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Alarm over PERA’s finances raises doubts about the future of pensions
The state’s public pension may be understating the scope of its financial problems by billions of dollars, an independent review has found, raising new concerns about the Colorado Public Employees’ Retirement Association and its precarious finances.
As a result, for the first time since a state pension reform in 2018, a legislative oversight panel is considering whether to recommend further reforms to the system, which administers retirement benefits for more than 700,000 current and former public sector employees.
The concerns stem from a steady stream of bad news this summer — an annual financial report in June showed that pension finances deteriorated last year It is an independent review released last week which concluded that PERA is at a much greater risk of becoming insolvent than its own financial advisers expect.
A draft of the independent review, provided earlier this month to the legislature’s Pension Review Subcommittee, found problems with a number of assumptions PERA uses to calculate its unfunded debt to retirees, saying the pension’s $27.5 billion funding shortfall could be as much as 10% larger than PERA believes.
The report, from PNYX Group, headquartered in Switzerlandrecommended that the state provide a $2 billion cash infusion to avoid what he said was a “material risk of reaching a point of no return” where it would not be able to make its payments to retirees.
Lawmakers, however, objected to the $2 billion price tag, calling it a policy failure.
“I don’t believe that’s going to happen,” said Sen. Chris Kolker, D-Centennial, who chairs the subcommittee.
PERA advisors on Friday rejected the conclusions of the reportsaying PNYX has not provided enough data to substantiate its claims. But PERA’s own analysis says there is up to a 30% chance of a financial setback in 2025, triggering another round of benefit cuts and contribution increases.
And things could look even worse this time next year. PERA is scheduled to update its demographic assumptions in early 2025, an exercise that occurs every four years and has triggered major financial course corrections. each of O last two times it occurred.
That prompted oversight panel members to ask what — if anything — the Legislature should do to prevent more automatic cuts from being implemented.
“We’re in a perilous situation right now,” said former Sen. Jack Tate, a Republican member of the panel who co-sponsored the 2018 pension reforms. “So I think some recommendations — no matter how poorly received by the legislature — for the financial security of the plan would be welcome.”
However, large-scale legislative changes remain unlikely, lawmakers said, barring a financial crisis too big to ignore.
The state faces tight finances of their own in the coming years, and the 2018 pension reforms were designed to keep the pension on track financially without political intervention. Of the four potential rounds of automatic benefit cuts and contribution increasesColorado has two remaining if the PERA board and state legislature do not intervene.
“I don’t see any glaring legislative changes, personally,” Kolker said. But, he added, the panel would draft a letter at its next meeting this week to send to the Pension Review Commission, which has the power to propose legislation.
The independent review cited two significant issues:
First, it argues that PERA is betting on unrealistic investment returns, resuming the discussion long-running debate in Colorado. PERA needs its portfolio to grow 7.25% annually to meet its funding goals, which is higher than the national median of 7% for other public pensions. PERA has vastly exceeded its investment goals in recent years, averaging 7.8% growth over the past decade and 8.3% over the past 30 years.
PERA is reviewing its investment portfolio this year, and some members of its board are pushing to invest more in riskier assets, such as private equity, in search of higher long-term returns.
The most pressing issue highlighted by the report is that PERA’s demographic assumptions have been consistently wrong since the pandemic, adding $2 billion to the unfunded pension debt. Public sector workers have received larger pay raises in recent years than PERA expected, which translates into larger pension payments when they retire.