A new article from the American Enterprise Institute tackles the thorny issues of assumptions on rates of return for public sector pensions and the practice of asset smoothing to level out variation of plans. These issues are critical in light of where things stand in the Commonwealth right now.
First, Act 44 of 2009-which aimed to reform local government pensions and made special provisions for the City of Pittsburgh-says that the determination for the City’s pension health "shall utilize an actuarial assumption as to investment earnings equal to the regular interest rate fixed by the [Pennsylvania Municipal Retirement System] board plus 1.5%". What does this mean? It means that when the state analyzes the actuarial tables and data for the City’s plans the rate of growth for assets will be 7.5% instead of the traditional 8%. It may seem miniscule, but as AEI points out "some analysts believe these returns are overestimated. Wilshire Consulting, for instance, argues that most plans will receive only around 6.5 percent average returns going forward. If this turns out to be the case, the typical plans’ costs will rise by almost 80 percent. Pension funding is very sensitive to rates of return".
Keep in mind that three weeks from today, on September 1st, the biannual valuation report for the City, using that 7.5% rate, is due to be filed with the Public Employee Retirement Commission. Recall that the end of 2010 bailout plan crafted by City Council, which dedicates a portion of parking tax revenue over the next thirty years, was done to bring the pension funds to 50% funded or better in order to avoid a takeover of the pensions by PMRS. The PERC valuation will determine if that threshold was met.
Second, to the smoothing provision, both Act 44 and Act 120 (which changed things for state workers and school employees) had provisions in it for stretching out when gains and losses were realized. Act 44 increased the time period from fifteen to twenty years and Act 120 changed the asset smoothing for the public school employees’ system (PSERS) from five to ten years. Both PSERS and the state system (SERS) received "fresh start re-amortization of unfunded accrued liability".