Massachusetts Treasurer Steven Grossman wants to reduce the assumed rate of return on the state's $50 billion in pension fund assets that is now 8.25%, among the highest for U.S. public retirement plans.
Mr. Grossman said he's gathering legislative support for a cut to 8%, with an option to go lower. That would put Massachusetts more in line with other states, yet the move would cost taxpayers and covered workers $1.7 billion to maintain funding commitments.
“I will predict right now with a fair degree of confidence that we will be using the 8% number for our expected return,” Mr. Grossman said in an interview. The rate is set by law, and the earliest it could be changed would be next year.
More than a third of 126 state and municipal pensions, including the $237.5 billion California Public Employees' Retirement System, Sacramento, have cut investment assumptions since 2008 as returns have lagged behind historical averages, according to the Public Fund Survey. Wilshire Associates said this week the median return for public systems was 1.15% for fiscal 2012 as the European debt crisis and a slowing global economy curbed equity gains.
“Whatever increase in our unfunded liability is more than made up for by the increased confidence from the rating agencies and investment community in our willingness to reflect reality and common sense,” Mr. Grossman said of the change he's seeking. The state plans to fully fund its retirement plan by 2040.
Massachusetts is one of nine retirement systems, out of 126 tracked by the Public Fund Survey, that assume investment earnings of 8.25%. Most, 44, use 8%, while more than half, 68, project less than 8%.
Indiana's retirement system this month cut its assumed rate of return to 6.75% from 7%, the lowest of the funds tracked in the survey, said Keith Brainard, research director at the National Association of State Retirement Administrators, which conducted the study.
The Massachusetts pension holds more stocks and fewer bonds than most others, which is why it assumes a higher rate of return, said Mr. Grossman. During the past decade, the fund's average annual return has exceeded 7%, he said.
However, in the 12 months through June, the state fund lost 0.08% on invested assets, hurt by weak equity market performance, he said. For that period, the Standard & Poor's 500 index gained 3.1%. In the previous fiscal year, the system earned a 22% return.