The CEO of the Colorado Public Employees Retirement Association now admits that his organization cannot continue to meet its obligations without “sweeping legislative changes.”
Testifying on Monday before the Legislative Audit Committee, Meredith Williams painted a bleak picture for the lawmakers.
“We can’t invest our way back to long-term sustainability,” he said.
Eighteen months ago, PERA’s net assets available for investment amounted to $43.17 billion. During the next 12 months, they shrank to $29.5 billion. As of June 1, they stood at $29.7 billion.
Although PERA’s depressed investment portfolio rebounded slightly between December and June, increasing in value by $826 million, that increase was almost completely negated by the imbalance between contributions and benefits.
For the first five months of the year, member contributions amounted to $685 million, far less than the $1.3 billion paid to beneficiaries.
Williams’ tone is a complete reversal from just a few months ago.
On Nov. 26, the Rocky Mountain News published a letter from Williams in which he took issue with an editorial the paper published which, citing a CSBJ story, called for the legislature to take immediate action to address PERA’s looming financial crisis.
“The worst thing to do in the midst of economic turmoil is to overreact just a few months into a financial downturn,” Williams wrote. “The Rocky Mountain News has proposed sweeping and far-reaching policy changes for the Colorado Public Employees’ Retirement Association, the retirement plan for 440,000 current and former public employees. The Rocky’s call for the Colorado legislature to take action to address the funded status of Colorado PERA is rash and premature.
“Like all investors, PERA has seen the value of its investment portfolio decline in recent months … It is irresponsible to rush to the conclusion that PERA should seek sweeping legislative changes based on back-of-the-envelope calculations of PERA’s funded status at an arbitrary point in time.”
In the November article cited by the Rocky, CSBJ conservatively estimated PERA’s funded ratio (i.e, the percentage of future liabilities that current assets will be sufficient to cover) to be 56.5.
That estimate understated the gravity of the crisis which now confronts PERA and its 440,000 members. As of June 1, PERA’s funded ratio stood at 51.5.
But that wasn’t the first time Williams had vociferously defended PERA’s investment strategy.
Two years earlier, reacting to a Sept.1, 2006, CSBJ article, Williams derided suggestions that PERA’s projected investment returns of 8.5 percent annually were not sustainable, and that lesser rates of return might create serious financial problems for the pension fund.
This week, Williams offered lawmakers no specific plan for securing the solvency of the pension fund, other than promising that PERA would offer one this fall.
The new equation, according to Williams is “C+I = B+E.”
In other words, contributions from active members plus investment returns need to equal benefits plus expenses. That formula is not as simple as it might appear, since PERA’s aging work force and generous benefit structure yield substantial expense increases every year.
PERA was last restructured during 2005, when the legislature crafted a bill which increased payments from employers and slightly reduced benefits for future plan participants.
This restructuring became necessary because of the post 9/11 stock market decline and, more significantly, decisions by PERA during 1999 to offer more generous benefits to its members, at a time when the plan’s funding ratio exceeded 100 percent.
The 2005 restructuring was heavily dependent upon PERA’s investment managers achieving an average return of 8.5 percent annually. That assumption was driven by the belief that the prolonged bull market in equities, real estate and commodities that began during the early 1980s would continue indefinitely.
Glen Gustafson, School District 11’s finance director, said last year that any increase in PERA contributions “would just decimate us.”
“Our payroll is $120 million annually — so every 1 percent increase means another $1.2 million that we have to pay,” he said. “And this all dates back to around ‘99, when they dramatically enlarged the benefit structure.”
Gustafson’s opinion hasn’t changed.
“There is no easy solution (for PERA),” he said this week. “The revenue coming in is insufficient to meet the demands of retirees. There will have to be serious adjustments.”
But, he said, further increases in employer contributions should be off the table.
“PERA is mandated by state law, so withdrawing from the plan is not an option,” Gustafson said. “Employer contribution rates will, under present law, grow to 16.45 percent by 2012. Employees pay 8 percent. It’s scary and concerning for all of us — we don’t know how bad this (economy) is going to get.”
District 11 board member Charlie Bobbitt echoed Gustafson’s concerns.
“The school district cannot sustain a 16.45 percent employer contribution to PERA,” he said. “If that rate is increased even more, we’ll have to cut staff. The increased money we’ve gotten from the state through Amendment 23 hasn’t had any effect, except to pay for PERA.”
Bobbitt said he believes that the state legislature should, if anything, reduce employer contribution rates.
“The politicians don’t want to stand up and admit that their solution (legislation enacted during 2005) was wrong,” he said.
Rather than lean on employers — and, by extension, the taxpayers — Gustafson said that legislators ought to consider increasing employee contributions and reducing benefits.
But Williams, at least for the moment, wants to be very careful. “No one segment or group will bear the brunt (of the proposed changes),” he said. “We will all have some skin in this game.”
And some of that skin may come from Williams’ hide.
“We’ve lost confidence in Meredith,” said one municipal official who asked not to be identified. “This is a crisis, and we don’t think he can lead us through it.”
|Net Assets Available for Benefits|
|December 31, 2007||$43,172,026|
|Employer ContributionsMember Contributions
Retiree health care and life premiums
Medicare retiree drug subsidy
Disability Premiums and Life Insurance Claims