What causes PERA pension debt?

We’ve been working recently with the Pension Integrity Project at the Reason Foundation  analyzing data on Colorado PERA to see what new lessons and learnings we might extract. Over the next week or two, come back to PERAscope for some interesting cuts at PERA data.

To start, let’s parse the causes of PERA’s burgeoning pension debt, based on an analysis of PERA’s actuarial valuation reports.

Over the past 20 years, PERA’s unfunded liabilities have grown by $31.6 billion. Recently, when PERA officials have discussed this issue, they’ve pointed to changes in their assumptions as a major reason for debt increases. Last year’s decisions to lower the estimated of return from 7.5 percent to 7.25 percent, and to make adjustments for increased longevity of retirees pushed all PERA funds into dangerously underfunded territory.

But the Pension Integrity Project 20-year analysis finds that changes to assumptions, methods, and provisions is actually the smallest factor in PERA’s debt growth.

The largest factor has been underperforming investment returns, accounting for $8.4 billion of PERA’s unfunded liability since 1996. PERA’s assets have consistently returned less than assumed, leading to growth in pension debt.

The second biggest cause of higher pension debt has been a disconnect between PERA’s long-term assumptions about returns and actual year-to-year returns of PERA’s various divisions.This has accounted for $7.7 billion of the increased debt.

The third largest cause has been interest on PERA’s debt, accounting for about $6 billion in new debt.

And the fourth largest cause has been insufficient employer and employee contributions, adding $4.6 billion in debt since 1996.

Many of these factors provide good examples of how wishing for something doesn’t make it so. What will it take for Colorado PERA to publicly face reality?

Stay tuned for more.

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