Room for further improvement
January 12, 2011
As a member of the accounting faculty at Florida Gulf Coast University, I’ve been following Sanibel’s pension fund deliberations because I have a research interest in this area. This is a very complex topic that many communities are grappling with.
I’ve reviewed City of Sanibel financial statements since 2003 in addition to other materials to gain a better understanding of Sanibel’s pension plan status and provided a brief summary below. It helps to understand how we got to where we are today before addressing changes going forward.
In 2003, pension plan assets equaled the pension liability as calculated because the City fully funded the plan each year. In 2003, a liability did in fact exist but had not been recognized in the financial statements given the method used to calculate the pension liability and presentation standards.
• In 2004, the required method used to calculate the liability changed resulting in an unfunded pension liability of $5.6 million.
• In 2005, the unfunded liability decreased to $5.1 million, as the unfunded portion was amortized into pension cost.
• In 2006, the plan was amended adding the city manager and city attorney to the defined benefit plan and also adding a cost of living adjustment.
• The unfunded pension liability increased from $5.1 in 2005 to $6.3 million in 2006, and then to $7.4 million in 2007.
In 2008 and 2009, the pension liability was severely impacted by negative market effects resulting in plan asset losses of $2.9 million in 2008 and $.8 million in 2009, for a total decrease in pension plan asset value of $3.7 million.
To summarize, pension liability is comprised of:
• $5.6 million from pension liability calculation method changes,
• $3.7 million from market losses, and
• Additional liabilities due to the addition of a cost of living allowance and the extension of benefits to two additional positions.
City Council understandably is examining the pension plan, mindful of the impact on city taxpayers. The current focus centers on the benefit formula, which credits participants with 3 percent of their salary for every year of service. City Council adopted the union proposal to incorporate a defined contributioncomponent that will help shelter the city and Sanibel taxpayers from the effects of market risk. Market risk contributed $3.7 million to the current liability.
City Council has proposed a reduction of the plan multiplier from 3 percent to 1.68 percent and the addition of a defined contribution component. This is where I believe there may be room for further improvement.
• How would a reduction in the cost of living adjustment affect the liability?
• What would the effect be of a ceiling or a cap on payments to individual retirees?
• Finally, what would the impact be of changing to a defined contribution plan, shielding the city from market risk and stabilizing the contribution?
This topic has been under study by the city Pension Committee and City Council for over a year. Many hours of study have been invested in an area with complexity that far exceeds the summary above. It is important that analyses thoroughly explore funding options and that the results of the analyses are communicated to city residents and employees to assure the viability of the city pension plan as well as protect our relationship with valued city employees.
(Christine Andrews has a Doctorate in Business Administration, 24 years of university teaching experience with 10 years teaching pension accounting. She has worked as a CPA in New York State and has 11 years of industry experience. She is currently on the accounting faculty at Florida Gulf Coast University.)