54:06During the recent Cocoa Beach Pension Board meeting, discussion revolved around the pension plan’s valuation in light of recent salary increases for city employees and the implications of market volatility. The board addressed concerns about the future financial viability of the pension plan and examined the performance of investment portfolios amidst economic fluctuations.

The meeting’s focal point was the pension valuation report presented by an actuary, who highlighted the impact of unexpected salary increases on the pension plan. Over the past three years, employee salaries had risen by approximately 50%, surpassing the anticipated growth of 18%. This surge was attributed to efforts in retaining and recruiting talent amid inflationary pressures. Consequently, the actuary recommended adjusting the city’s budget for fiscal year 2526 to a 12.1% contribution rate to accommodate these changes. While member contributions remained at 5%, the city’s required contributions were expected to rise from the current 16.59% to 17.1% next year.

The actuary emphasized the importance of annual adjustments to contributions, explaining that salary hikes necessitate higher projections for retirement benefits. This adjustment is essential to ensure the pension plan remains adequately funded. The favorable investment returns exceeding 20% over the past year were acknowledged, yet the actuary highlighted the four-year averaging method employed to stabilize city contributions, smoothing out investment return volatility.

Concerns were raised about the plan’s long-term stability given the ongoing salary increases and turnover rates. While high turnover could benefit the pension plan by reducing member contributions while maintaining city funding, it poses challenges for city management in sustaining a stable workforce. The actuary warned that continued salary hikes could complicate the stability of contributions, raising questions about the plan’s future sustainability.

0:00The meeting also delved into market predictions and the performance of the pension portfolio, with Blake M from Sterling Capital providing a comprehensive analysis. He reported a generally flat market performance for the fourth quarter, noting a 2.6% increase in the Russell 3000 growth benchmark, contributing to a 24% year-to-date rise. Despite this, the bond market had faced a decline of over 3%, reflecting investor concerns about inflation and interest rate changes.

Blake discussed the concentration of returns among the “Fantastic Five” stocks, previously known as the “Magnificent Seven,” leading to disparities in growth and value stock performances. Growth stocks had surged by about 35% for the year, while value stocks increased by approximately 15%. Despite these gains, Blake projected a realistic expectation of high single-digit returns for equities in 2025, cautioning against anticipating further high returns.

12:56The board also scrutinized the pension portfolio’s asset allocation and performance. The portfolio began the fiscal year with a value just below $21 million and stood at nearly $21.5 million by the quarter’s end. Despite a commendable 11% return, it fell short of the 12.5% benchmark return due to insufficient exposure to high-performing AI-related stocks like Nvidia and Microsoft. The board acknowledged the volatility expected in 2025, with concerns about tariffs potentially impacting market stability.

26:15Diversification was a key theme, with discussions focusing on balancing growth and value stocks to mitigate risk. The portfolio maintained a near-target distribution of 53% in stocks and 46% in bonds. However, there was recognition of the substantial risks inherent in the S&P 500 and large-cap growth sectors, which dominate the market with extreme valuations.

54:06The board addressed the pension plan’s funded status, noting gradual declines since 2021 but no drastic fluctuations expected. The meeting concluded with the approval of the October 1st, 2024 valuation report and a declaration to maintain the expected investment return assumption of 7.25%.