A few clarifications to “The City Attorney’s Big Gamble on Pensions Heads Toward a Climax“:
• “The city’s pension system expects to earn 7.5 percent every year.”
The San Diego City Employees’ Retirement System has a long-term earnings expectation of 7.5 percent. We expect that each year we’ll either be above or below that mark, but average 7.5 percent over the long-term. In fact, the $1.4 billion of returns above expectations reflects average annualized returns of 9.2 percent, well above the expected 7.5 percent. The actuary handles these return fluctuations by using a smoothed actuarial value of assets to determine the city’s Annual Required Contribution. Asset smoothing method dampens the volatility in assets and contribution rates that could occur because of the fluctuations in market conditions, and the use of an asset smoothing method is consistent with the long-term nature of the actuarial valuation process.
• “Were you to get a pension board very sympathetic to employees, they might never want to lower that expectation, even they think it’s too optimistic … ”
The SDCERS board is composed of 13 members, the majority of whom are independent of the pension system. The SDCERS board has lowered the long-term expected rate of return twice in the past five years, from 8 percent to 7.75 percent and then again to 7.5 percent. The board reviews the investment return assumption each year, and is scheduled to discuss this again in the fall. There are differing opinions on the current SDCERS board regarding whether the rate should stay the same or change yet again.
• “ … because it would increase employees’ regular contribution.”
Lowering the investment return assumption not only increases the employees’ regular contribution, it also increases the city’s regular contribution. It’s fair to say that the city is not necessarily in favor of lowering the rate, either.
Mark Hovey is CEO of the San Diego City Employees’ Retirement System.
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