Marin County pension fund posts 11.8% return

July 28--Marin County's public pension fund has reported a preliminary 11.8 percent net return on investments for the fiscal year that ended June 30.

That constitutes an improvement of more than 9 percentage points over the return that the Marin County Employees' Retirement Association reported for the previous fiscal year and is well above the fund's 7.25 percent assumed annual rate of return on assets.

"Both domestic and international equities performed really well over this fiscal year so that drove a significant portion of the returns," said Jeff Wickman, the association's retirement administrator.

"It's a positive return, but one year isn't going to make the system, just like if we have a poor performance it is not generally going to break the system," Wickman said.

Wickman said that while the 11.8 percent figure is preliminary it covers a majority of the association's portfolio.

"What it doesn't include is the final returns for our private equity and some of our private real estate," he said.

The Marin County Employees' Retirement Association (MCERA) 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.

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. Wickman said he has not yet calculated by how much this year's positive performance will reduce the estimated shortfalls.

Last year, however, MCERA employer contributions were reduced by 0.4 percent despite the fact that the pension fund earned just 2.2 percent.

"The rates are determined by the actuary taking into consideration all the economic and demographic factors that occurred during the year," Wickman said.

For example, he said, the California Public Employees' Pension Reform Act of 2013, which placed a cap on the amount of compensation that can be used to calculate a retirement benefit, has lowered pension costs somewhat.

Just over half of the association's portfolio is in equities: 31 percent in domestic stock and 21 percent in international stocks. Twenty-two percent of its portfolio is invested in fixed income investments such as bonds, 10 percent in real estate, 10 percent in private equity and 6 percent in real assets such as commodities.

Reduced assumptions

County Administrator Matthew Hymel informed county supervisors of the preliminary rate of return during its meeting on Tuesday.

"That's a positive return," Hymel said. He added, however, "We're still planning on a potentially lower earnings assumption."

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.

In December, CalPERS announced it would cut its expected rate of return from 7.5 percent to 7 percent by 2020, after failing to reach its target the previous two years. Earlier this month, CalPERS reported a preliminary 11.2 percent net return on investments for the fiscal year that ended June 30. CalPERS said that would bring its fund's performance to 8.8 percent over the past five years, 4.4 percent for the 10-year time period and 6.6 percent for the 20-year time period.

Hymel said he still expects MCERA to lower its assumed rate of return despite the higher earnings in fiscal 2016-17.

Wickman said, "We'll look at the investment assumption this year as part of what we call our 'experience study.' There is a possibility it could be changed."

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. It performs a more detailed experience study every three years. In 2014, the association lowered its rate of return assumption from 7.5 percent.

Over the past five years, the association's average rate of return has been 8.3 percent; over the past 10 years it was 5.8 percent; and over the past 20 years it was 7.1 percent.

'Pension debt crisis'

Marin members of Citizens for Sustainable Pension Plans have called for MCERA to adopt an assumed annual rate of return well below 7 percent, and the higher earnings announced this week hasn't changed their minds.

"It would be a mistake to consider this more than a welcome 'blip,'" said Jody Morales of Lucas Valley, founder of Citizens for Sustainable Pension Plans. "We still have a pension debt crisis here in Marin County that must be addressed. One good year of investment returns can't erase that."

Paul Premo of Mill Valley said, "While the latest returns when finalized may help offset some of the under-earnings of the past couple of years, there is no reason to consider any upward increase in the earnings assumption of 7.25 percent."

Premo has said he would like to see the association adopt a return assumption of 6.4 percent. He said that while the stock market has had a good run since the election of Donald Trump and might continue to perform well if corporate income tax and "excessive intrusive regulations" are cut, interest rates are forecast to "remain stubbornly low for the conservative fixed income investments portion of MCERAs investments."

Richard Tait of Mill Valley said, "Many economists feel like we're in a different era now. The outlook is for lower interest rates over the next 10 years."

Tait said a lower assumed annual rate of return will mean that employer and employee contributions will have to be increased and "with increased contributions the likelihood of adding to the unfunded liability will be reduced."

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