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Politics and Government

Colorado’s PERA board may ditch its longtime financial adviser after $1.3 billion mistake

The error was spotted by an internal audit, triggering what the board president described as a “serious fire drill”

Dome of Colorado state Capitol building on July 21, 2018. (Jeremy Martinez, Special to The Colorado Sun)
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The Public Employees’ Retirement Association’s board of directors is considering jettisoning its longtime financial adviser after an accounting mistake caused the firm to underestimate the Colorado state pension’s liabilities by $1.3 billion.

The error was spotted by an internal audit, triggering what the board president described as a “serious fire drill” to rewrite the pension’s annual financial report before it was released to the public — and credit rating agencies — in June.

But while the mistake was caught and corrected before publication, some board members say they’ve run out of patience with their longtime actuary, Cavanaugh MacDonald, the Atlanta-based firm that has advised PERA since 2007.

In that time, the pension’s finances have plummeted from 75 percent funded to 61 percent. But more concerning for some board members, the mistake in this year’s financial statements was the third accounting error the firm has made in its tenure, and the second in the past two years.

“It’s a serious issue,” board president Tim O’Brien told The Colorado Sun. “… I couldn’t tell anybody that $1.3 billion isn’t a lot of money or a big mistake.”

The findings of auditor CliftonLarsonAllen were released to the Legislative Audit Committee in August. The report details a simple mistake — the firm plugged in the wrong number when calculating the retirement system’s unfunded debt, which now totals between $29 billion and $55 billion, depending on the accounting method used.

It was how the error occurred that raised eyebrows.

One of the numbers used to calculate PERA’s liabilities is a 20-year municipal bond rate, published monthly by The Bond Buyer. But rather than pulling that figure from The Bond Buyer, a 100-year-old subscription service that’s ubiquitous in the industry, multiple board members said Cavanaugh MacDonald found the number on an Oregon state website — and it was wrong.

“I think it was careless,” said O’Brien, who is also the Denver city auditor. And “at the board meeting, I didn’t feel like they were totally accepting responsibility for it.”

Cavanaugh MacDonald did not respond to messages from The Sun seeking comment. But this isn’t the first time the actuarial firm — which advises dozens of public pensions across the country — has come under scrutiny in Colorado.

For years after the housing crisis, Cavanaugh MacDonald consistently advocated for a more aggressive view of the stock market and inflation than some board members — and many private sector financial advisers — think is realistic. When those market returns didn’t materialize, PERA dug itself a deeper and deeper financial hole.

Several board members, including O’Brien, favor the more optimistic view of long-term market returns. But for a majority of the board, the latest accounting error appears to have been a bridge too far.

The latest error comes at a tenuous time for PERA, which is trying to show the public — and lawmakers — that its finances are on the right path. Lawmakers this spring approved sweeping pension reforms that seek to pay off the system’s debt within 30 years. PERA executive director Ron Baker said the accounting mistake only occurred in the initial development of the annual report and did not affect the reforms.

“The decision to put to bid our actuarial service firm was not easy but done in the best interests of the fund,” Baker said in a statement. “Certainly, the actuarial error that occurred as part of reporting the 2017 financial report was concerning to us and the PERA Board but the decision to put the contract up for bid was broader than a single incident.”

At a June board meeting, there was some debate about whether to disclose the mistake at all on the annual financial document, fearing it would raise unwarranted concern from S&P Global Ratings.

The rating giant had previously threatened to downgrade Colorado’s state credit because of the pension’s growing debt, but improved the state’s outlook following this year’s legislative changes.