Pension funding set to soar. Taxes may follow.

The Journal Inquirer has an article today reporting that in order to properly fund the town pension system the 2011 funding level will need to be about twice what was budgeted this year.

EAST HARTFORD — The town faces having to increase its pension fund by more than $6.5 million by 2011 to satisfy actuarial demands, officials said Wednesday.

According to Mayor Melody A. Currey, the town’s actuaries have recommended the increase to bring the pension fund up to $14.5 million in 2011. In March the Town Council approved a pension plan contribution of $7.97 million for the 2009-10 fiscal year.

“Because of extraordinary times, the actuaries are saying we need to put in $14 million,” Currey said.

The result could be a rise in the tax rate in future fiscal years.

Town Finance Director Michael P. Walsh said the actuarial increase is a recommendation that won’t be acted upon until market conditions are clear.

While the increased funding liability is unavoidable due to the pension system East Hartford has and the market downturn it is incumbent on the Mayor, Finance Director and Council to identify ways to offset this added burden so that the taxpayers don’t suffer more than necessary.

On the positive side this added funding today will result in reduced funding than would otherwise be required in the future as the market recovers. While scrapping pension programs may be a good idea underfunding an existing one is a bad idea.

Being a concerned citizen who has previously blogged on the issue of creative pension cost reduction I shot an email over to Melody and Mike Walsh with a suggestion to reduce taxpayer pension liability in the long term.

Melody & Mike,

I had previously mentioned this idea casually to a council member but I don’t think anything ever came of it.

While I am not certain of the legality, a purchase of town tax liens by the pension program could yield significant savings for the taxpayers of East Hartford through reduced contribution costs.

Currently, as I’m sure you are aware, the town sells tax liens annually through the RFP process to the highest bidder in order to reduce the tax delinquent rolls.
As I understand the criteria used for lien sales is 3 years delinquent or greater than $10,000 delinquent.

Many of the liens put out to bid are secured by developed commercial and residential property and all are priority liens, subordinate only to federal and prior municipal liens, meaning they are typically the first to be paid in the event of a property sale or most financing operations or foreclosure. These liens also carry a statutory simple interest yield of 18% annually making them entirely unmatched as far as return is concerned. As additional security these liens can be foreclosed. The statutory life of a municipal tax lien is 15 years which means that the average lien put out to bid has 12 or more years of life remaining.

I believe in 2008 of the 3.6 million in delinquent taxes $820,000 worth of liens secured by desirable residential and commercial property were successfully sold through RFP.
More liens were offered but because of the property securing them, mobile homes and vacant or swamp land, they are effectively worthless as an investment and the town would not be wise to back the pension system with them. The undesirability of these liens is evidenced by their unsuccessful sale history.

Had the pension system purchased these liens last year the pension system would have experienced up to $147,600 in return which would effect a reduction in budgetary funding for the pension system. Because of the statutory life of the liens it would be wise for the pension system to either attempt foreclosure, which is probably beyond it’s scope, or auction the liens to a third party to foreclose after the lien reaches about 12 years old. That would provide up to 9 or more years of return.

Each dollar continuously invested in municipal tax liens at current statutory rates will double every 5 years meaning that by the time any one lien reaches the end of it’s safe investment life it will have provided a 200% return. Comparably similarly secure CDs at going rates double every 20-25 years.

There may also be further benefit from pension ownership of municipal liens. It is in the interest of a lien holder to ensure that the property securing their lien is well kept, secure and desirable so that it maintains or grows it’s value in order to protect the lien in the event of a sale, refinance or foreclosure of the property. This may give incentive for volunteer maintenance of liened properties by pension participants and thereby reducing blight and increasing personal investment in East Hartford’s communities.

Jon Searles

Pensions will plague taxpayers until they are laid to rest in the graveyard of bad social experiments. Until then I’m sure the Mayor would be glad to hear your suggestions on how to reduce the tax impact of these programs. Send her a line at mcurrey@ci.east-hartford.ct.us.