Here is a transcript of my remarks to the PERS Board at their May 31, 2019 meeting. My views have evolved since I started blogging about this issue. I now realize that various gimmicks, such as extending the amortization period of the unfunded liability (passed by the state legislature) do nothing to solve the problem, but only delay the day of reckoning. So bring on the spinach and let’s dig in.<\/p>\n\n\n\n
Members of the PERS Board:<\/p>\n\n\n\n
I wish to offer some observations and suggestions as you begin the rate-setting process for the next biennium.<\/p>\n\n\n\n
From the standpoint of its\nfunding status, we all understand that PERS has been troubled for quite some\ntime. What is supposed to happen with pension systems and economic cycles is\nthat you enter a recession with the pension well-funded. When the recession\nhits, the pension funding status deteriorates some. Then when markets recover,\nthe funding status again returns to acceptable levels.<\/p>\n\n\n\n
PERS has not followed this\ntrajectory. It was pretty well-funded before 2008. Then the financial crisis\nhit, and OPERF posted big losses. But the key to our current problems is what\nhappened in the decade after 2008. During that time, OPERF recovered some, but\nthe returns could only be described as mediocre. Add to this an inactive state\nlegislature, and the PERS board which has been slow to reduce its assumed rate\nof return to better match actual OPERF returns, and we find ourselves where we\nare today. We are at the top of the economic cycle, in the eleventh year of a\nbull market in stocks, looking at a large unfunded liability that has defied\nyour efforts to reduce it.<\/p>\n\n\n\n
A recession is on the\nhorizon, and for PERS to be in such a weak position at this point in the\neconomic cycle is very troubling. OPERF\nremains exceedingly vulnerable in falling markets. We saw this just last year, when the public equity\nportfolio, comprising 1\/3 of all OPERF assets, declined over twice as much as\nthe S&P 500. When the recession comes, OPERF\u2019s losses will once again be\nsubstantial, adding billions to the unfunded liability.<\/p>\n\n\n\n
How do these predictions\naffect what you do this year? First, you need to accept that your policy for\nmanaging the unfunded liability has not worked and needs to change. Next you\nneed to acknowledge it will become dramatically more difficult to control the\nliability as the economy heads toward recession. And finally, you need to acknowledge employer\nrates need to be a lot higher than they are today. You should not assume the legislature will\nstep up significantly, or the Investment Council will somehow post better\nreturns. You must make use of your policy-making authority to take action.<\/p>\n\n\n\n
My suggestion is this: if you\ndo nothing else this year, you must get the assumed rate of return down to a\nrealistic level. To accomplish that, you need to adopt a new methodology to\nevaluate and set the rate. Your current practice of trying to predict future investment\nreturns has not worked, largely because OPERF returns have lagged both broad markets\nand its own benchmarks for years, not to mention that market predictions are\nnotoriously inaccurate.<\/p>\n\n\n\n
Stop trying to guess future\nreturns. Instead, look back at what OPERF has actually given you over a\nrelatively long period, in both up and down markets. The latest 10-year period\nthat includes both rising and falling markets was 2008-2017, in which OPERF\nreturned an annualized 6% per year. <\/p>\n\n\n\n
Since 2008 was (hopefully) a\nrare financial event, you might have room to keep the assumed rate a little\nhigher than 6%. But you would be making a mistake if you look at recent OPERF\n10-year returns, which no longer include 2008. A quick calculation shows that\nif OPERF lost just 10 percent in 2019 (definitely a possibility in a\nrecession), 10-year returns drop right back to the mid-6\u2019s, 6.4 percent to be\nexact.<\/p>\n\n\n\n
I call on you to act this\nyear to set your assumed rate of return into the mid 6\u2019s and get on with the\nhard business of setting employer rates to where they should have been years ago.<\/p>\n\n\n\n
Setting the assumed rate to 6.4%\nwill increase the stated unfunded liability dramatically, likely pushing it up\nby about $6 billion. It will cause a big increase in employer rates, but I\nargue it\u2019s long overdue. Either you raise rates now based on a realistic\nfunding status, or you will find yourself raising them much more in the future\nas yearly pension payments increase dramatically over the next 20 years. You do\nnot serve the public interest by continuing to understate the problem. And It\u2019s\nnot your job to keep employer rates low any way you can. Leave the gimmicks to\nthe politicians and make fiscally sound decisions that protect the pension\nsystem.<\/p>\n","protected":false},"excerpt":{"rendered":"
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