Wednesday, Aug. 23, 2006 | At a recent meeting of the board that oversees the county of San Diego’s pension system, only one member of the board voted against a decision to ignore the advice of consultants and maintain the so-called “assumed rate of investment return” at 8.25 percent.
To understand what that means takes a somewhat complicated explanation that San Diegans are now uniquely qualified to understand given all of the discussion about the city of San Diego’s pension problems in recent years.
The concept is simple. People work for the government. They get paid salaries. They also get benefits. One of them is a guaranteed pension. Not just money set aside for future use, but a guaranteed monthly retirement check.
So what employees receive in exchange for their work is not just a salary but a promise for a future salary after they leave the job.
To pay for these promises, pension systems have three sources of funding: taxes and fees levied on residents; the deductions taken out of employees’ checks; and the investment returns both of those revenue streams can end up earning.
The more they earn on investments, the less these systems have to charge taxpayers.
But this isn’t just a benefit. Some local government systems – like many corporations – have decided to rely heavily on these investment returns. The city of San Diego believes it will make an average of 8 percent on its investments. The county of San Diego believes it can make 8.25 percent on average well into the future.
According to a recent article in the Los Angeles Times, Warren Buffett has set the assumed rate of return for his companies’ retirement systems at 6.4 percent.
It is frankly impossible to guarantee that funds like the county and city will make more than 8 percent on their investments in the future. And prudent financial planning would dictate that these systems plan for at least the possibility that they won’t earn that much, especially in light of the fact that people with the esteem of Buffett question that high of an assumption.
But this is no time, apparently, to be conservative. These government pension administrators know that if they lowered the assumed rate of investment return, they would have to ask taxpayers for millions just to keep the fund at the same state of perceived health they are in now.
Despite the recommendation of its advisors, the county of San Diego’s pension system won’t even lower its assumption to 8 percent. Why? Because the people who run that system know that such a move would require the county government to pony up millions immediately. And that would require one or two actions: tax increases or cuts in the cost of government (jobs). With a notable exception of Treasurer Tax Collector Dan McAllister, the members of the county’s board of directors would rather the county not have to make such difficult decisions and they plan instead to rely heavily on the investment managers they employ to outperform their advisors’ less-bullish predictions.
That’s a mistake but it’s also a gamble. Impressive investment earnings should be a welcome addition to the pool of funds that pays for pensions, not a necessary source of its vital water. No one should stake their financial future on the performance of a market that historically may have performed decently but offers no guarantees for the future.
Government workers interested in protecting the health of their pension system should also push for the funds to lower their assumed rate of return. It would force the governments they work for to set aside enough assets to ensure that if the stock markets don’t perform so splendidly, they won’t be facing the kind of strife the city of San Diego faces now.
Imagine the unthinkable: if these governments were to only earn 6.4 percent off their investments over the next decade – as Buffett has predicted for his funds – they will not only be in trouble, they will be destitute. And they will have to turn to future taxpayers to bail them out.
All it would take to prevent that and plan conservatively (which is, ironically, how many of the administrators describe their political views) is a readjustment of such expectations to more conservative levels. It may take some pain now, but the employees and future taxpayers would be more secure and less liable to face some kind of future sticker shock.
Alas, politicians aren’t in the game of planning for the future and as long as they are able to control what are supposed to be independent agencies that oversee the pension plans, they will never be forced to.