The five root causes of PERA’s $32 billion hole

A panel discussion early Wednesday morning about the future of Colorado PERA drew a hefty crowd, another sure sign that addressing the serious challenges facing the state pension system is a top priority for people across the political spectrum.

Some 75 people showed up in Centennial for the¬†Business Leaders for Responsible Government session. Panelists included acting PERA Executive Director Ron Baker, Secure Futures Colorado’s own Amy Slothower, Joshua Sharf of the Independence Institute, and Lynea Hansen of the Colorado Coalition for Retirement Security.

The most substantive portion of the discussion came when Slothower enumerated five causes of PERA’s $32 billion unfunded liability. PERA’s Baker, by the way, agreed with this analysis.

“We hope any reform will address all five of these problems,” Slothower said. They are:

  1. Underperforming investments. A year ago, the PERA board lowered its long-term return assumption from 7.5 percent to 7.25 percent. “A lot of people would challenge that assumption, and the ramifications of missing it are pretty significant,” Slothower said.
  2. Other missed assumptions. PERA was slow to adjust its mortality assumptions — people are living longer, and therefore tapping PERA benefits for more years than projected. Another among a “slew of assumptions that are hard to predict” is that payroll would grow faster than it has.
  3. Expected change of unfunded liability. Each year, PERA has to recognize interest on its unfunded liability. As the unfunded liability grows, so does the amount of interest owed.
  4. Insufficient payments into PERA by “everyone.” Contribution rates by members and employers (aka taxpayers) are set in statute, and can only be changed by statuatory change. “Defined benefit plans that work have floating contribution rates,” Slothower said. “They make adjustments according to reality. If we had been making those incremental adjustments along the way, we probably wouldn’t be where we are today.” Slothower noted that PERA’s package of reforms includes automatic adjustments. “We are excited to see this in their package,” she said. “We all agree on the automatic adjustments, so let’s get that one passed.”
  5. Changes in assumptions and methods. This includes changes to accounting methods and other more technical adjustments.

“We have different thoughts about what the package looks like,” Baker said. “Our goals are very much the same.”

State Senator Jack Tate (R-Centennial), who moderated the panel, said he wanted to see legislation emerge from the 2018 session that “is a permanent fix, not a kick-the-can-down-the-road fix.” To make that happen, he said, it’s important to analyze why the 2010 fix known as Senate Bill 1 failed to adequately address PERA’s challenges.

“How do we avoid having to come back again in another seven years?”

And that, friends, is the $32 billion question.

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