Buoyed by stellar investment returns and the ongoing implementation of a legislative rescue package, Colorado’s state pension system in 2019 had one of its best years in decades.
But — pension officials acknowledged with Friday’s release of the system’s annual finance report — the topline numbers belie the depths of the challenges the Public Employees’ Retirement Association may soon face as the economic fallout of the global pandemic comes further into focus.
“It’s a weird time to have such good numbers, knowing that the other side of the equation is coming in 2020,” said Ron Baker, PERA’s executive director.
Nonetheless, 2019’s financial performance was a rare cause for celebration for the beleaguered pension system, which relies on a mix of investment returns and employee and taxpayer contributions to fund the benefits of more than 628,000 members. If nothing else, the banner year puts PERA on more stable footing as it braces for the financial difficulties ahead.
The pension’s investments grew by 20.3% in 2019, its second best market return in the past 20 years. PERA’s unfunded debt to retirees fell to $29.8 billion from $31 billion. The system ended the year with 61.9% of the money needed to pay current and future benefits; that was improved from 59.8% funded at the end of a disappointing 2018.
More importantly: each of PERA’s five major divisions ended the year on track to full funding with the 30-year window recommended by pension experts. That means that, unlike this time last year, PERA’s members won’t see another automatic contribution hike or benefit cut in 2021.
Still, changes could be on the horizon, as the effects of coronavirus ripple through public budgets and the broader economy in the years to come.
Here are three key issues that PERA officials and its board are watching moving forward:
1. The markets
The financial picture released at PERA’s board meeting on Friday doesn’t account for how coronavirus has roiled the global stock market.
Through March 2020, PERA officials said they had lost 11% on their investments, which would represent its worst investment year since the fund dropped 26% in 2008. Since then, markets have rebounded, making up much of their losses. But because PERA’s funding depends on 7.25% returns each year, the market rebound as it stands today wouldn’t be enough to prevent the pension’s finances from taking a hit. Avoiding a huge loss on the market is nice; PERA needs the market to grow to stay on financial track.
And there’s no guarantee the worst of the market’s troubles are over.
“We don’t know with certainty what’s going to happen next week, let alone in future years,” Brad Ramirez, an actuary with consulting firm Segal, warned the board on Friday.
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2. The Colorado legislature
PERA avoided some of the most drastic pension changes lawmakers had been considering when they balanced the state’s budget this month. Lawmakers cut a $225 million payment to the pension that was due July 1. That added an estimated $990 million to the pension’s long-term debt, due to the compounding time value of money.
But with more budget cuts expected next year, lawmakers may not be done with PERA. In May budget writers rejected five more options to reduce spending on the pension, which could have added another $2.5 billion to PERA’s unfunded debt. Other seemingly unrelated cost-saving moves, like furloughing or laying off workers, could also take a bite out of the pension’s finances, because PERA depends on payroll-based contributions to fund benefits.
Short-sighted decision making in the face of huge budget cuts doomed PERA’s previous pension rescue plan in the wake of the Great Recession, Senate Bill 1.
On Friday, Board Chairman Tim O’Brien praised lawmakers for heeding PERA’s message during its recent budget discussions: “You’re gonna pay me now or you’re going to pay me later. And it’s going to be more if you pay me later.”
3. PERA’s internal assumptions
Even before coronavirus hit, PERA was planning to conduct what’s known as an experience study this fall, a complicated analysis in which the pension reviews its assumptions about mortality rates, investment returns and payroll growth.
In short: this study helps dictate how much money PERA thinks it needs to pay off the benefits it owes.
The last major experience study and PERA’s subsequent funding policy changes are in part what led to the massive reform effort passed in 2018. And already, some board members are questioning whether PERA’s existing assumptions are sound.
During Friday’s meeting, board member Susan Murphy questioned PERA’s 7.25% assumed market returns, noting that over the last 20 years, the pension has averaged just 6.2% annually on its investments. The board also took note of another discrepancy: the public sector’s payroll has only increased 2.7% a year since 2010, while PERA assumes 3.5% growth.
In other words? While PERA’s numbers look good today, by the time lawmakers put together next year’s budget, “we may have a different story to tell,” said Baker, the executive director.