California should understand by now the dangers of setting long-range fiscal policy based on present convenience. Yet officials at the state’s largest pension fund adopted that dubious approach once again last week. Public retirement boards, however, should base financial decisions on careful long-term planning, not rosy assumptions that avoid politically tough decisions.
The California Public Employees Retirement System board last week rejected a plan to lower its expectation of investment earnings. The pension fund’s actuaries recommended that the system cut its assumed future earnings from 7.75 percent to 7.5 percent. The reduced figure would provide a more accurate forecast, given expectations that investment returns will be smaller over the next decade than in the past. And the 7.5 percent figure would also provide more protection against future economic downturns.
But pension fund officials’ motive was not to select the best fiscal policy for the retirement system. Instead, they decided to avoid causing financial upset now. Choosing a lower forecast rate would have required bigger contributions from state and local governments to cover retirement costs — potentially hundreds of millions of dollars in total.
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