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APPROPRIATION COMMITTEE REPORT TO THE NOVEMBER 2012 STM Warrant Article Analysis and Recommendations Article 2: Amend FY2013 Operating, Funds Funding Committee Requested Source Recommendation Enterprise Fund and Community Preservation Budgets $1,215,000 GF $165,007 CPA Approve (8 -0) ($7,424) Water EF ($78,217)1 Sewer EF Contribution to the Retirement Fund The Retirement Board reevaluates the state of the Town's Pension Fund every two years, and these evaluations factor heavily in determining the Town's annual pension assessment. An evaluation considers the current value of the assets in the Pension Fund, and the expected future value of those assets. It also projects the difference between the future value of the Pension Fund and the amount that would be needed to cover anticipated pension expenses. This difference is the unfunded liability. Municipalities are required by State law to fully fund this liability by 2040 by building up the value of their Pension Funds. The Retirement Board's most recent reevaluation increased the estimate of the Town's total pension liability and also increased the estimate of the unfunded portion of that liability. The overall size of the liability increased due to the adoption of new mortality tables that reflect longer life spans for retirees. The unfunded liability grew in part because the overall liability is larger, and because reductions in the value of the Retirement Fund from the 2008 -2009 recession are now fully realized in the financial model. Note that in the financial model, annual changes in the value of pension fund assets are smoothed out over several years and thus do not precisely mirror the current fund valuation. If the Retirement Board were to maintain its present target of achieving full funding by 2020, the required annual pension assessment would increase from $4,205,537 in FY2013 to over $7,300,000 in FY2014. The increase of approximately $3,000,000 would severely impact annual operating budgets beginning in FY2014, and continuing until 2020 when the Retirement Fund would be expected to be fully funded. To mitigate this budgetary impact, the Retirement Board recently voted to extend the funding timeline from 2020 to 2030, which will significantly decrease annual assessments by spreading the burden over more years. This will still allow the Town to achieve full funding well before the statutory deadline of 2040.' The Retirement Board also analyzed the impact of an additional contribution from the Town during the current fiscal year, which would further lower future contributions by immediately reducing the size of the unfunded liability. Based on the Retirement Board's analysis, the recommendation of Town staff is to make a supplemental, one -time appropriation of $1,000,000 from available funds into the Retirement Fund for FY2013. Together with the other measures voted by the Board, this would result in a pension assessment for FY2014 of approximately $4,800,000. This would be a $600,000 increase from existing levels, which can be more easily absorbed into the operating budget going forward, rather than the $3,000,000 increase that would otherwise be required. Under the new schedule, pension assessments would thereafter grow by roughly 3% per year, peaking at around $7,000,000 in 2030, at which time the liability would be fully funded. In 2031, the pension assessment would fall to approximately $2,600,000 and would then grow in future years by roughly 4.3% per year. ' The Retirement Board also reduced the expected rate of return on investments (the "discount rate ") from 8% to what is considered to be more a practical rate of 7 3 /4 %. This adjustment will moderately increase the annual assessments. 6