Marin County’s public pension fund earned 1.68 percent in the fiscal year ended June 30, falling far below the Marin County Employees’ Retirement Association’s 7.25 percent assumed annual rate of return on assets.
The 1.68 percent rate is a preliminary number, but isn’t expected to change significantly. It is the second consecutive year that the association’s $2.1 billion investment portfolio has failed to meet the 7.25 percent assumption.
The news resulted in renewed calls from pension fund critics, such as Marin’s Citizens for Sustainable Pension Plans, for the association’s board to lower its assumed rate of return; but board chairman David Shore said he doesn’t see the need.
“It’s a one-year return and we have a very, very long time frame,” said Shore, a financial adviser at Marin Financial Advisors LLC in Larkspur.
The Marin County Employees’ Retirement Association is a multiple-employer governmental pension plan whose members include the county of Marin, the city of San Rafael, Marin Superior Court, Marin City Community Services District, Southern Marin Fire Protection District, and Novato Fire District.
The association must earn a certain rate of return on its assets each year or require employers and employees who pay into the pension system to increase their contributions. Otherwise, the fund will be unable to meet its current and future obligations to pay pensions. Currently, the association has an unfunded liability of $402.8 million; the county of Marin’s share amounts to $243.6 million.
Jeff Wickman, the association’s retirement administrator, said that given the 1.68 percent rate of return, it is likely that employer contribution rates will have to be increased next year. He said the 1.68 percent return could change slightly in September, after final valuations become available for the association’s private equity holdings.
“But I wouldn’t expect the number to change greatly,” he said.
The association’s portfolio is well diversified, consisting of 31 percent domestic stocks, about 20 percent international stocks, 23 percent fixed income investments such as bonds, about 17 percent in real assets such as real estate and 9 percent in private equity.
The association’s investment earnings in the 2015-16 fiscal year suffered primarily due to poor stock returns, particularly in the international equity market. The association’s international stocks fell 7.75 percent. Its domestic stocks declined a little less than 1 percent, pulled down primarily by the poor performance of stocks issued by small- to medium-sized U.S. companies.
“During that period of time, we had a lot of volatility, particularly in the broader equity market,” Wickman said, “and in the international investments you had things like Brexit that impacted returns. Our investment in the S&P 500 during that time was up 4 percent; but our small cap investments were down.”
The association’s real assets increased in value by 13 percent and fixed income investments produced a 6.38 percent return.
“So they offset the losses we had in the other equity categories,” Wickman said.
Paul Premo of Mill Valley, a member of Citizens for Sustainable Pension Plans, noted that in the fiscal year that ended June 30, 2015 the pension fund’s portfolio earned 5 percent, falling 30 percent below its 7.25 percent assumption. That shortfall added $25.8 million to the county’s unfunded liability.
Premo said the association pays the principal of each year’s investment earnings shortfall over a 24-year period.
“It’s deferring to the next generation much of the shortfall expense,” Premo said. “It’s a ticking time bomb. Realistically, the MCERA board is going to have to consider lowering the investment rate of return assumption.”
Premo would like to see the association lower its rate of return assumption to 6.4 percent.
Bill Monnet of Sausalito, another member of Citizens for Sustainable Pension Plans, said, “We can’t really infer too much from one year’s results. This year’s results were not great; but 2013 and 2014 were outstandingly good.”
In the year ending June 30, 2013, the association’s portfolio earned a 14.7 percent rate of return, and in the year ending June 30, 2014, it earned an 18.6 percent rate of return.
But Monnet said in an investment climate where risk-free investments such as 10-year Treasury notes are earning just 2 percent interest, pension funds are having to assume increasing risk to get the higher rate of returns they’re seeking. He also wants the association to lower its rate of return assumption.
Wickman said the rate of return assumption is just one of about 18 assumptions that the association reviews yearly. Other key assumptions include the inflation rate, employee salary growth and retirement rates. Two years ago, the association lowered its rate of return assumption from 7.5 percent.
But chairman Shore said the fiscal 2015-16 earnings performance doesn’t suggest to him that it is time to revise the return assumption again.
Shore said, “It’s really about the trends over time. So far, our recent gains are overwhelming our recent low returns.”
