Public Pensions Under Continued Stress

As we have identified previously, pension plan investments are seriously underperforming.  TMRS, the pension manager for Georgetown employee's pensions earned just 0.34% on investments of $23B last year.  They continue to assume they will earn 6.75% on their portfolio, even though they admit the annualized return for the past ten years is 5.42%.  As the pundits like to say, this is NOT sustainable!

Pensions determine their assets and liabilities through formulas that depend heavily on the fluctuation of interest rates. When those rates fall, investment returns suffer and obligations to future retirees become larger.

While lower rates do boost the value of existing bonds, the negatives outweigh the positives for many funds. Pensions lose money when bonds with bigger payouts purchased years ago mature and are replaced with loweryielding securities.

The consequences of any losses are real: Large companies must compensate for weak returns and mounting obligations by pumping money into their plans, thereby devoting less to capital expenditures, acquisitions and research.

At public plans, underperformance often means taxpayers or workers are asked to pay significantly more to account for liabilities that are expected to rise as lifespans increase and more Americans retire.

Georgetown's managers need to pressure TMRS to adopt more realistic investment assumptions, even though that will cause the city contributions to employees pensions to increase.  Better to do it now and pay over times instead of waiting for a crisis.