Warnings ignored
WHY PERA IS BARRELING TOWARD ITS SECOND FUNDING CRISIS IN A DECADE
In a January 2010 letter, three members of the state pension fund’s board of directors sent a stark warning to state lawmakers: Any attempts to water down a proposed reform package could leave the retirement system that 1 in 10 Coloradans depend on as a replacement for Social Security in grave financial peril.
It was the first in a long line of warnings that went ignored.
A Denver Post review of thousands of pages of financial reports and hours of public meeting recordings found that state lawmakers and the pension board alike ignored numerous red flags after the landmark pension reform was passed in 2010, opting time and again for political expediency at the expense of the Public Employees’ Retirement Association’s long-term financial health.
Now, PERA is barreling toward its second watershed moment in a decade. PERA has only 58.1 percent of the money it owes in future retirement checks. Its funding gap has ballooned to $32.2 billion by one accounting measure — and $50.8 billion by another.
But unlike in 2010, when PERA’S looming insolvency was triggered in part by a global financial crisis, the latest fiscal crunch was arguably self-inflicted, brought on by wishful thinking and a consistent pattern of putting hard choices off to the future.
“Everyone has failed the citizens of Colorado on this — the legislature, the PERA board and (Colorado’s) governor.” Lynn Turner, a member of the PERA board of trustees
PERA today isn’t projected to run out of money, as it was in 2010. But its financial position has grown so precarious that another economic downturn could plunge the fund back into insolvency.
As a result, the state’s credit worthiness is now at risk. And eight years after public workers, retirees and taxpayers embarked on a “shared sacrifice” that was sold as a long-term solution, every Coloradan is now being asked to pay an even steeper price.
The simplest explanation of today’s need for reform is that the financial assumptions used to craft PERA’S 2010 rescue plan, Senate Bill 1 in the Colorado General Assembly, were wrong. Retirees are living and drawing benefits longer than projected at the time, and investments aren’t expected to grow as quickly. But the pension’s finances didn’t need to deteriorate to the point that they have.
“Everyone has failed the citizens of Colorado on this — the legislature, the PERA board and (Colorado’s) governors,” Lynn Turner, a member of the PERA board of trustees, told The Denver Post in an interview.
“There is plenty of ‘shared blame’ to go around, just as there will need to be ‘shared sacrifice.’ ”
A house of cards
Within a matter of months, there was already reason to believe the reforms were a house of cards.
At a November 2010 meeting, board members were offered two dramatically different forecasts of the U.S. economy.
The rosier view, from the board’s actuarial firm, Cavanaugh Macdonald, assumed that there would be 3.75 percent inflation, and used that prediction to affirm the 8 percent rate of annual projected growth used in the creation of Senate Bill 1.
That rate was critical to PERA meeting its financial goals — the more that PERA’S investments are expected to grow, the less that taxpayers and employees need to contribute to the fund to make it solvent. But the investment consultant, Hewitt Ennisknupp, predicted inflation would be significantly lower — about 2 percent a year.
Board members raised concerns that in hindsight have proved well-founded. Not only has the U.S. Consumer Price Index not averaged 3.75 percent inflation since 2010, there hasn’t even been a single year of 3.75 percent inflation dating to 1991.
If the board had averaged the two inflation assumptions together, it would have dropped the rate of return to 7.125 percent — a difference of billions of dollars in investment returns. A motion to reduce the rate to 7.5 percent was defeated 10-4 by board members.