WASHINGTON- Municipal officials should adopt a 6% rate of return as a baseline assumption for public pension investments, according to Alicia Munnell, director of the Center for Retirement Research at Boston College.
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She said the average long-term return assumption used by state and local pension plans in 2014 averaged 7.6%, ranging from 6.25% to 8.50%, but that a 6% estimate is a more realistic approach. She said her and co-author Jean-Pierre Aubry formed their estimate based on pension research from Michael Cembalest at JPMorgan Chase.
"We're in a low interest rate environment and the financial experts have all put out forecasts that have much lower rate of returns," said Munnell at the conference. "These plans do not provide riskless benefits."
Missouri State Treasurer Clint Zweifel, who also spoke at Munnell's presentation, agreed that 6% is an appropriate assumed rate of return to adopt in the near future. The Missouri State Employees Retirement System voted last month to reduce its assumed rate of return from 8% to 7.65% and is planning to bring it down to 7.05% by 2021. Zweifel had recommended a cut to 7.4% in 2017 and 7% by 2021.
"What we're looking at is basically what kind of return and investment mix should they be doing when funding their pension system," said Zweifel. "In that realm the 6% number is in line with a lot of financial economists think is reasonable for the foreseeable future."
Munnell's paper said five states--Illinois, Connecticut, and New Jersey, Hawaii, and Kentucky – face required pension payments that are more than 25% of revenues with Massachusetts, Rhode Island and Delaware in excess of 20%. She said much of the country is in solid shape with pensions however with 36 states having required payments below 15% of own-source revenues and 23 of those at below 10%.
"There are lot of states and a lot of cities where everything is really quite fine," said Munnell. 'And then we have a few cases that are really, really worrisome."
The fifth annual municipal finance conference at which Munnell and Zweifel spoke was hosted by Brookings for the first time as a partnership with the Rosenberg Institute of Global Finance at Brandeis International Business School, Olin Business School at Washington University in St. Louis, and Brookings' Hutchins Center on Fiscal and Monetary Policy. The event, which brings together academics, practitioners, issuers and regulators to discuss research on municipal markets and finance, was held in Boston the previous four years.
