The board that oversees the pension investments of a large chunk of Marin County’s public employees decided Tuesday to cut a key investment return assumption, resulting in member agencies and employees paying more to finance the program.
The nine-member board of the Marin County Employees Retirement Association, known as MCERA, voted 7-2 to reduce the fund’s assumed annual rate of return from 7.25 percent to 7 percent. The rate was last cut in 2014 from 7.5 percent to 7.25 percent.
MCERA is a multiple-employer governmental pension group whose members include the county of Marin, the city of San Rafael, the Novato Fire District and a number of smaller governmental entities.
The two dissenting MCERA board members advocated shrinking the rate even more.
“I think it is time for this board to be bold; money doesn’t grow on trees,” said board member Bernadette Bolger of Novato, who made a motion to lower the rate to 6.75 percent.
“It is time for us to put more into the plan, reduce the unfunded liability and give more certainty to the generation that is coming up,” said Bolger, a retired senior vice president of Mellon Capital Management and former chief trust counsel of Bank of California. Bolger was appointed to the board by the Board of Supervisors in 2008.
At the end of the previous fiscal year, the association had an unfunded liability of $477.1 million; the county of Marin’s share amounted to $297.1 million. Those numbers, however, haven’t yet been adjusted to reflect the public pension fund’s 11.8 percent net return on investments for the fiscal year that ended June 30.
The only member of the board to support Bolger’s motion was Kim Stevens of San Anselmo, a retired investment analyst and portfolio manager of Snyder Capital Management. Stevens was appointed to the retirement board by the Board of Supervisors in 2012.
Marin County Finance Director Roy Given, an ex-officio member of MCERA’s board, said the reduction to 6.75 percent included an assumption that inflation will remain low, a concept with which he wasn’t comfortable.
“One of the things the government is trying to do is bring up inflation,” Given said. “I’m concerned that we take too much of a bold move up front.”
Board member Phillip Thomas was absent so alternate board member Alan Piombo, a San Rafael police lieutenant, voted in his place.
“I just don’t see the urgency for a move that big,” Piombo said, referring to Bolger’s motion for a 0.50 percentage-point cut in the assumed rate of return.
Piombo said such a move would not “bode well for people’s willingness to commute to Marin and work for wages that are not keeping up with areas where it is much less expensive to live.
“I’m doing the hiring and it is difficult right now,” Piombo said. “This will make it worse.”
Bolger replied, “I don’t believe that is in our purvey as trustees.”
Piombo shot back, “Over-conservatism isn’t either.”
Cheiron actuary Graham Schmidt set the stage for the vote with a review of 2017 investment assumptions. MCERA’s previous 7.25 percent, nominal assumed rate of return was based on a projected annual inflation rate of 2.75 percent and a real rate of return of 4.5 percent. The real rate of return is arrived at by subtracting the inflation rate from the nominal rate.
Schmidt told the board that the 4.5 percent real rate of return was slightly high and recommended reducing it to 4.25 percent, which would result in a nominal rate of 7 percent if the inflation rate was left unchanged. But Schmidt said the board could consider reducing the inflation rate to 2.5 percent in addition, which would result in a nominal rate of 6.75 percent.
Schmidt said the nation’s annual inflation rate has averaged 4.1 percent since 1967, 2.6 percent since 1987 and 1.6 percent since 2007. He said the trend for public plans has been to gradually reduce inflation expectations but added that many plans are still at 3 percent or higher.
Jeff Wickman, the association’s retirement administer, said he won’t know how much more member agencies and employees will be required to contribute due to the reduction in the rate of return assumption until new calculations are done integrating the healthy investment return for the fiscal year that ended June 30. The increases will be phased in over several years.
Wickman did, however, supply estimates of what the increases would have amounted to without that additional revenue.
By year three of the change, the new rate assumption would have increased the county of Marin’s contribution by about 2.55 percent. The city of San Rafael would have seen its contribution grow by 4 percent; and the Novato Fire District would have had to boost its contributions by 5.35 percent.
MCERA’s members also include Marin Superior Court, Marin City Community Services District, Southern Marin Fire Protection District, Marin Local Agency Formation Commission, Marin/Sonoma Mosquito and Vector Control District and the Tamalpais Community Services District. Wickman said all these entities were lumped together with the county of Marin when estimates for increased contributions were made.
The new rate of return came as no surprise to Marin County managers.
In January, Marin County Budget Manager Bret Uppendahl said he expected MCERA to follow the lead of the California Public Employees Retirement System, CalPERS, and reduce its assumed rate of return to 7 percent starting in 2018-19. Uppendahl estimated the change would cost the county’s general fund an additional $2 million annually.
On Tuesday, County Administrator Matthew Hymel said that remains the county’s best estimate of what the change will cost.
In an email, San Rafael Finance Director Mark Moses wrote, “The MCERA Board decision was not a surprise. We have been anticipating an adjustment to the discount rate since the issue was brought up last year, and have incorporated it into our budget assumptions for fiscal year 2018-19 and thereafter.”
Paul Premo of Mill Valley, a member of Citizens for Sustainable Pension Plans, attended Tuesday’s meeting.
“The board took an important first step to recognize that the association’s return on assets assumption has been higher than many of its peers,” Premo said.
“The proposal to lower to 6.75 percent was defeated but the discussion was a good one,” he said. “I believe that in the future movement to 6.75 percent is both likely and desirable.”
