“It is wrong for PERA to pay out bonuses to employees on the one hand, and on the other, ask retirees to give up cost of living increases in years when the market declines.
…In 2008, PERA lost 26 percent of its value. Because PERA’s investment returns were better than the overall market benchmarks, the plan’s policy is to pay bonuses to those members of its investment staff who exceeded market results. Cary believes that in years when PERA’s investments decline in value, PERA should not pay out bonuses to the investment staff — especially when current state employees and retirees are being asked to make sacrifices.”
Woe, woe to the pitifully under-compensated PERA retirees! How daring and politically courageous of the state treasurer to” take a stand to protect the interests of all Coloradans, and in particular, the interests of the more than 470,000 state, school and local government workers in PERA.” What moxie, to put the interests of half a million Colorado voters before those of a handful of Wall Street investment advisers!
That’s fine — but it would be nice if Kennedy, who as state treasurer serves on PERA’s board, would note that the COLA freeze was necessary to keep PERA minimally solvent. And it would be even nicer if she, or any other elected official save a few powerless, cranky right-wing Repubs, would fess up and admit that the pension fund still has big problems.
We’ve written about PERA for four years, trying to convey a simple truth: the fund’s actuaries base their always-sunny view of PERA’s solvency upon wildly optimistic annual rates of return on investments.
And who determines the forecast ROI?
That would be PERA’s investment advisers/consultants/managers.
At present, that number is 8 percent, not just for next year, but for the next quarter-century.
If I had a nest egg of $25,000 and put it into an investment with a guaranteed compounded return of 8 percent, at the end of 25 years I’d have $171,211.88 without investing another nickel.
Not bad. But suppose I couldn’t take any risks with this money, and had to be as careful, cautious and prudent as, well, as a pension fund manager. I’d put the dough into treasuries, and be happy with 4 percent.
In that case, my nest egg would increase to $66,645.91.
Between 1980 and 1999 the Dow Jones stock index soared from 838 to 11,000. Since then, the Dow has soared to … 10,000.
For the entire 20th century, a period of unparalleled American growth and prosperity, the Dow’s compounded annual return averaged 5.3 percent. As Warren Buffett famously calculated, to match that rate the Dow would have to close at 2,000,000 on Dec. 31, 2099.
Easy enough! If the Dow increases by 22,111 points each year for the next 90 years, we’ll make it!
Of 50 state pension funds, 48 have problems. That’s because all of them have structured member/employer contributions and retiree benefits assuming long-term investment returns of 8 or 8.5 percent. That only works in boom times — and, as we’ve learned to our sorrow, booms end.
But not for pension fund managers nationwide, who continue to heed Will Rogers’ investment advice, delivered during the boom of the 1920s. Deftly skewering the conventional wisdom of his time (and ours), Rogers said:
“There’s nothing easier than making money in the stock market. You just buy some stocks and wait for them to go up. And if they don’t go up, don’t buy them!”
But let’s not blame the estimable Ms. Kennedy for all this. You can hardly expect her to fix problems that have been generations in the making.
PERA released its 2009 annual report on June 30. The fund reported significant gains for the calendar year, after losing almost a third of its value during 2008. Although welcome, those gains won’t even begin to fix PERA’s basic structural problems.
Besides those optimistic ROI forecasts, PERA’s problems are straightforward:
Too much money flows out of PERA to too many beneficiaries who are living too long, and too little money flows in from too few contributors, and too much (although still not enough) flows in from strapped local government employers who rely upon strapped and angry local taxpayers to foot the bill.
Something has to give. Will payments to present beneficiaries be reduced, or will legislators and the PERA board continue to stick taxpayers with the bill? Or will everyone play “let’s pretend?”