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LANSING UPDATE

From: Ellen Hoekstra
Legislative Update
April 2009

National Conference on Public Employee Retirement Systems: Public Pension Plans Well-Run

Last month, the National Conference on Public Employee Retirement Systems (NCPERS) responded to a Bloomberg article that failed to provide the full story about the operation of public pension funds in the United States. NCPERS pointed out that US public pension funds, which have been around for more than a century, continue to be well-run and to safeguard retirement security. Despite the recent losses in value, which have affected all kinds of investors, NCPERS states that public pension plans are well-suited for the future. NCPERS sets the record straight about the Bloomberg article, which had maintained that public plans set their earnings assumptions too high and that smoothing investment returns is misleading.

The Bloomberg reporter suggested that the 7.75-8% rate of return for the California public pension system (CalPERS) was too high (the MPSERS system also has an 8% earning assumption). He noted that CalPERS rate of return for the ten year period ending with 2008 was only 3.32% and that the fund's value dropped by 27% when the market plummeted last year. However, he failed to look over the longer term. Over the past 24 years CalPERS exceeded its earnings assumption 17 times and more than doubled it 8 times. He also didn't note that last year CalPERS beat the Dow by more than 7 %.

The reporter's charge regarding smoothing (averaging investment gains and losses over a set period of time) is also misleading. The purpose of smoothing is not to hide the truth about how well a pension plan is funded but to reduce sudden large swings--whether upwards or downwards--to maintain more stable contribution rates, which helps employers and taxpayers. That is why the MPSERS system likewise smoothes both its losses and gains over a five year period.

NCPERS notes that "given the economy and the losses that we've seen throughout the financial markets, it is not unexpected that we see anti-pension ideologues--Chicken LIttles in coat and tie--popping up more and more in the press. What is surprising is that the media continues to give their stories credence without fairly or accurately reporting the other side."

Like CalPERS, the Michigan Public School Employees Retirement System funds have lost money this year and last--as have private pension funds, mutual funds, and insurance companies. Public pension funds set their assumed rates of return based on the advice of professionals, including outside actuaries. Some years they will gain through their investments; others, they will lose. But defined benefit pension plans are in it for the long haul, and in Michigan their members' pensions are also protected by our State's constitution.

By Ellen Hoekstra, Capitol Services, Inc.
April 13, 2009