Someone’s going to have to pay in the PERA scenario

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Let us consider the following press release from state Treasurer Cary Kennedy concerning the Public Employees Retirement Association, the state pension plan.

“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?”

One Response to Someone’s going to have to pay in the PERA scenario

  1. Hi John, I recognize you as an intelligent conservative who has followed PERA for some time. Here are a few responses to today’s comments on PERA.

    According to the sponsors of this year’s PERA reform bill 90 percent of the savings in the bill come from retirees, that is, from taking their future contracted benefits. These retirees are members of a defined benefit plan, not a VARIABLE benefit plan. The retirees paid their dues for decades and upheld their end of the contract, so you can see that it is not unreasonable for them to expect that the state meet its contractual obligations, hence the lawsuit that is proceeding. I submit that no person, no conservative or liberal, should countenance the breach of contracts. That is a slippery slope. The PERA reform bill represented a pact between unions and PERA and the Dems to push the burden of shoring up the pension onto retirees. Cary Kennedy also bought into this scheme, although prima facie illegal.

    There are legal reforms under consideration, and implementation in the states. I suggest pushing final three years spiking down to 5 percent wage growth per year, require the payment of the annual actuarial required contribution (not paid by the state for about a decade), reform the pension prospectively (legally), implement the system that is used by the federal government (ability to change the rate at which current employees earn pension benefits in the future), have the Legislature appoint an interim study committee to examine legal reform options, have the Legislature actually contract for a legal opinion addressing its reform options, as several states have done.

    I don’t agree with Cary on skipping bonuses for the PERA investment staff. I think we need to pay them bonuses if they beat their market benchmarks. Some years they do this even if the market is down. We need the best investment staff possible and therefore have to compensate at market rates.

    The Legislature (Owens administration) and the PERA Board enhanced benefits a decade ago. That was a mistake. Also, the Legislature has neglected the need to pay the actuariral required contribution, another error. However, these errors were not committed by PERA retirees. They kept their end of the bargain, and their contracts will be honored.

    Algernon Moncrief
    July 3, 2010 at 12:52 pm