Public Pension Investment Returns and Market Volatility

For fiscal year ending June 30, 2011, state and local government retirement systems had a median investment return of 21.6 percent.

That statement is often followed by “but…” as in “but look what’s happened to the markets since then!” 

With a slow economic recovery and ongoing global market volatility, the fact remains that taking a long-term focus is an overarching factor in public pension investment strategies and projections.

A Macro View of Public Pension Assets

We’ve all heard the comment: public pension unfunded liabilities represent a “trillion dollar gap” and growing.

That unfounded statement considers the grand total of every system’s liability even though the actual liabilities vary dramatically due to multiple factors.

So while neither do assets all fall into one big pot, what do you get if you were to lump them together?

What about GASB?

The timing of the Government Accounting Standards Board’s (GASB) review of its accounting standards and modifications to these standards has nothing to do with media headlines.  Every 10 years, GASB takes a deliberative and very public look at its current standards and makes modifications that it believes will improve disclosure and reporting, with much input from experts and the public.

In other words, it’s business as usual.

Another Round of Rauh & Novy-Marx Questionable Projections

Robert Novy-Marx and Joshua Rauh – whose analysis last year contained flawed methods reflecting an inaccurate understanding of public sector finance and operations– released a new paper that makes more dramatic projections about the condition of public retirement systems and their effects on state taxes. The paper, The Revenue Demands of Public Employee Pension Promises, uses underlying assumptions that understate revenues, inflate costs, and ignore other available public policy options. As a result, the paper’s conclusions bear little resemblance to the actual practices of most state and local governments, or their pension plans, and again have limited application for policymakers wishing to address the financial impacts of the Great Recession.

Long-term public pension fund investment returns continue to exceed assumptions

State and local retirement trusts accumulate and pay out assets over decades, and as such, have an extended investment horizon. While the recent rebound in asset values is noteworthy, long-term investment return performance is most critical.