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EDITORIAL: Struggling public pension funds get hammered in first quarter

After a very bullish 2017, the stock market lost much of its momentum during the first quarter of 2018. And that’s more bad news for public pension funds.

The Wall Street Journal reported this week that government retirement plans lost an average of 0.23 percent during the first three months of this year. The performance widens “the gap between what these funds say they will earn and what they actually make,” the paper noted.

Nevada’s Public Employees Retirement System was among the many funds that took a hit. Its portfolio dropped 1.2 percent over the first quarter of 2018.

While a three-month span is hardly indicative of long-term investment trends, the market’s subpar performance in early 2018 nevertheless exacerbates the fragile fiscal condition of many public-sector pension systems. For years, such funds have made overly rosy projections in order to disguise the true costs of the lavish benefits promised retirees.

“Assumptions of high returns appeal to elected leaders,” the Journal noted, “because they reduce the amount governments need to set aside to cover pension promises.”

Indeed, the average public-sector pension plan is built upon an annual investment gain of 7.25 percent, the Journal reports. In reality, returns have averaged 6.79 percent over the past decade and 6.49 percent over the past 20 years. By comparison, PERS funds have realized a 6.4 percent increase over the past 10 years, 20 percent below the system’s 8 percent goal.

The gap between actual results and optimistic forecasts can leave taxpayers responsible for billions in shortfalls. It can also lead pension managers to make riskier investment decisions in order to try to close the deficit.

Last October, PERS officials lowered their annual growth assumption from 8 percent to 7.5 percent. It wasn’t enough. The system is unlikely to hit that target in the current fiscal year. One financial analyst told the Journal last year that a more realistic goal for public pension funds would be closer to 5 percent.

In the long run, the most promising way to address the looming government pension crisis is to transition public-sector workers to a defined contribution system akin to what’s offered in the private sector. Until then, however, PERS and other government retirement programs should stop pretending their investment assumptions have any basis in reality.

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