One of my top priorities as Colorado Treasurer is to keep our Public Employee Retirement Association (PERA) safe for current and future retirees, while also protecting Colorado’s taxpayers.
Currently PERA maintains a $21 billion unfunded liability. An unfunded liability is money that is currently owed to beneficiaries but is not in the fund. Colorado must work to find realistic, pro-taxpayer solutions to close this $21 billion dollar gap. We must not rely on Colorado’s taxpayers to backfill these obligations.
Below are some frequently asked questions that will help debunk some of the controversy surrounding PERA. If you have any other question please email me at Treasurer.Stapleton@state.co.us
How did PERA generate a $21 billion unfunded liability?
PERA guarantees an 8 percent return per year on their investment portfolio. This means that the benefits PERA pays out to future and current retirees are calculated under the assumption that their portfolio will grow at 8 percent per year for the next 50 years. Therefore, for every year that their portfolio misses the 8 percent mark, the fund will owe money to beneficiaries that it does not have.
The 8 percent return expectation surpasses a guaranteed rate of return, around 3.5 – 4 percent that a portfolio can achieve investing in bonds. Consequently, PERA’s portfolio, and retirees’ money is exposed to the ups and downs of the stock market and, as we have seen in the recent decade, the stock market does not always grow.
What is the current makeup of PERA’s portfolio?
As of December 31, 2009:
Global Equity 58.9%
Fixed Income 22.4%
Alt Investments 9.6%
Real Estate 6.0%
Opportunity Fund 1.9%
Cash and Short Term 1.2%
As you can see with 22.4 percent of PERA’s portfolio invested in fixed income which will yield between 3-4 percent, other investments in the portfolio must return more than 10 percent per year on average for their portfolio to meet their goal.
Didn’t Senate Bill 1, which passed in the 2010 Legislative Session fix PERA’s unfunded liability?
Senate Bill 1 which passed in the 2010 legislative session made incremental steps in the right direction. It decreased the cost of living adjustment and slightly adjusted the retirement age. While these were necessary and worthwhile reforms, they did not “solve” our state's unfunded liability because they are all predicated on an 8 percent annual return on PERA’s investment portfolio.
This 8 percent annual return is what PERA expects to achieve in returns every year, however, every year that they do not make these returns their unfunded liability grows. It is like setting your family budget on a 10% annual raise but if your raise comes in at 6 percent, your family will have bills that it cannot pay.
Wilshire Associates, a nationally recognized accounting firm, studied 126 public pension systems and found that not one of them, including Colorado, will achieve an 8 percent annual return.
Who runs PERA?
As Colorado Treasurer, I am the only elected official that serves on PERA’s board. Additionally 12 of the 15 board members are PERA beneficiaries, meaning only three board members do not have a personal financial interest in the decisions made by the board.
The board makes decisions such as setting the annual rate of return and voting on whether or not PERA will support reform legislation. If the board votes to oppose legislative reform, then PERA, at the direction of the board, uses their almost $400,000 annual lobbying budget to ensure the legislation does not pass.
In the 2011 legislative session, I helped craft and testify on behalf of a bill that would help balance PERA’s board. HB-1248 would have given the Governor, Republican or Democrat, the authority to appoint three additional members to PERA’s board, resulting in an 8-7 split between PERA members and non-PERA members.
Currently, PERA’s board is not balanced, too many of its members are direct beneficiaries of PERA. It is difficult for board members to make objective decisions when these decisions directly affect their pocketbook.