During the late 1990s, the Colorado Public Employees Retirement Association was one of the healthiest pension funds in America.
For many years, PERA had combined successful investment strategies with a comparatively restrained benefit structure, achieving a funded ratio of more than 100 percent. That meant the fund had more than enough assets to cover potential benefit claims by all of its members — and this very success put in motion the chain of events that has, 10 years later, brought PERA to the edge of insolvency.
During 1999, the legislature approved changes in PERA’s benefit structure, which gave its members far more generous payouts at retirement. PERA’s board, then composed almost entirely of potential beneficiaries, assured legislators that PERA’s wise investment policies and inherent financial strengths made the new structure eminently affordable.
But during 2005, the legislature was obliged to implement an emergency PERA fix, as a consequence of investment losses. Future benefits to members were slightly reduced, and employers were required to pay more into the fund.
For PERA to once again achieve a funded ratio above 80 percent, which experts in the field characterize as “healthy,” the fund’s investment managers and actuaries asserted that the fund would realize average annual investment gains of 8.5 percent for the indefinite future.
No media outlet seriously disputed these estimates until the Business Journal, in an article dated Sept. 1, 2006, raised significant questions.
We sharply questioned the sustainability of such returns, noted deficiencies in certain actuarial assumptions and pointed out that even slightly lower rates of return during the next 10 years would place the fund in peril.
The article was greeted by PERA officials with angry contempt. In a lengthy letter, PERA loftily explained that we didn’t know what we were talking about, that they were the experts and we weren’t, and that their expected rates of return were conservative, reasonable and fully achievable.
PERA reports its calendar year results on July 1 of the following year. The fund reported robust earnings during 2007 in its report issued on July 1, 2008 — but it became increasingly clear that PERA’s investment portfolio had experienced severe losses during 2008.
During November, the Business Journal published an article estimating PERA’s losses, based on the composition of its investment portfolio at the end of 2007. We concluded that PERA’s investments had shrunk by 25 percent or more, and that its funded ratio was as low as 56.5.
Reacting to an editorial in the Rocky Mountain News, based on our estimates, which called for an immediate legislative fix, PERA CEO Meredith Williams responded that “now is not the time to implement hasty fixes based on back-of-the-envelope calculations.”
Alas for Williams and PERA, our envelope looks to have been a lot more accurate than those hinted at by PERA’s army of investment managers, actuaries and accountants. As of June 1, PERA’s funded ratio was below 52, and Williams now admits that “we can’t invest our way back to long-term sustainability.”
Next year, the legislature will have to “fix” PERA yet again. This time, we suggest that they pay less attention to the elegant mumbo-jumbo from PERA’s hired guns and more to the opinions of unbiased financial experts without a dog in the fight.
PERA’s policies have too long been driven by unsustainable financial assumptions generated to satisfy the expectation of contributors and beneficiaries. We hope that the legislature will create a new model for PERA, one that is fair, equitable, sustainable — and, above all, realistic.
Believe it or not, we’d just as soon not run our annual “PERA in trouble” article.