Like many organizations and individuals with money invested in the financial markets, the Colorado Public Employees Retirement Association (PERA) had a rough year in 2015, a newly released report shows.
PERA earned just a 1.5 percent return on its investments in 2015, the pension plan’s worst performance since the Great Recession eight years ago.
As a result, Colorado public sector pensions, already badly underfunded and decades away from eliminating that gap, have seen the horizon recede several more years into the future.
As of Dec. 31 2015, “the funded ratio for PERA’s five defined benefit pension trust funds was 62.1 percent with an unfunded liability of $26.8 billion,” Gregory W. Smith, the organization’s executive director, wrote in the report’s introductory letter of transmittal. A year earlier, the trust funds were 62.3 percent funded, with an unfunded liability of $25.9 billion.
In other words, during 2015 PERA went almost $1 billion deeper into what’s already a very deep hole.
What this means, according to a report presented to the PERA board this week by actuarial consultants, is that between the end of 2014 and the end of 2015, the time needed to get PERA to a 100 percent funding ratio increased by between three and 11 years, depending on which division of PERA you’re considering.
Last year, actuaries estimated PERA’s state division would be fully funded in 2052. That’s now slipped to 2058. The school division has gone from being fully funded in 2053 to 2060. And it will take 12 years longer for the local government division to reach full funding – 2052 instead of last year’s projection of 2040.
Estimating so far out is, of course, an imprecise exercise as best. But every year that PERA investments fall short of the 7.5 percent annual gain goal, the more pressure is placed upon returns in subsequent years.
Before the Great Recession, accrued liabilities for PERA retirees were completely covered by the value of investment assets, according to Patrice Beckham, an actuary with Cavanaugh Macdonald, the firm that prepared the report for PERA. By the end of 2015, that ratio had slipped to 76 percent.
This means that “(PERA) hasn’t yet recovered from the financial crisis,” Beckham told the board.
Still, PERA’s website announcement that accompanied the release of its Comprehensive Annual Financial Report put a positive spin on what clearly was bad news.
“We beat the market, as well as our public pension fund peers,” PERA Executive Director Gregory W. Smith said in a YouTube video that accompanied the release. According to PERA, the BNY Mellon Performance and Risk Analytics and Investment Metrics Median Public Fund Universe – PERA’s peers — had a 2015 return of minus .2 percent.
In other words, PERA is saying “Hey, look, the other guys are sinking faster than we are!”
The PERA announcement continues:
“It was a very challenging year in terms of the investment markets,” (Smith) said. “We were able to achieve a positive return in an environment when a number of other public funds did not, which affirms PERA’s investment strategy and allows us to offer our retirees and the entire state a reliable source of economic stability. As a long-term investor, we understand there are ebbs and flows to the market and are built to withstand them,” Smith concluded.
Have a look at Smith’s video that accompanied the release;
Not everyone was as sanguine about PERA’s results.
“2015 was a bad year, and that potentially has major implications for the future,” said Josh McGee, a public pensions expert with the Laura and John Arnold Foundation. McGee coauthored a 2015 report on PERA titled “Risky Retirement: Colorado’s Uncertain Future and Opportunities for Reform.”
“It’s a big deal to have a one year change in position of almost a billion dollars,” McGee said.
McGee pointed to a table in the report that shows that a one percentage point decrease in the discount rate – from 7.5 percent to 6.5 percent – would mean that all of the funds combined would have a funding ration of just 54 percent.
Given that the 1.5 percent return this year amounts to a six percentage point from from the 7.5 percent rate, PERA would need “astronomical” returns in the next year to make up that gapMcGee said.
“Colorado has been proactive in trying to address this, but is still very behind in making sufficient changes to match its promises,” he said.
There will be mounting pressure for the state to increase taxpayer contributions to PERA, McGee said, but in the current political environment that will be challenging at best. “It’s kind of the immovable object bumping up against the Rock of Gibraltar,” he said.
Additional data released this week seemed to bolster McGee’s points. Cavanaugh Macdonald actuaries walked the PERA board through a “signal light” analysis of “40-year deterministic projections” of funding for each of PERA’s divisions. These projections were based on work performed last fall for the Legislative Audit Committee by another actuarial firm, Pension Trustee Advisors.
Some of the findings raise red flags. The state division, for example, has a 54 percent probability of being fully funded 40 years from now. To meet that goal, PERA would have to earn at least a 7.62% average annual return for the next 40 years.
But there’s also a 23 percent chance that PERA will become insolvent at some point after 2036 – as little as 21 years from now. That dire outcome would occur should PERA’s state division earn an average annual return of 6.51 percent or lower.
Projections are similar for the school division. There’s a 52 percent chance the division will be fully funded in 40 years, but to do so it will have to earn an average annual return of at least 7.73 percent.
On the gloomy side, there’s a 20 percent chance the school division will be insolvent some time after 2036. That would happen if average annual returns dipped below 6.28 percent.
PERA members need to exert pressure on plan officials and state policymakers “to address this,” McGee said. “Benefits are very shaky and will come under increased pressure in the years to come. The state needs to get out ahead of this, and fast.”