Over the weekend, the New York Times ran a good overview of the problem with public pension assumed rates of return on investments. As the article begins, “Few investors are more bullish these days than public pension funds.”

The issue is that many public pension funds assume rates of return around 8 percent — much higher than in the private sector, and not reflective of the actual risk involved. In assuming a high rate of return, states are expecting investment returns will lessen the need for contributions to pay for future benefits. This practice understates pension costs.

The focus of the article is on New York City, whose actuary has proposed to lower the assumed rate from 8 percent to 7 percent. That change is estimated to require an additional $1.9 billion each year.

As we discussed in a policy brief earlier this month, the Washington legislature reduced the assumed rate of return for public pensions from 8 percent to 7.9 percent for 2013-15, to 7.8 percent for 2015-17, and to 7.7 percent for 2017-19. We went into more detail on public pension issues in an April 2011 brief, Reforming Public Pensions.