San Diego County’s pension fund just handed the county bill for more than $30 million a year yet no one seems to have noticed.
Every three years, San Diego County’s pension fund looks into its crystal ball and decides what it expects investments returns will be over the next 50 years.
It’s arguably the most important and difficult decision the board has to make. Even a small change can force the county to cough up millions of dollars each year.
Yesterday, the board of the San Diego County Employee Retirement Association lowered its assumed net rate of return from 8.25 percent to 8 percent effective July 1, 2011. (Watch the meeting online here.)
A quarter percent may not sound like much, but it’s a change that will force the county to pay 3 percent of payroll each year. Using last year’s payroll numbers, that works out to roughly $33.88 million.
The 8 percent assumed rate of return represents the pension’s best guess about how the fund will do in the future, so that the county can set aside money to ensure the plan is well funded.
The shift to an 8 percent assumed rate of return moves San Diego County’s pension more in line with other big state pension funds. CalPERS, the $200 billion retirement system, is reviewing its assumed 7.75 percent rate of return and will make a recommendation to the board whether to lower it later this year.
Three years ago, the pension’s actuarial consultant, Segal Group, recommended an assumed rate of return but the then chief investment officer, David Deutsch, promised that he could generate the additional 8.25 percent with his Alpha Engine.
Deutsch resigned under pressure shortly before the pension reported losses of $2.4 billion for the 2008-2009 fiscal year.
The assumed rate of return is perhaps the most important variable in calculating a key barometer of a pension’s health known as the funding ratio — the ratio of assets to liabilities. SDCERA’s funding ratio stands officially at 91.5 percent, but that’s only because of an accounting practice that defers losses over several years.
If last year’s $2.1 billion loss were to be recognized right away, San Diego County’s pension fund would only be 65 percent funded, according to a report by an independent consultant. That’s well below the 80 percent that pension experts regard as healthy.
In the film Idiocracy, the main character, an average Joe played by Luke Wilson, awakens in the distant future to discover that he is by far the smartest person on the planet. During an IQ test, he is asked:
If you have one bucket that holds two gallons and another bucket that holds five gallons, how many buckets do you have?
It’s a satire of a very dumb future, but I was reminded of this scene when I saw the survey questions the Federal Reserve Board of Atlanta recently asked of subprime borrowers.
The authors wanted to explore the relationship between financial illiteracy and foreclosures. Not surprisingly, those who couldn’t answer such basic questions had a much higher rate of foreclosure. The results held up when controlled for cognitive ability, ethnicity, and other variables.
See for yourself:
The Fed’s Financial Literacy Quiz
* CPD – Cumulative Probability of Default over the life of a 5-year credit default swap contract. In other words, the market is estimating California’s chance of default in the next five years as one of five.
I got into an interesting debate today on whether the US is headed for inflation or deflation with Rich Toscano, a fellow contributor at the Voice of San Diego. You can read it here.