PERA board impaled on horns of a dilemma

We were critical of the Colorado PERA board’s timid decision last November to reduce its expected rate of return on investments from 7.5 percent to 7.25 percent. Still, even such a small decrease has significant real-life impacts, and last week, the board got a first look at how much deeper a quarter-point drop made the hole in which PERA finds itself.

PERA’s schools division, the fund’s largest, will now need 75 years to reach full funding, according to a revised Actuarial Impact Analysis prepared by Cavanaugh Macdonald Consulting. That’s up from 43 years before the quarter-point reduction in return projection. The state division will now need 55 years to become fully solvent, compared to 41 years before the reduction. And the local government division will now need 52 years, up from 35 years.

Wow.

Actuaries generally advise against pension funds needing more than 30 years to pay off unfunded liabilities. You do the math. PERA is deep into the “orange” warning area. And if expected returns were lowered to a more realistic 6.5 percent, heaven knows how many decades, or centuries, it would take PERA to catch up.

Cavanaugh Macdonald presented the board with a host of possible steps it could take to mitigate the damage, including estimates of how many years each step would knock off the total. You can peruse the report here and a more condensed chart of options and impacts here.

Here are some highlights, focused on the schools division, where the hole is deepest.

  • The biggest reduction in years to solvency — 45 years  — would come from eliminating cost of living adjustments for pensions for pre-2007 hires. But that would cut pension purchasing power in half within 30 years. That’s not going to fly politically. Not even close. Nor should it.
  • The next biggest impact — 39 years — would result from recalculating pension payments for new hires and non-vested members based on career average earnings rather than the current method of basing pensions on the three years of highest average salary. But this would result in a reduction of benefits of between 35 and 55 percent. See above regarding political viability.
  • The next biggest impact — 22 years — would stem from employers boosting their PERA contributions by two percentage points (from 19.65 percent of a worker’s salary to 21.65 percent). Still, that leaves the fund significantly behind where it was before the return reduction. It would take the schools division “only” 52 years to catch up.
  • Requiring all schools division employees to boost their contribution by two percentage points (from 8 percent to 10 percent) would reduce the years to solvency by 21 years.

Actuaries stressed that these impacts are not “additive,” meaning, for example  that adopting the first two bullets above would not result in a 84-year reduction, but rather “a notably different result.” Notable as in notably positive or notably negative is unclear.

For more information about last week’s board meeting, read this Denver Post article.

 

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