Thursday, March 1, 2007 Older Editions

FinCom member's report: Better return possible for retirees' fund

By Brian Messenger

Andover's retirement fund is one of the better performing independently-run systems in the state.

However, one member of the Finance Committee has issued a report detailing why the town would be better off handing over control of its retirement investing to the state, an idea that was met with opposition by members of the Andover Contributory Retirement Board on Monday night.

Andover's retirement fund for town employees ranks 18th out of 106 independently-run systems in Massachusetts and will likely reach full-funding capacity four years before a 2028 benchmark mandated by the state.

While the Andover fund grew by an average of 9.71 percent between 1986 and 2005, the state's Pensions Reserves Investment Trust produced a nearly 2-percent better annual return over those 20 years.

Committee Member Dick Howe presented a report to the retirement board, Finance Committee and selectmen that recommended transferring the management of all town retirement fund assets into the state's PRIT, a move similar to a plan included in Gov. Deval Patrick's recent municipal relief package that would absorb all under-performing pension funds in the state.

"Had we have done this 20 years ago, the total return would have been on average about 1.74 percent greater," said Howe of a switch to the state system. "$734,000 (more) a year would have been generated."

"These amounts of money are sizable and have significant impacts on our town budget," he said.

But members of the five-member retirement board argued that by giving control to the state, the town would lose the flexibility its enjoys with its investment planning and funding.

"The numbers themselves don't tell the whole story," said board Chairman James Cuticchia, a fire department employee. "Once it's in [the state system], it's in there. That's one of the risks of the current legislation."

"The problem is there's no exit strategy," said board member John Doherty, also the town's veterans director, on the push to go under the Commonwealth's plan. "You lose all local control."

Currently, 26 municipalities in Massachusetts have placed their retirement investing into PRIT, while 46, including Andover, have portions of their funds run by state.

The market value of Andover's retirement assets totaled more than $84.5 million at the end of 2005, according to the report.

A nearly $4.4 million contribution from the town for the fund is expected in fiscal year 2008.

As of the beginning of 2004, Andover's retirement system was at 78-percent funding capacity.

A state law requires all systems to be fully funded by 2028.

"We're going to beat that by four years, barring a disaster," said Doherty.

Cuticchia said with the retirement plan under local administration, the town can allocate its assets according to its own risk tolerance. Under a broader system like the state's, that ability is lost, he said, along with the freedom to work under the town's own funding schedule.

"If there was a funding schedule established, that would be it. There would be no discussion," under the state plan, Cuticchia said. "The local control is important."

"I think the local retirement system is capable of addressing the needs of the town and the employees in a manner that fits them best," he said, noting that a transfer to state control will still be considered as the governor's plan moves through the legislature.

"We have to constantly and consistently look at all the options before us" said Cuticchia. "It has to be an option and it has to be looked at closely."

Growing numbers of retirees

According to Cuticchia, 21 Andover employees retired in 2006, bringing the total number of both retired and other employees in the system to 1,234.

"The cost to the taxpayer in the next few years is likely to go up," said Finance Committee Chairwoman Joanne Marden, acknowledging the effect of an aging town work force where many individuals are living longer. This will increase the demands on the fund.

Patrick's current plan would call for the takeover of municipal retirement funds that have under-performed the state's by an average of 2.25 percent or more over the last five years and that are less than 80-percent funded.

Cuticchia said the Andover fund is approaching the 80-percent mark and has assets valued currently at $96 million.

"We're in very good shape," he said, "and working to be in better shape."

"Our fund is by no means one of the worst. In fact we're one of the better ... in terms of our progress toward full funding," said Howe. "In my view, while there is an issue of local control now, the goals of the state system are the same."

Finance Committee member Margaret Bradshaw expected the governor's plan to be met with criticism as it moves forward.

"From my understanding, it's going to be a big debate in the legislature," she said. "I think we'll hear all about this as it goes through the legislative process."

Municipal bonds suggested

A second recommendation of Howe's called for the use of pension obligation bonds to fund Andover's remaining uncovered percentage, which also was met with skepticism by retirement board members.

"This is very risky," said Doherty, who said the board had considered over the past few years using such bonds. "We have some reservations."

Cuticchia said he'd rather increase the annual funding to the retirement plan rather than issue bonds.

"I'm not sure if that's the smartest direction to head in," he said. "It's kind of like taking your money down to Foxwoods."