A dozen public entities and their employees in Marin County will have to contribute more to their pension fund under a plan before retirement board.
Graham Schmidt, a consulting actuary for the Marin County Employees Retirement Association, recommended that the board reduce the fund’s assumed annual rate of return from 7% to 6.75%. The rate was last cut in 2017, from 7.25% to 7%.
If the fund earns a lower rate of return, then both employers and employees, who share the cost of paying for pensions, will have to pay more.
The board is scheduled to vote on the recommendation at its meeting in December.
The retirement association includes Marin County, the city of San Rafael, the Novato Fire Protection District, Marin County Superior Court, the Marin City Community Services District, the Southern Marin Fire Protection District, the Marin Local Agency Formation Commission, the Marin/Sonoma Mosquito and Vector Control District and the Tamalpais Community Services District.
Bret Uppendahl, the county’s budget manager, said if the assumed rate of return is dropped to 6.75%, the county’s pension costs will increase by $3 million in fiscal 2021-22 and to $6 million annually by fiscal 2023-24, when the change is fully phased in.
Nadine Hade, San Rafael’s finance director, estimates the change would increase her city’s pension costs by about $350,000 in the first year of implementation and by $535,000 annually by the third year.
Joe Valenti, the Novato fire district’s finance director, estimates his district would face increased pension costs of $200,000 in the first year and $400,000 annually by the third year.
The rate of return is reevaluated by the association’s board every three years based on a review of economic and demographic assumptions used to fund the plan. Schmidt’s recommendation covered only the economic assumptions; on Dec. 9, the board will be briefed on the demographic assumptions.
Those assumptions will include such factors as the longevity of the fund’s retirees and the rate at which employees are retiring.
“At this point,” Hade said, “we do not know if the impact will be more or less.”
Jeff Wickman, the retirement association administrator, said that in 2014, when the board cut the assumed rate of return from 7.5% to 7.25%, a demographic change — an increase in longevity among the fund’s retirees — played a major role.
Pension hawks have long advocated for cutting the fund’s assumed rate of return, which they say is overly optimistic.
“Three years ago, Citizens for Sustainable Pension Plans recommended a rate no higher than 6.75%, but the board adopted an earnings rate of 7%,” Richard Tait, a spokesman for the Marin group, wrote in an email Tuesday.
“Even though the portfolio earned less than half of the 7% used this year, in its preliminary report the board’s financial consultant recommended an investments earning rate of 6.75% be used,” Tait added. “A rate of 6% would be more realistic and prudent going forward.”
Wickman said the fund’s rate of return has been 3.26% over the last year. Over the last five years, the fund has generated a 6.61% rate of return; over the last 10 years the rate of return has been 9.52%; and over the last 20 years it has been 5.82%.
As of June 30, 2019, the plan was 86.6% funded and had an unfunded liability of $399.4 million. Marin County’s portion of the unfunded liability is $237.5 million.
Hade wrote, “San Rafael has been far more aggressive in paying down its pension liabilities than most cities who are paying them off over a much longer period of time and with less conservative assumptions.”
One of the key assumptions underlying the assumed annual rate of return is price inflation. The Marin association’s current “nominal” 7% rate of return assumes an annual inflation rate of 2.75%. But the actuaries recommended the board cut that assumption to 2.5%. Bill Hallmark, another actuary for the association, said that between 2010 and 2020 the U.S. consumer price index increased 1.7%, while the Bay Area consumer price index grew by 2.8%.
If the board follows that recommendation, the fund’s “real” rate of return would remain unchanged at 4.25%, if the nominal rate were cut to 6.75%. The real rate of return is calculated by subtracting the assumed rate of inflation from the nominal return rate. The actuaries also presented an unrecommended alternative of cutting the nominal return rate to 6.50% and the inflation rate to 2.25%.
But board member Steve Block, a lawyer who is running for a seat on the Belvedere City Council in the election on Tuesday, said he would like to see the board consider cutting the nominal rate of return assumption to 6% and the inflation assumption to 2%.
“I feel like a low-end nominal choice of 6.5% is not a low-end choice,” Block said.
Schmidt responded, “To make a reduction of 75 basis points in the inflation assumption is a huge and dramatic change. I would argue a drastic reduction down to 6%, especially in the current environment, may not be good for the long-term health of the system.”
Ashley Dunning, the retirement association’s attorney, said, “From a legal perspective, the board needs to be acting on the recommendations of its actuary. To do a study using assumptions that your actuary has not recommended and that are not within the reasonable range that your actuary has recommended, may be going too far.”
