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Last week in an editorial, we expressed worry about the gamble that public pension systems were making on the stock market. They artificially lower the amount they owe to the system every year based on what they assume they are going to earn from investment earnings. The county of San Diego’s pension system, in fact, assumes it will earn an average of at least 8.25 percent each year for the long term and it has ignored repeated notices from its advisors that it would be prudent to lower the assumed rate of return to, at most, 8 percent.
They put this estimate so high so they can avoid asking taxpayers and employees to foot more of the pension bill. That’s fine if they make it. But it’s a bet that, if lost, could be disastrous for both taxpayers and future employees.
Many private investors have expressed skepticism that public pension plans can count on earning that much each year.
Turns out, the county actually banks on earning more than 8.25 percent in investment returns. That’s what the county’s pension system plans on earning after it deducts its own administrative costs. In other words, in order to keep their $1.4 billion deficit in check, county officials not only have to earn 8.25 percent on their investments, but they have to earn more than that to pay for, well, themselves.
Under the 1937 law that governs retirement systems like San Diego County’s, the pension system is allowed to spend 0.18 percent of its assets on its own administration. So the county is gambling not only that it will make 8.25 percent on its investments, but actually 8.43 percent.
I don’t think it’s impossible for them to make that much on their investments – though eminent financial planners around the country don’t think they can. I just think they should assume they will make less and therefore be prepared for at least the possibility that they do. That would be prudent, conservative financial planning. Apparently, to them, such planning is ridiculous.