Red ink could force DeKalb to address pension woes

The county pension board has adopted a strategy shunned by other local government pensions: Use a more realistic projection of how much investments will earn in the future.
DeKalb pension chairman Ed Wall is adopting an unconventional strategy for government retirement funds: Show more red ink.

DeKalb pension chairman Ed Wall is adopting an unconventional strategy for government retirement funds: Show more red ink.

At a time of tight budgets and dueling priorities, the chairman of the DeKalb County Pension Board is drumming up a strategy for closing a funding gap of hundreds of millions of dollars.

Ed Wall thinks he’s got the right approach. But, like his preference for Cowboy hats, his style is a bit unconventional. His plan, backed by his pension board, has made the retirement fund’s red ink even bigger — $1 billion.

That, the board believes, will prompt the county to raise contributions by about $12 million a year.

Wall, who is a managing director for public finance investment banking at Piper Jaffray in Atlanta, calls it “taking the medicine now.”

The funding gap looks larger because the board lowered its estimate of how much its investments will earn in coming years. With that maneuver, DeKalb now appears to have one of the most fiscally unsound local retirement funds in the state, based on a new state auditor’s report that compares the funding status of some 450 government-sponsored funds.

But in the long-term, the approach may stop the fund from amassing larger deficits and achieve a faster payoff, helping to assure the retirements of thousands. By 2028, pension leaders say, the gap can be closed.

“You take the Enrons and the Worldcoms,” Wall said, referring to the giant corporations that failed after massive accounting fraud schemes. “Remember how they did tricks to pretty up their earnings? We’re not going to do tricks.”

The lower projection sank DeKalb’s funding ratio to about 52%. In the Metro Atlanta area, among the local funds that look about as bad is the City of Marietta General Pension Plan. An actuarial report shows it has improved its funding ratio to 56.7% from 53%.

However, Marietta based the calculations of its unfunded liabilities on an assumed long-term investment rate of return of 7.5% a year, records show. Some other local public pensions that appear well funded have assumed an even higher rate, 7.75%. Doraville, at 6.75%, is among the few statewide with more conservative projections, the new auditor's report shows.

The DeKalb board is assuming a rate of 6.5%. The board says that is more realistic, although Rocky Joyner, DeKalb’s actuary, said it is more common for Georgia plans to adopt a rate like Marietta’s.

Had DeKalb done that, it would have improved its funding ratio to more than 60%, pension officials said.

“People kind of jump on that funded ratio because they want to do a quick statistic,’’ said Chuck Carr, the Atlanta actuary who handles the pensions for Atlanta police and firefighters.

“But it’s really a mistake in my opinion,” he said. “It doesn’t tell you a whole lot.”

The DeKalb fund’s leaders, meanwhile, say they don’t care about making a good impression.

“We don’t need to be worried about cosmetics, as long the fund is sound and secure,’’ board member Robert Robertson said.

Scam numbers

Years ago, pension boards drew the ire of taxpayers and legislators when they pumped up actuarial rates of return to hide underlying shortfalls. Some plans used rates as high as 8.5% during a period of devastating market losses.

Chester Spatt, former chief economist for the Securities and Exchange Commission, is now a professor of finance at Carnegie Mellon University. He says some government pension funds projected unrealistic investment earnings to reduce the amount of contributions needed. PHOTO: SEC

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“It’s been sort of a scam with respect to what kinds of interest rates you want to project with respect to returns,’’ said Chester S. Spatt, a finance professor at Carnegie Mellon University’s Tepper School of Business, who served as the senior economist for the Securities and Exchange Commission from 2004 to 2007. “It’s a scam because you project out unofficially high rates of expected returns that reduces the amount you need to fund.”

One reason that governments often don't want to drop the projected rate of return for investments is because they will have to pay more in contributions, Carr said. That's because even small changes in projected investment returns can cause significant increases in liabilities.

It can be an expensive move.

“Absolutely it means that cities have got to put more in, and that’s hard when budgets are tight,” he said.

DeKalb County has made it a priority to shore up the $1.2 billion fund so that any shortfalls don't have to be made up by taxpayers. In his proposed budget, CEO Michael Thurmond has recommended increasing contributions, though not by the total amount the board wants.

Thurmond’s administration plans to detail a long-term strategy for strengthening the pension fund at a meeting with the Board of Commissioners on Feb. 5.

County Commissioner Jeff Rader, who attends pension meetings, said it will be up to the pension board to persuade commissioners.

“Some commissioners instinctively want a strong pension, but there are a lot of pressures on funding,” Rader said. “This is pure money out of the cookie jar.”

But Rader is satisfied with the board’s strategy. He said he hasn’t seen the kind of market performance to justify high rates.

“In the literature, we have mostly seen capital returning a decreasing return on investments,’’ he said. “In the past 15 years or so, there aren’t as many great investment opportunities that are out there.”

While DeKalb’s pension fund reported a rate of return over the last decade of 10.16%, beating its target of 9.79%, its performance in the last year was dismal, records show.

It reported millions of dollars in losses, amid volatile markets that shook up investors.

For 2018, the fund reported a loss of 6.68% — worse than its benchmark, which reported a loss of 5%.

Records show the fund had market value of $1.26 billion as of Dec. 31. A month prior, it reported a market value of $1.37 billion.

The county has said it wants to pay down its debts and set aside money to do that over the next few years, Wall said. As the county raises its contributions, employees will also have to pay more.

With the new calculation, the county will pay in a total of $82 million in contributions, which includes employees’ portion. The fund, pension board members said, is in desperate need of the cash infusion.

James Hendrix, an active firefighter on the pension board, said he hopes the county will act responsibly to improve contributions. If the pension isn’t funded, it stands to lose important federal and state funding, while its credit rating could suffer.

“They will definitely have to address it,’’ he said. “They don’t have a choice.”