Some Colorado PERA board members demonstrated a clear understanding of the challenges facing the state pension fund during a meeting last week, pushing for an aggressive move to address the plan’s troubled finances. But their efforts fell short.
As a result, the board voted to reduce PERA’s long-term estimated rate of return by just one-quarter of a percentage point, from 7.5 percent to 7.25 percent effective January 1 of next year.
Eleven of 15 voting board members are elected by PERA beneficiaries in elections where fewer than 5 percent of eligible voters cast ballots. It was most of the board members in this bloc who resisted more aggressive action. They said that the uncertainties inherent in a projection period spanning 30-plus years makes it irresponsible to react to short-term market fluctuations with large reductions in rate of return estimates.
Cavanaugh Macdonald Consulting, PERA’s actuarial consulting firm, had recommended that the rate remain at 7.5 percent.
Susan G. Murphy, one of three governor-appointed members of the PERA board, pushed for a full percentage point reduction in the long-term investment return assumption, to 6.5 percent. She said that actuaries base recommendations on historical data, but that “a forward-thinking analysis is more appropriate.”
But several elected board members said they wanted to stick with the actuaries’ recommendation and hold steady at 7.5 percent. Carole Wright, a retired Aurora Public Schools teacher, said she worried that if the board went against the actuaries’ recommendation, “I may be in violation of my fiduciary responsibility” to PERA members.”
Murphy countered that she would feel more comfortable taking into account a wide array of input from a variety of sources board members had tapped, including two senior Wall Street executives who last month counseled PERA to lower its estimate sharply. As a fiduciary she said, she would rather take action to increase the chances of “achieving what we have told beneficiaries they might expect.”
And governor-appointed board member Lynn Turner, a former Securities and Exchange Commission chief accountant, took issue with Wright’s statement. He said it was “absolutely false” that anyone was ignoring the actuaries’ recommendation. Rather, he said, other board members “are ignoring all this other data that point to something lower (in a rate of return).”
Turner proposed lowering the rate by a half percentage point, to 7.0 percent. That motion failed narrowly, on an 8-7 vote.
To help offset the impact on solvency of a lower rate of return, the board also voted to reduce long-term inflation expectations from an annual average of 2.8 percent to 2.4 percent.
Lowering the projected rate of return may bring PERA more in line with reality, but ti also lays bare some hard truths that PERA will have to explain to its members. According to a 2015 report on PERA, Risky Retirement, Colorado’s Uncertain Future and Opportunities for Reform, annual returns of 7 percent would mean pension debt would be more than $20 billion in 2045, compared to $12.45 billion in 2015.
The report didn’t calculate long-term pension debt at a return rate of 7.25 percent.
Stay tuned for another post that attempts to put PERA’s latest moves in context.