A tumbling stock market has exacted a heavy toll on Baltimore’s pension funds in the first quarter of the current fiscal year.

The police and fire pension fund and city Employee Retirement Systems fund have lost a combined $600 million in value from July 1 through Sept. 30, according to pension officials.

The losses come on top of $290 million in the decline of the pension funds’ value in the previous fiscal year, putting the two funds responsible for paying city employee pensions almost $900 million down since last year. 

The mounting losses in value do not include the abysmal month of October, when major stock indexes around the world fell on average 20 percent or more.

“To say that October was ugly is really an understatement,” said Stephen Fugate, chairman of the police and fire pension fund board.
“I don’t have the official numbers yet, but given the market, I would estimate we may have lost another $200 million.”

And pension officials said volatile equity markets might not give back recent losses in the near future.

“It appears that market volatility will continue for a while, with short rallies followed by short declines,” said Employee Retirement Systems Executive Director Roselyn Spencer.

If Spencer’s predicitons are right, and the market fails to make up ground this year, city taxpayers could be facing a mounting bill to keep city pension funds solvent.

Each year consultants calculate the amount of money the city needs to fork over to fund employee pensions. The consultants, known as actuaries, base the funding requirements on the assumption that enough funds should be on hand at all times to pay all obligations owed to beneficiaries if the city suddenly closed up shop one day.

Funding levels are based on meeting a guaranteed rate of return — what actuaries call the discount rate — year in and year out.
In the city’s case, the discount rate has hovered around 8 percent a year. That’s not hard to make in good times, but when things go bad for too long, taxpayers have to make up the difference. 
The inconsistent performance of the stock market over the past decade has contributed to a fivefold increase in contributions to the city’s pension funds since 2000, to $118 million this year. Taxpayer dollars have kept the city pension funds relatively close to fully funded — the  Employee Retirement Systems is funded at 90 percent, for example — but at a steep price.

And if the stock market doesn’t substantially rebound this year, actuarial experts say taxpayers might have to pick up an even bigger tab to make up for hundreds of millions of dollars in past losses.

“If the stock market stays where it is, there is going to be a very big increase in the payments required to fund pensions,” said Michael Eddress, an actuary who spent years calculating pension obligations before starting his own investment firm, Fair Advisors. “If things stay the same, there is no question cities are going to have to enormously increase their contributions.”

By Stephen Janis
Examiner Staff Writer 11/11/08
sjanis@baltimoreexaminer.com