Figuring out how to manage a public pension system is hard, complicated work. Pension board trustees have to juggle complex investment strategy, and make critical judgment calls — like assuming how long people will live on average. So, states and their pension boards could at least try to make things easier and learn from past mistakes. 

Sadly, this isn’t always the case. In fact, there are at least a dozen states right now that don’t want to change their ways when it comes to assumptions about future investment returns. Year after year, these states fail to take bold enough steps to lower their assumed rate of return making the same mistake over and over – kind of like Groundhog Day.

Consider Kansas: trustees for their Public Employees’ Retirement System (PERS) have been assuming for at least the last two decades that investment returns will make 7.75% to 8%. That’s turned out to be overly optimistic, and even though there have been some years with double-digit investment returns, the average over the long-term has fallen short of that goal. As a result, Kansas has developed nearly $9 billion pension debt, and KPERS has less than 70% of the money it should have on hand to pay current and future pension benefits.

Meanwhile, around the country the national average assumed rate of return has fallen below 7.25%. The best funded pension plans, like the 100% funded South Dakota Retirement System, often have assumed rates of return closer to 6.5%. 

It is critical to have an accurate assumed rate of return because it is the basis for determining contribution rates into a pension fund. The higher trustees assume their future investment earning will be, the less they will need to ask be contributed into the pension fund today. The lower a pension fund’s assumed rate of return, the more that needs to be put in today in order to pay out pension checks in the future. 

So when actuary advisors for Kansas PERS recommended earlier this year that trustees lower the pension plan’s assumed rate of return, it was a surprise when they said no. The trustees wanted to stay the course. Even though Kansas PERS’ own investment consultants say there is only a 50% or so chance of earning that 7.75% return over the next 20 to 30-years.

It’s like they are stuck in a cycle year after year, choosing to keep their high risk investment assumptions. And they aren’t the only ones. 

For most states there is at best a 50/50 chance of earning a 7.5% return over the next few decades. And yet, there are 36 public pensions making exactly that prediction. Most of them are struggling with their finances and dealing with billions in pension debt. But even these states aren’t the highest risk takers.

There are 13 state and local retirement systems that have promised benefits over $1 billion, that are also assuming investment returns higher than 7.5%. Here is a list of them, along with their funded ratio (which ideally should be 100%):

8% Assumed Rate of Return

  • Ohio Police and Fire Pension Fund — 69% funded
  • Arkansas State Highway Employees’ Retirement System — 84% funded 

7.75% Assumed Rate of Return

  • Kansas City Public School Retirement System — 61% funded
  • Mississippi Public Employees Retirement System — 61% funded
  • Alabama Employees Retirement System — 63% funded
  • North Dakota Teachers Fund for Retirement — 66% funded
  • Kansas Public Employees Retirement System — 68% funded
  • Alabama Teachers Retirement System — 70% funded
  • Michigan Municipal Employees’ Retirement System — 73% funded (technically the cities, counties, and other local employers that participate in MERS can select their own assumed return between 7.5% and 7.75%)

7.55% to 7.7% Assumed Rate of Return

  • Louisiana State Employees Retirement System (7.65%) — 64% funded
  • Louisiana Teachers Retirement System (7.55%) — 67% funded
  • Montana Public Employees Retirement Board (7.65%) — 74% funded
  • Austin, Texas Fire Fighters Relief and Retirement Fund (7.7%) — 88% funded

(All of the numbers above are as of each pension plan’s most recent actual reports, typically as of June 2019, though a few plans haven’t publicly updated their status since December 2018.)

Why do states keep making these risky assumptions about their investments year after year? Times have changed. Markets have changed. The world since the financial crisis of 2008 is very different. Interest rates are at historic lows — which is great if you want to buy a house, but bad if you want to get a large investment from a safe bond. 

The states above need to take a good long look at their shadow this year and consider whether or not to keep with their same predictions year after year.