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PERA investments rebound in 2023, but Colorado pension plan finances falter
Colorado’s public employee pension system generated strong investment returns in 2023 – but its finances still deteriorated during the year. second time in five years as he struggles to recover from a miserable 2022.
The Colorado Public Employees’ Retirement Association’s investments grew 13.4% in 2023, according to its annual financial report released Friday. This corresponds to the 13.4% loss from the previous year.
But because the pension must return an average of 7.25% per year to meet its funding goals, the net result has been a setback for the chronically underfunded pension.
PERA’s unfunded debt to members grew by $1.2 billion to $27.5 billion, the report shows. Its funding ratio – the amount of money it has in the bank in relation to the benefits it owes to current and future retirees – fell slightly from 69.9% to 69.6%. According to state law, its goal is to be 100% funded by 2038.
However, at the five-year mark of the 2018 Colorado pension reform law, PERA’s financial position has improved dramatically from when Senate Bill 200 passed into law for the first time. At that time, PERA was only 60% financed, with an unfunded debt of 31 billion dollars.
These gains, however, occurred in an exorbitant cost to retirees, public employees and the agencies that employ them.
Mixed investment returns and pay rises combine to hurt pensions
PERA covers more than 220,000 current public employees statewide, most of whom work for the state or school districts. In total, PERA has more than 700,000 members, including 138,000 retirees and more than 300,000 others who have changed jobs but have not yet retired.
The financial decline in a good year in the stock market is partly due to the way PERA calculates its balance sheet. PERA smoothes its gains and losses over several years to avoid large swings in a single bad market year.
In 2022, this boosted pension finances despite a 13% loss, thanks to the lingering impact of huge investment gains in 2020 and 2021.
Last year, the opposite happened and 2022 losses offset investment gains by more than 400 million dollars.
Another problem for pensions: it was a difficult year for private equity and real estate, which represent around 19% of its investment portfolio. PERA profited 24% from its publicly traded shares, but its private equity holdings grew just 5%. Your real estate investments have lost 10% of their value.
Big pay raises for teachers and public servants coming out of the pandemic have had an even bigger impact on pensions, adding nearly $800 million to unfunded debt.
Here’s why: Retirement benefits and pension contributions are tied to how much an employee earns. Thus, in theory, the corresponding increase in contributions should generally cover the cost of salary increases. But when older workers closer to retirement get big raises, it can increase their benefits more than their contributions can make up for during the time they have left in the job market.
Benefits, contributions to remain stable
The financial report brought at least some positive news for PERA members.
Pension finances are doing well enough to avoid another round of automatic benefit cuts and contribution increases.
Since 2018, a safeguard built into the law has been activated twice, causing public servants and their employees to contribute more to the pension than the law initially required.
Annual cost of living increases for retirees fell to 1% under the provision during a period of high inflation, steadily eroding the value of their pensions.
For context, Social Security benefits increased 3.2% this year and 8.7% last year, and Colorado pension members are not eligible for the federal program during the years they work under PERA.
Meanwhile, public servants contribute more than ever. For most members, 11% of each paycheck goes toward the pension, while most PERA employers contribute another 21%.