What is the County’s history of returns on their investments?
Consultants for the County have used several broad measures of stock market performance over the last 80 years to estimate the likely return on investment of a new investment trust. The model discussed at the June 5, 2013 working session of the Commission used a borrowing cost of 4% and an investment return of 6%.
The County already manages the investments of money in the Washtenaw County Employee Retirement System (WCERS), which was begun in 1981 and currently has a balance of $218 million and the Voluntary Employee Beneficiary Association (VEBA). Their experience in terms of investment income would give a real world estimate of what might be expected for the income on a new investment trust.
The annual net yield on investments in the WCERS trust since its inception in 1981 is 8.2%.
However, the 1980’s and 1990’s had periods of high inflation and the stock market profited from the technology revolution. The yields due to inflation were not real dollar profits and the technology revolution cannot be counted on to repeat itself.
The annual net yield on investments in the WCERS trust since 2000 is 3.2%
The annual net yield on investment in the VEBA trust since its inception in 1997 is 3.5%.
The annual net yield on investment in the VEBA trust since 2000 is 2.4%.
The current investment trusts invest in a balanced portfolio of bonds and stocks; however, the County proposes that the new trust would invest only in stocks. Financial advisors generally recommend a balanced portfolio because it tends to be a safer investment and because stock and bond prices typically have an inverse relationship (when bond yields are high then more money flows from the stock market to the bond market and stock prices decline and vice versa). In the current plan, it would not make sense to borrow money only to put it into bonds that yield a lower interest rate than the bonds the County will issue.
The bonds in the County’s investment trust have given the accounts more stability and have performed roughly equally with the stock investments.
Overall, a 6% net return on the County’s planned stock investments is probably too generous and it is risky.
Annual Financial reports for WCERS
Annual Financial reports for VEBA