$20 million Luzerne County employee pension fund loss explained

By Jennifer Learn-Andes - jandes@timesleader.com

By Jennifer Learn-Andes


Luzerne County taxpayers must pay more to prop up the employee pension fund in coming years because of a $20 million loss last year.

But while the shortfall was described as “investment losses” by the actuary last week, it’s not a situation where the pension advisor caused the fund to decrease by that amount.

Morgan Stanley, the firm advising the county regarding the fund, reported a negative 2.19 percent return for 2015, resulting in a loss of $4.6 million.

The problem: the assumed rate of return was 7.25 percent, which means investments were projected to pump $15.4 million into the fund.

The two developments combined resulted in $20 million less than expected for the county’s ongoing efforts to close a gap, now estimated at $50 million, between the fund’s assets and liabilities, actuary Greg Stump, of Boomershine Consulting Group LLC, said Monday.

The fund has three ways to pay present and future pensions guaranteed by law: investment earnings, employee contributions and taxpayer subsidy.

The county’s 2016 taxpayer subsidy is expected to be $11.3 million — up from last year’s $10.2 million — and projected to continue rising to $16 million in 2025 before dropping to around $10 million in 2035, the year the plan may be fully funded, according to an actuarial chart released last week.

The assumed return rate, which was set by the county retirement board, is part of the formula to calculate the required amount of taxpayer subsidy.

Board members have started discussing a possible drop in the 7.25-percent assumed rate, saying it may be unrealistic in today’s financial market.

Many overseers of public pension funds across the country are wrestling with a similar question because continued overestimation could result in a sudden payment spike down the road.

Reducing the assumed return rate would force officials to contend with higher taxpayer subsidies sooner.

Last year’s taxpayer subsidy went from $8.4 million to $10.2 million because the retirement board dropped the assumed rate from 7.5 percent to 7.25 percent, officials said.

While maximizing returns is a goal, investment advisor Richard J. Hazzouri has said his team is constrained by its need to limit risk to the public fund, particularly in a county without a reserve or other cushion to absorb gambles that don’t pan out.

The fund’s current allocation: 38 percent bonds, 35 percent stocks, 5 percent cash and 22 percent alternative investments. Hedge funds make up only 8 percent of the alternative mix, while the rest are mutual funds or exchange-traded funds.

Last year was the first with negative returns since Morgan Stanley took over from Merrill Lynch in September 2008, according to records obtained Monday.

The gains since then: 2009, $10.2 million; 2010, $21.3 million; 2011, $11.5 million; 2012, $16.1 million; 2013, $12.1 million; and 2014, $12.2 million.

As of April 15, the year-to-date investment return was 2.12 percent, with gains of $4.2 million.

More than half of this year’s gains — $2.4 million — were wiped out by payments to the county’s 1,200 retirees. The fund, which was valued at $205.6 million on April 15, paid $7.2 million in pensions last year, records show.

Also impacting the fund’s growth is the county’s continued practice of turning over the taxpayer subsidy the year after it is due, which began years before the 2012 switch to home rule government.

For example, county officials expect to pay last year’s $10.2 million subsidy this month. It’s a sign of progress, officials said, because the subsidy was turned over in June last year.

With this year’s 2.12 percent investment return, the fund lost $222,600 through April 15 by not having the $10.5 million deposited on Jan. 1.

Reach Jennifer Learn-Andes at 570-991-6388 or on Twitter @TLJenLearnAndes.

Reach Jennifer Learn-Andes at 570-991-6388 or on Twitter @TLJenLearnAndes.

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