Colorado PERA appeared before the state’s Legislative Audit Committee last week, to present the results of its annual outside audit (clean books) and its 2015 Comprehensive Annual Financial Report (bad, but better than some other states in a flat market environment).
Legislators on the committee treated PERA officials with kid gloves, asking no tough questions and allowing PERA to toot its horn, which its leadership takes every opportunity to do.
Buried in the voluminous documents, though, were some dubious claims about PERA’s funding and benefit design. Especially troubling was the discussion of defined contribution plans like 401Ks. On page 62 of its glossy 192-page Senate Bill 10-001 report, PERA asserted that:
“If considering the same structure as the PERA Hybrid DB (defined benefit) plan, the retirement benefits provided to a typical full service career employee at age 65 under (the PERA plan) would be significantly greater than the benefits provided to that same career employee under the alternative plan structures (defined contribution). Or looking at it another way, to provide the same benefits as the PERA Hybrid DB plan…under an alternative plan structure would cost significantly more.”
PERA’s argument is based on the assumption that defined contribution (DC) pension plans would earn between 2 and 4.5 percentage points less annually than the PERA defined benefit (DB) plan. The problem with that assumption is that it has no factual basis.
“This assumption is not supported by any evidence on the relative investment performance of DB and DC plans or by the relative performance of the target-date funds in PERA’s own DC plan,” said Josh McGee, a public pensions expert with the Laura and John Arnold Foundation and Manhattan Institute.
McGee said that recent analyses of the relative performance of private sector DB and DC plans show only a 0.7 percentage point advantage for DB plans since 1990. That’s about one-third the size of PERA’s assumption. What’s more McGee said, the performance of DC plans has improved over time, so the former advantage enjoyed by DB plans is now nonexistent.
Finally, the report asserts that losses to the state GDP would have approached $20 billion in 2014 if PERA had been under a self-directed DC plan.
“These projections are absolutely absurd. No serious economist would endorse these exaggerated estimates,” McGee said.
Also, he said:
“The reality of the situation is thatColorado’s public employees owe PERA nearly $30 billion for benefits workers have already earned. This pension debt must be paid, and will result in at least $30 billion plus interest removed from the Colorado economy over the next 30 years through some combination of benefit reductions, public service cuts, and taxes.”
And here’s McGee’s withering conclusion:
“This is another unfortunate example of PERA placing a heavy thumb on the scale and trying to spin results in their favor. They should spend less time and member resources on misleading spin and more time working to shore up their own deteriorating finances.”