Naples pension investments dipped in Q1 and bounced back in April and May. What does that mean for the city?

When fear over the coronavirus pandemic caused the stock market to tumble in March, city of Naples pension investments fell as well. 

Naples lost about $31 million across the city’s general employee, police and fire pension plans in the first quarter of the year, according to the city’s quarterly investment performance report. 

The $31 million drop is a 17% loss. About $180 million is invested across the city's three pension plans, according to the city's 2019 comprehensive annual financial report. 

The first quarter saw a drop, but pension investments have bounced back in April and May, city investment performance reports show. About $18 million was gained across the three pension plans in the first two months of the second quarter.

The performance of the city's pension investments impacts how much Naples taxpayers may have to contribute to retirement plans. When investments perform well, the city may not have to allocate as much money to pension plans. When the investments take a dive, the city is liable for more dollars to fund the plans. 

It’s not clear yet how Naples pension investments will perform in June. The hope is the plans will return to where they started at the beginning of the year, said City Councilman Ted Blankenship, who is the new chairman of the city’s joint pension board. 

“I think we will be basically back to where we started at the calendar year, which means the plans are in satisfactory health,” Blankenship said. “There’s no question about paying benefits to the police or firefighters or employees.” 

Return on investments

The three Naples pension plans are funded by contributions from employees and the city, in addition to investment earnings. 

The city's pensions investments target about 62.5% to stocks, 17.5% to fixed income securities and 20% to real estate and alternative investments, such as hedge funds, the annual financial report shows. 

“We have a lot of exposure to equities,” Blankenship said. “That’s what is so volatile. It changes every day with the stock market.”

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Naples assumes a 7.3% rate of return on its investments for the current 2020 fiscal year. 

A higher assumed rate of return, like Naples', means the city has to take “pretty big risks” to hit the assumptions, said Don Boyd, co-director of the State and Local Government Finance Project at the University at Albany’s Rockefeller College in New York. 

“Taking those pretty big risks allows them to ask for less money from the local administration, so the city pays less now, but the city takes a great big risk, which is that they could fall $31 million in a span of three months,” Boyd said. “Nobody can predict how it’s going to turn out.” 

In addition, the city’s assumed rate of return on its investments has an impact on the size of the unfunded liability across the three pension plans. The higher the assumption, the lower the liability the city reports, Boyd said. 

"It affects how much they say they get in contributions from a government," Boyd said. "If they think they're going to earn a lot of money in investment markets, then they just have to ask for that much less from taxpayers." 

The three Naples pension plans are between 75% and 85% funded, according to the 2019 comprehensive annual financial report, which means the cost of retiree benefits is not completely covered.  

About $30 million was unfunded across the city’s three pension plans at a 7.4% assumed rate of return in the 2019 fiscal year, according to the city’s 2019 comprehensive annual financial report. 

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The city plans to drop its rate another tenth of a percent each year until it reaches 7%, according to the annual financial report. Lowering the rate of return will raise the amount of money the city needs to contribute to fund its pensions, Boyd said. 

“This small change in the earnings will make for very big increases in governmental contributions. This is a very dangerous situation that many public pension funds are in. In fact, Naples is probably in a slightly less dangerous situation than the typical plan, and not every plan is deeply underfunded, but they're more or less underfunded,” Boyd said. “That's why you see them having a policy that only changes a percentage point a year. Honestly, it does very little to diminish the risk. They really need to move much more.”

Blankenship said Naples plans to examine the rate of return on pension investments this summer. 

“Say we wanted to take it down to 6%. That means the city needs to put in more money now. That means less money to do water quality projects or parks,” he said. “It’s all a trade-off. We want to get it right. We don’t want to be too conservative, but we don’t want to be too aggressive either.” 

If the city’s investments get back on track at the end of June, Blankenship said Naples would likely continue with the plan it has had for the past number of years.

“If the economy goes bad and we’re not earning as much as we think in investments, then we would probably want to put more money into the plans to make sure we can meet the pension benefits that have been promised to employees,” he said.  

Impact on budget planning 

The ups and downs of the city’s pension investments will “have virtually no impact” on preparations for the budget for the next fiscal year, Naples Finance Director Gary Young said in an email. 

“The impact in the out years will depend on actuarial analysis, long-term effects on investments, plan changes and/or additional decisions from the pension boards and/or Council,” Young said. 

The city plans to contribute the same percentages of salaries to the three pension funds: 46% for police, 48% for fire and 13% for general employees during the next fiscal year, he said.

The contribution rates are higher than those required by the actuary to keep the pension plans funded, Young said.

Brittany Carloni is the city of Naples reporter at the Naples Daily News. Support her work by subscribing to our local news organization. Find her on Twitter as @CarloniBrittany.