Colorado PERA earned a 7.3 percent return on its investments in 2016, a marked improvement from the 1.5 percent of 2015, but not good enough to reverse the public sector pension funds’ downward trajectory, according to documents released Friday.
A new “Signal Light” analysis (the last several slides in a pretty lengthy deck) shows that all five PERA divisions fall into the orange (second worst) category. Reducing the assumed rate of return from 7.5 to 7.25 percent last November, as well as revising actuarial tables to reflect the reality that retirees are living longer, contributed to the increasingly gloomy forecast.
How bad is it? There’s a greater chance that the schools division, the largest of the five, will plunge into insolvency between now and sometime after 2037 (a 44 percent chance) than that it will be fully funded by 2067 or later (pegged at a 31 percent probability), or, under the most optimistic scenario, be 100 percent funded in the next 40 years (a 25 percent chance).
The state division, the second largest, fares only marginally better. It has a 38 percent chance of going bust between now and sometime after 2037 (a 44 percent chance) than that it will be fully funded by 2067 or later (pegged at a 31 percent probability), or, under the most optimistic scenario, be 100 percent fund. The local government, judicial, and Denver Public School divisions face somewhat brighter futures.
A series of graphs presented by actuaries from Cavanaugh Macdonald Consulting at Friday’s PERA board meeting also showed that the state and schools divisions will dip down into the 20 percent funded range in the next 25 years even if the funds average the projected 7.25 annual rate of return over that period. Should the rate of return drop to to 5.75 percent, that day of reckoning would come in 15 years for the state division and 17 years for the school division.
An uncharacteristically somber PERA Executive Director Greg Smith said PERA cannot allow this to happen. “We are already too low. At a 20 percent funded ratio on that (7.25 percent return) line, you can’t run the risk. Period. Period. Period,” Smith said. “We have to move that line. That’s the game. That’s the objective. That’s what has to happen. We’re already bad enough. Action needs to be taken.”
Otherwise, Smith said, “To get below 20 percent is a death spiral. If you have one bad year when you’re in that 20 percent range you’re at the point of not being able to pay benefits.”
We’ve been consistent PERA critics in this space, so let’s give credit where credit is due. At Friday’s meeting, more board members, and the PERA staff, were willing to publicly acknowledge that long-term prospects for solvency are dicey at best without significant course corrections in the near future.
This marked a welcome change from a year ago, when many board members and senior staff painted unrealistically rosy scenarios.
No one claims that PERA will go broke tomorrow, or that today’s retirees won’t receive their guaranteed lifetime pension. But if you’re a young teacher, school or state employee, you might want to start paying attention.
Lynn Turner, a PERA board member appointed by Gov. John Hickenlooper, said PERA can’t continue using current member contributions to fill funding shortfalls. “We are taking money from new employees and using it to pay off liabilities for old employees,” Turner said. “That’s unequivocal. Some may call this a Ponzi scheme. I still think this is a good plan if changes are made. But what does it look like if we don’t have new employees paying these liabilities off?”
Smith and others took umbrage at Turner’s characterization, and he backed away from it. But no one tried to say everything is hunky-dory and that PERA is and will remain in fine fettle without major changes.
Cavanaugh Macdonald also pointed out that all PERA divisions once again fell short of paying their full Actuarially Defined Contribution (ADC), what plan actuaries recommend be set aside in a given year to fund retirement benefits. The state division paid 84 percent of ADC, and the schools division 82 percent. ADC payments have been in that range over the past several years.
As long as ADC languishes, unless returns skyrocket, PERA funds will continue to slip farther behind. But to make full ADC payments, employers would have to start making payments of more than 22 percent of employee pay. Current payments average between 18 and 19 percent.
From whence would that money come? One of two places: your wallet or other state programs.
When the PERA board meets for a three-day planning session in September, recommendations for how to address these serious challenges should emerge.
Let’s hope the board and staff, and for that matter the legislature don’t flinch away from making the heard decisions that confront them, and all of us.