The bloom is off the rosy scenario

Even in a year where irrational exuberance seems to have run amok and markets have hit record highs, big public pension funds have begun to recognize that their rosy scenarios about returns on investment need to toned down.

Last week, reports out of California revealed that the California Public Employees’ Retirement System (Calpers) top investment officials are likely to recommend a quarter- to half-point reduction in the mammoth fund’s average annual investment return. That figure sites at 7.5 percent today, and may soon be reduced to 7.25 percent, or even 7 percent.

According to the Financial News:

The accounting maneuver would have real-life consequences for taxpayers and cities. It would likely trigger a painful increase in yearly pension bills for the towns, counties and school districts that participate in California’s state pension plan. Any loss in expected investment earnings must be made up with significantly higher annual contributions from public employers as well as the state.

Bruce Channing, chair of the city managers’ pensions committee at the California League of Cities, said: “Lowering the rate of return sooner is undoubtedly going to make it more difficult for cities that are teetering on the edge financially.”

You’ll remember that last month Colorado PERA’s board tiptoed to the edge of a half-point investment return assumption cut, to 7 percent, before getting squeamish and settling for 7.25 percent. Still, even that modest reduction has real-world consequences.

In today’s Denver Post Perspective section, the estimable Vincent Carroll weighed in on PERA’s precarious position, and the need for bolder action. Since neither the cheerleading board, nor the in-denial staff seems willing to stare reality in the face, Carroll called on the state legislature to pass a new bill. He wrote that a bill should, “at the very least,”

  • Change the composition of the 16-member PERA board, which is heavily dominated by PERA members and retirees whose instincts are to a push any financial reckoning into the future. The governor makes only three independent appointments, yet they usually are the most clear-eyed regarding PERA’s finances. Two of those appointees — Murphy and Lynn Turner — were responsible for the motions to reduce the assumed rate of return to a more realistic 6.5 or 7 percent. There are plenty of other states whose pension boards are not so stacked with insiders.

  • Raise the retirement age for members with 30 years service from as early as 58 to 65 in order to reflect current longevity and the career cycle of the average American.

  • And perhaps most important, mandate higher contributions until PERA is fully funded. There are only two possible sources: government employers and employees — although the employers’ share already is approaching the breaking point. Currently, for example, school districts must contribute a punishing 19.15 percent of PERA members’ pay, while members contribute 8 percent. One way or the other, the total between those two funding sources must rise.

These are solid suggestions which we wholeheartedly endorse. Action during the upcoming session may be to much to hope for, but if organizations like ours keep the pressure on, and PERA members begin to perceive that the threat is real, movement in the near future is not only possible, but likely.

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