Blog Post < Previous | Next >
CSPP
Marin County public pension negotiators start with flawed approach
California legislators have interpreted public pension law such that negotiated benefits can never be reduced; not only benefits accrued to date, but benefits accruing in the future.
One would think that, in such an environment, negotiators representing taxpayers would require that actuaries use conservative, risk-free assumptions to calculate the cost of these untouchable benefits.
Current Marin County negotiators representing taxpayers (the county administrator and the Board of Supervisors) continue to use assumptions completely inappropriate for plans with fixed benefits.
The investment return assumption is by far the most important assumption that impacts the future cost of pension benefits.
Our current county negotiators use a 7.5 percent investment return assumption in negotiations. Previously, they used assumptions even higher (Warren Buffet and Joe Nation, among others, have opined on the unrealistic assumptions used by public pensions).
This has created negotiated benefits far too high, since the higher the investment return assumption, the lower the cost of benefits.
Thus, what may seem like reasonable benefit costs have turned into exorbitant pension costs and huge unfunded pension liabilities (at least $370 million in Marin and over $500 billion statewide).
There are two financially responsible choices moving forward:
1. Use realistic assumptions appropriate for pension plans with fixed benefits, or
2. Encourage meaningful pension reform that allows for some benefit flexibility by adopting rules such as has been advocated by former San Jose mayor Chuck Reed to allow for pension benefit changes if the funded status falls and required pension contributions rise to predetermined unreasonable levels.
In the absence of meaningful pension reform, isn’t it time we insist that county negotiators utilize assumptions appropriate for plans with fixed benefits?
~ Bob Bunnell, Kentfield Citizens for Sustainable Pension Plans
CSPP core member, Bob Bunnell, has over 35
years experience in the administration of defined benefit pension and defined
contribution/401K plans, and is still employed in that field.