The Metropolitan Utilities District will kick in more money to its pension fund.
The Omaha gas and water utility’s board of directors on Wednesday approved a recommendation by MUD management to increase contributions to the plan in 2018 to $11.4 million, or $800,000 more than this year’s budgeted amount.
The change means MUD’s contributions will make up 75 percent of the total plan, up from a previous level of 73 percent. MUD employees’ contributions cover the remaining portion.
“We typically ask for a little bit more funding than the actual required amount … so we can chip away at the unfunded liability,” said Joe Schaffart, the organization’s vice president of accounting.
Price inflation and economic growth have historically mirrored each another; where one goes, so goes the other.
But that relationship has changed since the global economy’s recovery from the 2008 recession, and economists and actuaries anticipate inflation to stay low despite forecasts for continued economic growth.
The U.S. economy registered an annualized growth rate of 3 percent in the second quarter. Consumer-price inflation in July grew at just 1.7 percent, however.
Because inflation influences many of the things central to corporate financial planning — think cost-of-living adjustments, wage and salary increases and returns on investments — and because pensions require long-term planning, the aberrant behavior upends previous assumptions used for MUD’s pension.
Accordingly, the plan’s assumed inflation rate will be revised to 2.6 percent from 3.1 percent.
“We look at recent experience, historical patterns, bond expectations and investment consultants’ expectations and everything points to lower inflation, even over the long term,” said Pat Beckham, principal and consulting actuary at Cavanaugh Macdonald Consulting. Beckham’s firm completed the pension study for MUD.
The change also means other assumptions in the plan will be revised downward to reflect lower inflation. Instead of planning on annual investment returns of 7.25 percent as the previous assumptions called for, MUD can more reasonably expect returns of 7 percent, for example.
And that means the pension faces a larger shortfall, totaling about $60.5 million instead of about $52 million. In other words, the plan — which comprises assets valued at about $359 million — is 85.6 percent funded under the new assumptions, versus 87.4 percent as of Jan. 1, 2017.
The Nebraska Legislature considers 80 percent a healthy level for public pension plans.
Managers of such plans make adjustments every year based on behaviors of the markets and broader economy. An accounting change last year sent the Omaha Public Power District’s funded ratio to 69.2 percent from 72.4 percent in 2015, even though the pension plan’s balance increased by $35 million to $905 million at year-end 2016.
Despite MUD’s plan being funded at a higher ratio than OPPD’s, Director Mike McGowan on Wednesday said he thinks the board should have a goal of upping MUD’s pension funded ratio to 90 percent as soon as it can.
“The way I see it is the district has a promise to the employees to fund this pension and have that money available throughout their retirements,” McGowan said. “Back in 2008 we were at 100 percent. Look at what happened when the market fell. I’m uncomfortable with it below 90 percent.”
In other business, the board approved $8.2 million worth of cast iron gas main replacement work to be completed in 2018.
The board also approved expanding MUD boundaries to include 24 areas that were previously served by the district but not situated within its defined borders. The change gives 289 residential customers and 13 commercial customers the ability to vote for MUD directors in future elections.