Sunday, March 17, 2013

Finally the Actuary Gets 7% "Net of Expenses"

On January 30, 2013, the governor signed the law changing the assumed interest rate for the five city pension funds from 8% gross of expenses to 7% net of expenses. This new rate is effective as of July 1, 2011. The rate should have gone into effect on July 1, 2009 when the five year term of the old 8% rate ended. That is two years of underfunding for all of the city pension funds. That does not mean that the new rate is an appropriate rate, just better.

I love Bob's little twist on the new rate, "net of expenses". In plain English this means the new rate is actually higher than 7% when compared to the old 8%.

The expenses in FY-2012 were $486.7M($370.3M investments and ($116.4M administrative). The assets as of June 30, 2011 were $111B. A 7% return is $7.777B, add on the $486M and you have $8.263B. That is a 7.4% rate needed to cover the 7% "net of expenses". The bottom line is that the target rate for 2012 was 7.4% gross of expenses.

Unfortunately, for FY-2012 the five city pension funds fell short of their target by $5.963B. Over the last 13 years the shortfall is $38.375B. Either the trustees are going to have to ramp up their investment skills or the taxpayers are going to have to continue to cover their losses.


Janet Diaz said...

Hi john . I shared your blog on this matter. can you explain to me in laymen terms. So I can explain what it boils down to .

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