Most public employees in El Paso County must, by state law, join the Colorado Public Employees Retirement Association.PERA covers the employees of Memorial Health System, Colorado Springs Utilities, the City of Colorado Springs and of every public school district in the county – but not employees of El Paso County.
County employees, as well as those of the Pikes Peak Library District and the 4th Judicial District, are covered by the El Paso County Retirement Plan, which was created during 1967.
The county’s plan has assets of $211 million. PERA’s assets amount to more than $30 billion.
Like PERA, the county plan has suffered steep losses during the last 18 months. The market value of the asset portfolio dropped from $293.3 million at the end of 2007 to $208.1 million a year later.
The plan’s funded ratio declined as well.
According to the “certificate of actuarial valuation” prepared by Buck & Co. during May, “The market value of assets was sufficient to provide for 72.8 percent of the actuarial present value of accumulated plan benefits as of January 1, 2009, as compared with 111.3 percent as of Jan.1, 2008.”
Compared to PERA, which saw its funded ratio drop to 51 percent during the same period, the county’s plan seems reasonably healthy. As of June 30, it stood at 75.4 percent, slightly improved from Jan. 1.
But drastic changes might be necessary in order to ensure that the plan can provide scheduled benefits to present and future beneficiaries.
According to Buck & Co., “A contribution rate of 6 percent of salary by both the participating employers and members (12 percent of salary in total) in 2009 will not be sufficient to fund the normal cost and amortize the unfunded actuarial accrued liability over 30 years from the valuation date. The total actuarially required contribution necessary to fund the plan’s benefits under the board’s funding policy for 2009 is 16.7 percent of salary.”
Plan administrator Howard Miller, who was hired June 15, acknowledged that larger contributions will be needed.
“We expect to seek a tiered incremental increase for both employees and employers,” he said, “going to 6.5, 7 and 7.5 percent during the next three years.”
On Thursday morning, Miller presented his plan. Beginning in 2010, employer/employee contributions will rise half a percent annually for three years, at an annual cost of about $970,000.
The employer’s portion of the increase would, by definition, be funded by county taxpayers.
Like PERA participants, the public employees who contribute to the county retirement plan have no choice but to join the plan.
Unlike PERA, however, they also contribute to the Social Security system, to which both employer and employee pay 6.25 percent. In total, an amount equal to 24.5 percent of employee salaries is paid into the two systems, with equal contributions from employer and employee.
If increased according to Miller’s recommendations, that percentage would rise to 27.5 percent.
The “safe harbor” provision of the Social Security Act exempts “wages received by certain state or local government workers participating in their employers’ alternative retirement system” from Social Security taxes. According to Miller, to withdraw from Social Security, a local government retirement system must have a combined employer/employee contribution level of at least 16 percent.
“Even then,” he said, “there’s no assurance that the application (to withdraw) will be accepted.”
“I’m not completely familiar with Colorado law on this subject, and there may be some statute that forbids local governments from withdrawing,” he said. “I would think that federal law would be controlling. In Texas, where I worked previously, a number of local governments chose to withdraw.”
PERA participants presently pay 22.5 percent of their salary into the system, two-thirds of which (16 percent) is funded by employers. That number is scheduled to rise to 24 percent by 2012.
The county retirement plan’s woes arise from the same constellation of problems that have afflicted PERA, and other public pension plans nationwide.
Liabilities have increased dramatically, more than doubling during the last 10 years. During 2000, actuarially accrued liabilities stood at $155.6 million, increasing to $331.3 million at the beginning of this year. Benefit payments also have increased as the number of retirees has expanded.
Payments to beneficiaries are projected to rise from $16.8 million during 2009 to $33.3 million during 2018.
Increasing employer/employee contributions will not by itself be sufficient, according to the actuaries. The fund must achieve an annual rate of return of 8 percent – and that, said investment adviser Jerry Paul, might not be possible.
“We tell our clients that 7 percent is the most that they can expect on any kind of reasonable investment mix,” said Paul, who is chief investment officer of Denver-based Essential Investment Partners. “The relationship between risk and return has not been banned, and unfortunately that math has a geometric impact.”
If the rate of return falls below projected levels, he said, the cumulative impact of shortfalls is much larger for a pension fund than for an individual.
“You can always work for another year or two, and money flows in, not out,” he said. “That’s not an option for a pension fund – they can’t just stop paying out benefits for a year. I’m not familiar with the El Paso County fund, but 8 percent, or 8.5 percent, is the usual number for pension funds. I think that’s because there are only a few firms who do this work (public pension actuaries), and they all come up with the same number. And they all know that if they’re outliers in their recommendations they won’t get any business. It’s just like real estate appraisers during the boom – if you appraised properties for what they were actually worth, you would have been out of business in a hurry.”
And politics is often part of the mix, Paul said. “How many politicians are going to win votes by saying, ‘We’re going to lower your pensions?'”
As floundering pension funds nationwide seek the high returns that they need to maintain funding ratios, at least one has decided to follow a strategy known to gamblers as “doubling down.”
Calpers, the California Public Employees Retirement System, is the nation’s largest plan, with more than $180 billion in assets. Last year, the system lost nearly $60 billion, embracing a strategy of allocating substantial funds to private equity, real estate and other then-fashionable investments.
Joseph Dear, investment chief of Calpers, has a new idea – and it’s the same as last year’s idea.
According to the New York Times, Dear “… aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure …”
Why? Because he thinks that such investments will kick his overall rate of return up 3 percent or 3.5 percent to the 7.75 percent that Calpers’ actuarial assumptions require.
Miller said that Buck’s 8 percent figure is reasonable and attainable for the county pension plan.
“We’re operating with a very long time horizon,” he said. “30 to 50 years.”
But, he cautioned, the plan won’t embrace a strategy similar to that of Calpers.
“That’s not anything we would suggest,” he said, “or that the board here would assent to.”
Neither would Paul.
“Doubling down – that’s what they call gambler’s suicide,” he said. “The public is not well-served by the short-term horizon of politicians, or of union bosses. There’s going to be a day of reckoning, and it won’t be pretty.”