.

Maine capped contribution rates by municipalities at 12.5 percent and 9 percent for employees, giving both parties certainty about how high costs would go to make up for investment losses. If pension losses exceed the capped contribution rates, retiree cost of living adjustments are reduced. Maine’s local governments and employees share in investment gains and losses at a 55 percent to 45 percent split.

Had Maine’s plan been in effect after the financial crisis, contribution rates would have increased to 12.5 percent and 9 percent and held there for five years. Retirees would have had a 30 percent annual reduction in cost of living adjustment for seven years, according to Gene Kalwarski, chief executive officer at Cheiron, a McLean, Virginia-based actuarial and financial consultancy.

“Under a traditional plan, you have one lever that deals with something like a recession, that’s the employer contribution,” Kalwarski said. “Here we’ve got the COLAs as well as the member contributions that reduce what otherwise would have been an employer contribution spike.”

W h e n t h e m a r k e t s rebound and investment gains exceed the assumed investment return, the COLA would increase until reaching a cap of 2.5 percent. Further gains would allow employers and employees to reduce contributions for services performed by current members when the plan is fully-funded, to a minimum of about 14 percent, 7.7 percent for employers and 6.2 percent for employees.

That would have served the pension well in the 1990s when roaring stock market gains allowed governments to stop making annual contributions, Kalwarski said.

Banyan Cay expects leisure travelers to make up about 65 percent of its guests, with the remaining 35 percent coming from group events and meetings.

But that figure could increase. Groups, including weddings, charity groups and business meetings, already are scouting for the next new thing in Palm Beach County. “We’ve been excited about the reaction from the market, and we haven’t done any marketing,” Mullen said.

He thinks the hotel will appeal to groups seeking an upscale leisure site with the latest in technology and comfort.

The business market, including financial firms, also have taken note. And with West Palm Beach attracting more companies and financial firms, Mullen said Banyan Cay could become the in-town meeting destination with companies that have offices downtown.

While Palm Beach has its charm, Mullen pledges that Banyan Cay will have a much more easy-going atmosphere than the fairly formal air of the posh island.

“It’s privacy without the pretension,” Mullen said in describing the un-Palm Beach feel planned for Banyan Cay. “More of a relaxed dress code.”

Homes also are part of the equation and SobelCo is building five model homes now. The 94 single-family homes will range in price from the $500,000s to the mid$800,000s.

Plans also are afoot to build more expensive homes, with some in the $1 million range. A deal to bring on a developer to build the 52 custom-built homes fell through, but Mullen said the group is weighing other contenders.

Also coming at some point: Condominiums. A piece of the Banyan Cay property is zoned for a 25-story condo with 179 units.

Al Adelson, a developer of The Bristol, the ultra-luxury condominium nearing completion in West Palm Beach, said he’s interested in building the condo if a deal can be struck for the right price.

Mullen said several contenders have talked with Banyan Cay about building additional residences, but for now Banyan Cay is focused on building the hotel and resort.

When Noble House first teamed with Banyan Cay majority owner Domenic Gatto Jr., the area around Palm Beach Lakes Boulevard still was up-and-coming, having received a boost with the tear-down of the old Palm Beach Mall and the completion of the new Palm Beach Outlets in 2014.

The Outlets, Mullen said, have performed better than expected. And coming soon is a hotel being built by the owner of the Houston Astros, which has its spring training home at the new Ballpark of the Palm Beaches south of 45th Street in West Palm Beach.

Last year, the Astros purchased the western most tower of the three Forum office buildings on Palm Beach Lakes Boulevard and is transforming the building into a hotel that will serve the team and visitors to the area.