In a move reflecting more realistic expectations, Marin pension trustees cut a key investment return assumption a quarter percent Wednesday, meaning member agencies and employees will pay more to finance the program.
Pension chief Jeff Wickman said Marin joins Orange County in adopting a more conservative 7.25 percent investment assumption in an era when most pension programs assume investments will earn 7.5 percent.
The new assumption reflects actual earnings data over the past decade, including an 18 percent increase last year, and is in line with adviser recommendations, Wickman added.
Pension critics who have long advocated a rate closer to 5 percent were absent as the pension board voted unanimously to cut the rate and juggle other assumptions about pay, mortality and inflation as recommended by Cheiron actuary Graham Schmidt.
The lower investment rate assumption means that payment rates will rise for the county, San Rafael, Novato and Southern Marin fire districts, as well as a handful of other agencies that are members of the county pension system. “Employee rates will be going up” as well, Schmidt said.
Although rates have not yet been calculated, Schmidt estimated that on average, employees and agencies can expect to contribute 1 percent or so more to the pension program next fiscal year. The increase will be minimal because trustees also reduced an inflation assumption to 2.75 percent while pegging annual payroll growth at 3 percent and adjusting retiree mortality calculations.
Taken together, the new milestones “are a reasonable set of assumptions,” Schmidt said.
“It looks like the Marin County Employees Retirement Association implemented some more conservative assumptions consistent with advice from its investment and actuarial advisers — including reduced inflation and earnings expectations, and reflecting that retirees are living longer,” noted Assistant County Administrator Daniel Eilerman. “While employer and employee rates for next year are not yet available, and nobody likes increased costs, these appear to be prudent decisions given the circumstances that will result in about $1.5 million to $2 million in added costs for the county overall, or up to 1 percent of pay.”
It was unclear how much the moves will reduce the county system’s unfunded liability or retiree debt.
Agencies are able to understate potential liabilities by counting on the stock market to lift investments, but even if optimistic assumptions of about 7.5 percent returns panned out, retiree debt mounted by the county “is a staggering $1.2 billion,” according to a detailed report issued last year by Marin’s Citizens for Sustainable Pension Plans.
What’s more, Marin’s city and county governments have mounted a retiree debt of as much as $2.3 billion, making the average resident’s share of the bill $25,000, the pension watchdogs reported. And even more conservative calculations by Stanford academics put unfunded liability for the county Civic Center alone at $2.3 billion, triple the county estimate.
The report concluded the county and its cities have banked less than half the money needed to pay for the retirement benefits elected officials have promised their agency’s employees, leaving a future generation of Marin taxpayers to pick up the tab if investments tank.
Eilerman noted that overall, the county’s retiree liabilities have been cut by $98 million over the last three years — including paying down beyond required contributions an additional $32 million toward pensions and $26 million toward retiree health obligations. Another $14 million was set aside this fiscal year.