Archive for December 7th, 2012

PERA’s Resolute Optimism

PERA’s Board recently voted to retain its wildly optimistic expected rate of return of 8% over the next 30 years.  The decision has the effect of reducing the unfunded liability twice – once through higher returns, and again because they mistakenly use the rate of return as the discount rate.  Remarkably, PERA’s board made that decision even as pension plans all over the country are reducing their expected rates of return.

The latest is the Orange County Employees Retirement System, which called a special meeting for Thursday evening to lower its expected return from 7.75% to 7.25%.  It follows CalPERS, CalSTRS, and about 40 others of the 126 public plans in the National Association of State Retirement Administrators’ Public Fund Survey.

The most direct parallel is the change made only Tuesday by the Pennsylvania Municipal Retirement System, which lowered its expected rate of return from 6% to 5.5%, starting January 1.  PMRS’s returns closely track those of PERA, returning an annualized 0.5% less per year over the last 10 years than PERA:

That comes to an annualized rate of 5.3% over the last decade for PMRS, or just below their new rate of 5.5%.  PERA’s barely done better, and 5.8%, but insists on retain an industry standard, and wildly unrealistic, 8% expected rate of return.

Note that PERA’s average rate of return is 6.9%, while its cumulative average return is 5.8%.  Of course, you can’t spend average returns, you can only spend cumulative returns.  Yet another reason for PERA to be more, rather than less, conservative.

On the other hand, it must be encouraging to see PERA’s resolute optimism at a time when so many other plans are losing heart.


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