In the previous post, I mentioned that PERA, in retaining its 8% expected rate of return, was persisting in an unwarranted optimism, one that is likely to end up costing the citizens of Colorado billions of dollars down the line. Part of the evidence was that other municipal pension plans around the nation have recently lowered their expected rates of return. That said, as of 2009, the overwhelming number of plans in the Center for Retirement Research’s Public Plans database were living in what can only be described as Fantasyland, as the following histogram shows:
I’m sure the right part of the graph, which resembles a strong signal from those plans to their taxpayers footing the bills, is only accidental.
In fact, between 2001 and 2009, plans were extremely reluctant to revise their expected rates of return, despite the fact that they rarely met them for more than a year at a time, and continued to fall farther behind in their funding. If you look at actual returns for those years, they don’t come anywhere close to what was projected:
The result is that plan assets haven’t kept up at all with plan liabilities, even in these years when the market has performed reasonably well (Source: Public Fund Survey):
Understanding that many factors go into whether a plan’s funded level increases or decreases, the fact is that looking forward from 2001 to 2009, over the succeeding 21 years, the median plan would have to return about 10.5% over the following 21 years, to make up for having fallen behind in the first decade:
The problem, of course, is that plans have spending requirement every year; they can’t simply choose to sit on their assets and wait for their investments to catch up. It means that low returns in early years require even higher returns in the later years for the plans to return to 100% funded levels, without increasing cash infusions or a reduction in benefits.
One guess as to which will be the plans’, the governments’, and the SEIU’s first choice.