BATH — The city has a unique problem on its hands, given today’s economic climate: what to do with an extra $8.8 million.

The surplus is with the Maine Public Employees Retirement System, thanks to excess employer contributions the city made from the late 1970s to mid 1990s, according to City Solicitor Roger Therriault.

He explained in a Jan. 3 memo to the City Council that when city employees switched from Social Security to the Maine State Retirement System, Bath had to pay for “catch-up” contributions for employees who had worked for the city for several years.

As a result, the city “had to over-fund the pension system for a period of time,” City Manager Bill Giroux said last week. “The employees paid a normal percent in their check, but the city had to pay extra.”

Giroux explained that actuaries determined the payments, and that they tend to estimate on the high side, since they do not want to underfund the pension system.

As it turned out, he said, the city overpaid.

“One of the reasons that happens is that people might not stay in the system as long as the actuaries calculated, or they might not live very long after they retire, so they don’t collect very much,” Giroux said.

The city knew about the surplus, but the state retirement system would not let Bath touch it, based on an old U.S. Internal Revenue Service ruling, Giroux said. In 1996, the city switched to a participating local district plan within the same retirement system.

“When we did that … the state took that surplus that had been growing, and set it aside, and the city then was able to use … a piece of the interest (from that surplus) to make their payment to the state retirement system,” Giroux said.

Last year the city paid $219,000 toward the city’s share of the pension, he said, money that came out of interest generated by the surplus. But there was more interest than Bath needed to spend on its share of the retirement system, so the fund kept growing.

When the IRS conducted a review of the pension system late last year, Giroux said, “they noticed that some towns had these orphaned funds. Ours was one of the largest ones.”

The IRS called for those funds to be made available to the communities, and the state retirement system informed Bath that it can either take the entire surplus or none at all, in which case the city would continue to use part of the interest to pay into the retirement system.

“The worry on our part (in not taking the money) would be … we were told we couldn’t touch it, for years,” Giroux said. “Now all of a sudden we can touch it. … If we leave it up there, what if five years from now there’s a different law change or something, and we can’t touch it?”

The City Council indicated in a workshop Feb. 16 that it was interested in taking control of the funds, Giroux said. But as opposed to spending the surplus, the city will send out a request for proposals from investment companies to manage the money for the city.

Bath would use a portion of the interest to continue paying the city’s annual share of the pension system, and now could use the rest of the interest to reduce taxes or fund capital projects, Giroux said.

The city would never use the principal, he said. He explained that the interest might usually generate $400,000 to $600,000 a year.

Giroux acknowledged that some people will want the city to spend the $8.8 million. But if the city invests the money, he explained, and the investment performs as it has over the past 30 years, it is likely that the money would generate about $22 million in the next 30 years – and that’s with spending the interest and not compounding it.

“It isn’t necessarily taxpayers who are living here today that paid this,” Giroux said. “It’s been people who have paid it over the last 40 years. And so I think the council’s wish and certainly my recommendation was that this money should benefit Bath people for a long, long time. And that’s how you do it.”

Giroux said a council vote to accept the surplus could come in two or three months.

Alex Lear can be reached at 781-3661 ext. 113 or alear@theforecaster.net.