PERA solvency could take more than 30 years
By Marianne Goodland
The first post-Senate Bill 1 actuarial projections for the Public Employees’ Retirement Association are in, and the news isn’t as good as PERA officials would like: PERA will still need more than 30 years to get to full financial solvency for most of its divisions.
The new projections were discussed by representatives of Cavanaugh MacDonald, an actuarial consulting firm, with the PERA board of trustees on July 31. According to Ed Koebel of Cavanaugh MacDonald, PERA’s state division, its second largest, will need more time to reach full-funded status than the 30 years projected under SB 1. The same is true for PERA’s largest division, the school division, as well as the judicial division.
SB 1, which was signed into law Feb. 23 by Gov. Bill Ritter, was pitched to legislators as the solution that would put PERA on the road to full funding status in 30 years, or by 2040. In the aftermath of the 2008 market collapse, PERA lost more than $12 billion, and had just $29.6 billion in assets to pay $57 billion in liabilities (benefits). Without a fix, PERA officials projected the public pension plan would be broke in as soon as 2026.
During the 2010 session legislators put together a bi-partisan proposal to fix the troubled plan, similar to one proposed by the PERA board late in 2009. The plan that eventually became SB 1 temporarily eliminated a cost-of-living increase for retirees, reduced benefits for new hires and sought higher contributions from its members and from PERA employers. Ninety percent of the PERA fix is to be borne by current, future and retired members.
But PERA trustees found out Friday that a higher responsibility on members has a downside, and that’s when the number of active employees drops and the payroll that goes with it doesn’t keep up. According to Koebel, the projections under SB 1 included an assumption that the number of active PERA employees would increase by about 1.5 percent per year. That’s a conservative estimate based on historical data, according to PERA’s Karl Paulson. The assumption also included an increase in state payroll of about 4.5 percent per year. Neither of those happened in the state division in 2009, Koebel said; the number of active, or currently working state employees in PERA, actually dropped by about 100, and the state payroll increased by only .05 percent.
The lower numbers had a dramatic impact on PERA’s state division. According to PERA documents in order to reach full-funded status by 2040, the state division would need above-average investment returns of 9.5 percent per year every year for the next 22 years. Under the expected rate of return, at 8 percent, which is set by the board, at the end of the 30-year period the state division’s asset to liability ratio would be at just 66 percent, which is close to where it was at the end of 2009. It would take at least another six years beyond that to reach 100 percent, Koebel said. But Koebel also said he believed the drop in active employees and lower payroll was just a “blip…Overall, long-term, the system will be fine,” he said.
Paulson agreed, saying that one year does not make a trend, and even two or three years would not be a problem. “Projections show that SB 1 as advertised will work,” he told The Colorado Statesman. “The real driver is investment returns,” he said, adding that he also believed the state will grow in population and that will drive higher state employee numbers.
But the decline in state employee numbers did raise concerns for some PERA trustees. Carole Wright commented the employment numbers for the future do bear “serious watching.”
PERA-eligible state employment may be headed into a decline in the next several years, based on recent state audits and workforce reports issued by the Department of Personnel and Administration. A recent DPA report said that about 30 percent of state employees are now eligible to retire or will be eligible in the next five years, and a 2009 state audit noted the high cost of training new workers, a problem that is compounded “when there is mass turnover.” In addition, a recent Associated Press story noted that when the economy recovers, dissatisfied employees who have stayed at their jobs would be ready to make the jump to better ones.
The decline in state employee numbers was not matched by PERA’s other divisions, which fared a bit better in the Cavanaugh MacDonald analysis, but most still need more than 30 years to get to full-funded status. The largest division, the school division that covers all public school districts except for the Denver Public Schools, could reach full-funded status as soon as 2030, with the above-average rate of return of 9.5 percent and by 2040 would be at 88 percent with the expected rate of return of 8 percent. The judicial division also showed that it could be close to full-funded status by 2040; at 8 percent it would be at 91 percent; at 9.5 percent it would reach full funding by 2028.
The only division that is still projected to reach full-funded status is the local government group, which would get there in 30 years at the 8 percent rate of return, according to the analysis. At 9.5 percent, it could reach 100 percent by 2026, and at the time employee and employer contributions could begin to ratchet down.
PERA’s newest division, the Denver Public Schools Retirement System (DPSRS), has a much easier road to full-funding, based in part on steps taken by that pension plan to shore up its assets prior to the merger with PERA last year. Cavanaugh MacDonald shows DPSRS at full funding by 2032 at the 8 percent rate of return, and by 2024 with the 9.5 percent rate of return.
The 2009 Comprehensive Financial Annual Report (CAFR) is now out, and shows that PERA’s total assets rose from $33.4 billion at the end of 2008 to $37.4 billion as of Dec. 31, 2009. Its liabilities actually dropped by more than $1 billion in the last year, and are now at $54.5 billion, a ration of 68.9 percent, or about 1 percent less than at the end of 2008. The CAFR and other audited information is expected to be on the agenda of the Legislative Audit Committee when it meets Aug. 16-17.
A review of PERA’s investment holdings, as contained in the 2009 CAFR, shows that over the past year the total portfolio increased in value by 17.4 percent. Over that last three years it declined by 1.4 percent; over five years it increased by 3.9 percent and the 10-year average was 3.3 percent. And it’s worth noting that no single section of PERA’s portfolio, which includes global stocks, fixed income, alternative investments, or real estate, met the expected 8 percent rate of return over the 10-year average.
The CAFR also included information on PERA’s administrative expenses, which should come as good news to legislators who have raised concerns in the past about travel and other costs — PERA’s travel expenses declined almost 25 percent from 2008 to 2009.
A snapshot of PERA’s stock holdings show the pension plan holds nearly $380 million in stock in Exxon Mobil; another $289 million in Microsoft; $235 million in IBM, and $214 million Apple.
PERA’s rate of return raises red flags for candidates for next week’s primaries for state treasurer. Republican State Treasurer candidate Walker Stapleton has said in published reports he would like to see a rate of return around 4.5 percent, but also believes the state should move to a defined contribution plan, rather than the current defined benefit plan.
J.J. Ament, his primary opponent, told The Statesman in June that he favors a rate of return of around 7 percent, but also believes the state should allow its employees to pay into Social Security, with a separate retirement account (PERA employees do not contribute to Social Security).
The two Republican candidates who square off for governor next week both favor changes to the size of state government, which could impact PERA’s ability to reach full-funded status. Former Congressman Scott McInnis has said in television ads he would reduce the size of state government; businessman Dan Maes is more specific, stating he would reduce the state full-time equivalent FTE, a measure of the number of state employees. Neither candidate provided specifics on how they would address the impact to PERA if the state payroll were cut through attrition or layoffs.