Discount Rate Assumptions and the Certainty of Tax Increases

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After years attempting to interpret public documents related to pension funds to understand the method of deciding what a reasonable investment return assumption would be, I finally have it straight from a municipal investment advisor. As I’ve posted on Tiverton Fact Check:

Me: So if a town comes to you and says, “We want to hit this number,” you say, “Well, what’s your risk?,” and that’ll play into seven-and-a-half percent.  The fact that the town can then in 20, 30 years increase taxes to make up for the loss, then you have a little higher tolerance for risk, so you can go up to 7.5%, which you may never hit, but in the end of 20, 30 years, you’ve got other assets — taxpayers — you can take money from.  Is that part of the conversation?

Gene McCabe, Director of Investments for Washington Trust:It is.

In the not-too-distant future, I suspect it’ll become unreasonably expensive for us municipal assets.  Elected officials and government employees should start pondering what will happen when assumptions about how much money can be confiscated from Rhode Islanders prove as fanciful as assumptions about high returns at the stock market roulette wheel.



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