AP reporter Jeff Amy recently reported that according to PERS Executive Director Pat Robertson, PERS is not in a crisis. Instead, Robertson says PERS just needs to earn 13% in investment income this investment year:
This ugly picture could be greatly improved by a good year in the stock market. Robertson said that if investments earn more than 13 percent in the current year, projections for 2042 will rebound above 80 percent and PERS won’t have to ask employers for more money. While 13 percent sounds like a lot, the fund has earned more than that in five of the last 10 years.
Sigh…. So misleading. First, Robertson is now banking on a 13% investment return that is over 5% higher than the already inflated assumption of 7.75%? That’s neither smart nor sound from an actuarial standpoint.
Second, here is a chart of PERS investment returns for the last 10 years courtesy of Jackson Jambalaya:
So those 13% plus years were surrounded by 5 years that ranged from 3.5% to -19.4%. This suggests that a 13% year would be great–but also unsettling from a volatility perspective.
Third, PERS is not going to earn 13% this year. Robertson says PERS just needs a good year in the stock market. Take a look at the PERS Investment Report for the quarter ending September 30. PERS is about 60% invested in the stock market. The rest is in bonds, real estate, cash and private equity. It is highly unlikely that all these asset classes are going to rise 13% this PERS investment year. And Robertson knows that.
Yes, U.S. stocks are on a tear. But non-U.S. stocks are not and bonds are getting hammered. Take a look at this chart of the S&P 500 (GSPC), non-U.S. stocks (VXUS) and bonds (BND) for the year to date. Domestic stocks are up 11.37%, but foreign stocks and bonds have gone nowhere. This does not suggest a 13% investment return for PERS is on the horizon. California is assuming a 6% return for its PERS program and many investment advisors do not believe that is a realistic projection.
To read a detailed analysis on this subject by an investment professional, check out Are U.S. Pension Funds Delusional? on the Pension Pulse blog. Or if that’s too negative, Pension Tsunami is an aggregator site for news on the NATIONAL PENSION CRISIS.
Fourth, and this is the really scary part, stock valuations are at dotcom and housing bubble highs. Hopefully, this time is different. But this time is rarely different. The stock market is arguably more likely to drop 20% next year than rise 20%. And if it just goes nowhere on average for the next 5 years–like it has for the last few years–that’s just as bad as a 20% drop followed by a 20% gain.
Fifth, why is California’s PERS considered to be in a crisis and Mississippi’s is not? When you look at funding ratios, Cal-PERS has a better funding ratio than Mississippi. California is cutting benefits and lowering its investment assumption to reflect expected smaller returns in the future. Meanwhile, Mississippi does nothing.
When someone says “it’s not about the money”, it’s about the money. So when the PERS director says PERS “is not in a crisis”, is it in a crisis? California is in a crisis. Dallas, Fort Worth, other cities, other states–crisis. But Mississippi is different? Despite having the 10th worst funded state plan in the nation? Sure.
PERS participants would be unhappy having their contribution rate raised. But better to raise it a little now than a lot later. Or even worse, cut benefits after retirement. People would understand a higher contribution rate. Later, they will probably be mad that their contribution rate was not raised sooner.
Pat Robertson did not create the problems PERS is having. And she can’t fix them. So I don’t get why she is not pounding on the politicians to start addressing it.