Both funds, along with others all over the country, vastly overstate their expected long-term returns. The City’s fund claims it will make 7.75 percent a year; the County ups the ante to 8.25. But the City’s fund has only chalked up a performance of minus 1.84 percent over three years, 3.3 over five years, and 5.1 over ten. The County’s performance has also badly lagged its bogey.
A government’s annual contribution to its fund is based on these unrealistic expected rates of return. Many scholars suggest using a “risk-free rate of return,” which would be about 5 percent. At a meeting last month, one of the officials of the City fund said that if the expected rate of return were cut to 5 percent, the unfunded actuarial liability would double or triple to $5 billion or $6 billion. Whew! Chief of staff Rebecca Wilson says board members aren’t quite so pessimistic: they think the unfunded liability would double and the required annual contribution rise by 50 percent.
But a 50 percent boost in the City’s required contribution would be backbreaking. So maybe going to 5 percent would lead to reform: the City of San Diego would be forced into bankruptcy, and a judge might challenge the notion that excessive benefits are embedded in the law.