Archive for category Colorado Politics
PERA’s unfunded liability often comes into sharper after a year of low returns. Its detractors point to last year’s 1.5% return, for instance, as evidence that PERA’s expected rate of return is too optimistic (it is). Its defenders argue that a single year’s returns are less important than the long-term (they are). They then point to a time frame, say, the last 7 years, where PERA has averaged 9.7%.
But it’s not just average returns that matter. It’s cumulative returns, and there, even a couple of bad years can wreak havoc on a defined benefit plan.
Let’s look at PERA’s returns since 1990:
A few really bad years to start off the century, and we all remember 2008. But aside from that, mostly above expected, and a few years slightly below expected. If you had invested $100 in PERA Mutual Fund in 1990 and let it sit for a quarter century, you’d be about where you should be, based on each year’s expected rate of return. Most years, you’re even ahead of the game, before the dot-com burst and the housing bubble burst bring you back to earth.
But of course, you don’t put $100 in in 1990 and let it sit. You put $100 in every year. Instead of looking at this from the perspective of each year going forward, let’s choose the perspective of 2015 looking back at each year. That is, for each year where you’ve invested $100, let’s see how you end up in 2015.
For $100 invested in 1990, you’d expect to have about $800, and we already know that that’s what you’ve got. For $100 invested in 2000, though, you’d expect that to be worth $355 today, but it’s only appreciated to $228. That’s because in January 2000, you invested before the bad years of 2000-2002. So money invested in every year from 1995-2003 is worth less now than PERA’s expected return would project. In fact, there are only a few years where the cumulative return through 2015 is better than expected, because 2000-2002 and 2008 wipe out all the gains beyond expectations.
Not surprisingly, this means that your PERA Mutual Fund is short of expectations in 2015, by just over 9%. You’d expect to have just over $9000, but instead you’re just under $8200.
Naturally, PERA’s actual situation is much more complex than this. But the point remains – it’s not enough to do as well as you’d expect over a long period of time, even in the absence of required annual payouts. In order to keep the plan solvent, you need to do better than that.
Could people be catching on to the shell game / ponzi scheme that is Colorado’s public pension system? If the Denver Post can start running critical articles, then anything’s possible.
Yesterday (“‘Alarm bells’ raised: PERA stability again under scrutiny“), the Post noted that even PERA is admitting that it’s going to take longer to reach fully-funded status than had been previously estimated.
Wow! Who could have predicted this? It’s a shame nobody’s been around to tell them this might happen.
PERA is paying particular attention to the Judicial Fund, which is projected never to crash and burn, but never to achieve fully-funded status. It’s like a pension version of Purgatorio. We’ve been here before with larger funds, and indeed, the Denver Public Schools Fund also has an infinite amortization period.
The Judicial Fund is tiny. The DPS fund isn’t huge itself. The state could easily just pay these pensions out of current cash.
The State and School Funds, however, are gigantic by comparison, and have the potential to crush state and school budgets. Their amortization periods are now around 45 years, and headed in the wrong direction. The amortization period varies wildly with relatively small shifts in return because we’re operating so close to the margin. It’s not the 10 year shift itself that’s worrisome, it’s the fact that we’re so close to infinity to begin with.
PERA with good amortization. A small difference in the funded level doesn’t change the date much. This is ok, as long as you don’t drift too far off center.
PERA with bad amortization. A small difference in returns sends you first to the brink, and then spinning off into space, helpless, never able to retire. You just don’t want to be operating in this region.
PERA, like most public pensions, relies on “time diversification,” or the idea that over the long term, average expected returns are the best guide to what will happen. But they’re not the best guide to what the risk is to the fund, the retirees, and the citizens of the state. The paradox is that even as average returns converge, where you end up at the end of 30 or 40 years spreads out.
It’s like the pension version of “gas expands to fill the available space.” Imagine if I brought a canister of chlorine gas into the room and took the top off of it. Sure, the center point would stay the same, but pretty quickly we’d be all DIA murals.
In the same way, the expected returns converge to the mean, but the number of things that can happen, the number of different balances you can end up with, grows, and therefore so does the risk of one of those balances being negative.
PERA itself has acknowledged this. Its own study in 2015 showed a better than 1-in-6 chance that the School and State Funds would crash and burn sometime in the next 30 years, based solely on variations in expected returns:
When PERA runs into trouble, it will likely be because of low investment returns. The state will then likely try to come to the taxpayers to bail it out. It may even be forced to do so by the courts.,
The problem is, the taxpayers have their retirement money in mostly the same places of PERA, and will have also been seeing low returns on their own retirement portfolios. Basically, the state will be demanding money from people who don’t have it, in order to honor promises they didn’t make.
As a taxpayer, I’m mad. But I’d also be mad if I were in the legislature. Here’s PERA Executive Director Greg Smith:
“You all put together a 30-year plan to recover from that,” Smith told lawmakers. “We’re six years in, and we’re behind. And we’re going to go and talk about how can we get back on track for what that plan was.”
“You all?” Yes, that’s true. The Legislature had to vote on the plan. But it was informed by PERA’s Board, who not only backed SB1, but also had a huge part in drafting it and commenting on its provisions. Every year, every time the question has come up, PERA’s Smith has said that things were just fine. Every time anyone proposed changes to make it more robust – better reporting, small tinkering at the edges, larger more substantive improvements – PERA’s Smith has been there with his merry band of union and retiree groups arguing against them.
This is Exhibit A of why we need to move to a defined contribution plan and take these decisions out of the hands of elected officials. Legislators aren’t (all) dumb, but they’re not specialists, and they rely on experts like Smith to inform them about what needs to be done. But Smith and PERA as a whole have a vested interest in telling them that everything is fine, or that more money from taxpayers will fix the problem.
Moving to a 401(k)-style plan, or even a cash balance plan, would help insulate everyone from the politics here.
This year, one of the more controversial ballot measures is a proposed State Constitutional amendment to limit State Constitutional Amendments. It has some superficial appeal: In some years past, a fair number of amendments have passed, and the State Constitution is supposed to be a foundational document, not just a compilation of what some people in a given year think are cool ideas. This year, a number of out-of-state environmental groups tried and failed to get anti-energy initiatives on the ballot, and Amendment 71 is in large part a response by the energy industry to that effort.
The measure has three main parts:
- New amendments would require 55% to pass
- Petitioners would need 2% of the registered voters in each State Senate district
- Old amendments would still only require 50% for repeal
While US State Constitutions have never been held in the same reverence as the US Constitution, I’m open to the idea that it’s too easy to get bad ideas on the ballot, and that in a given bad year, some of those ideas will end up being enshrined there. Certainly an ongoing government-by-plebiscite is a dangerous way to govern.
But Amendment 71 is a bad idea whose time has not yet come.
Political power is a zero-sum game. In theory, the citizens of Colorado have a number of options for checking the power of the state government. They have the right to overturn laws at the ballot box. They have the right to put new laws onto the ballot. And they have the right to put Constitutional amendments on the ballot.
As will be the case, the state legislature has systematically moved to negate those checks. Citizens may overturn only those laws that are not deemed to be for the public peace, health, and safety. As a result, the legislature routinely adds the so-called “Safety Clause” to even mundane measures, in order to protect them.
Colorado also has no hold-harmless period for citizen-initiated statutory changes. In effect, the state legislature can immediately overturn any statutory change with a simple majority vote. Constitutional amendments, on the other hand, require a 2/3 vote in each house to be placed on the ballot for repeal. This may explain why the Constitutional route is so popular.
But by considering this (potential) problem in isolation, the proponents are demonstrating political tunnel vision.
Amendment 71 would make it harder to rein in the state legislature, while doing nothing to prevent the legislature from imposing its will on the people. It does nothing to limit the abuse of the Safety Clause, and it does nothing to create a hold-harmless period for citizen-initiated statutory changes. It represents a staggering net shift in power towards those interests who have existing money and organizational ability to get measures on the ballot, and away from the citizenry’s ability to limit legislative power.
I know some of the people involved on the pro-71 side, and I don’t question their sincerity, only their judgment. In 2008, when I was running for State House of Representatives, then-State Senator Greg Brophy and I met up at an issues forum sponsored by Hadassah. On the ballot was Referendum O, a measure to tighten up the process for amending the State Constitution. Greg was in favor then, and I opposed it, so while he’s a paid spokesman for the A71 group now, he comes by his support honestly, and is hardly “bought” as some have suggested.
But Greg, of all people, should know from his own experience how flawed his arguments are. The State Constitution is no guarantor of our rights at all when the State or US Supreme Court willingly interprets it to benefit a political agenda.
Consider the 2013 gun law recalls. Two Democrats – from what were drawn as safe Democratic seats – were recalled over the 2013 bills and replaced by Republicans. A third from a competitive seat was at risk until she resigned to make sure that a Democrat could succeed her.
And yet. After that, after the Democrats won back those seats and still lost control of the State Senate, after they nearly lost control of the State House, the laws remain on the books, and have survived court challenges. The Democrats are bound and determined to ignore clear signals from the electorate that they’re on the wrong side of this issue, and have simply no real incentive not to pursue further changes as their electoral majorities allow.
Brophy himself declared from the well of the Senate, “I will not obey this law!” That alone showed that he understood that the guarantor of our rights is not the Constitution or the courts but ourselves.
Much of the appeal on behalf of Amendment 71 has come to rural Republican voters, who rightly feel targeted by a number of bad Constitutional initiatives put on the ballot by Boulder and Denver liberals. The argument is that, with the State Senate signature distribution requirement, they’ll be able to block bad ideas at the signature-gathering stage. But when A71 proponents failed to meet their own standard, they didn’t fall short in the rural districts. It was in some of the liberal college districts in Ft. Collins and Boulder, who have more registered voters and thus a higher signature threshold. In all likelihood, A71 would do more to let those districts block ideas desired by the rest of the state than to keep them from imposing their bad ideas on us.
In a year when the Democrats have an excellent shot at taking back the State Senate, giving them control of the whole legislature and the governorship, it’s a terrible idea to limit the citizens’ potential checks on that government.
Maybe they are.
Watching the Rangers-Blue Jays game the other night, I saw a commercial against Colorado’s Amendment 72, an initiative to amend the state Constitution to raise the tobacco tax from 84 cents a pack to $2.59 a pack.
The main stated argument in favor is that such a high tax will reduce underage smoking, and the money is supposed to go to programs to do that, along with a wish-list of other tangentially-related health expenditures, such as money for hospitals and student loan relief for rural doctors.
What was striking was that the language was almost identical to a radio ad I had heard earlier in the week opposing California’s Proposition 56, which would raise its cigarette tax from $0.87 to $2.87. The tax-raisers in California are evidently using the same arguments as the ones here in Colorado.
It may be that the Right is finally figuring out that it needs a national effort to combat state-level bad ideas. Since the language used in the anti-referendum ads was so similar, I can only assume that they were a coordinated response. Given the electoral environment in both Colorado and California, I’m not optimistic about defeating these taxes in either states, but I hope that they don’t take the wrong lessons from it and give up.
Coordination is nothing new for nationwide liberal interest groups. They routinely find promising states to run similar legislation or ballot initiatives in, coordinating their efforts nationally, and running similar ad campaigns. (For instance, former New York Mayor Michael Bloomberg is running spots in favor of a 1-cent soda taxes in both San Francisco and Oakland this year.) Then, having established bona fides, they move onto other states. California and Colorado are both targeted for tobacco tax increases because they’ve “fallen behind” other states in how much they let their non-smokers translate their feelings of moral superiority over smokers into action.
Historically, they’ve relied on conservative state-level think tanks and political groups not to realize that any given initiative or legislation wasn’t unique to their state.
In recent years, the right has gotten wise to this strategy, although it’s been somewhat ineffective in countering it. As out-of-state funding is almost always unpopular, the Left has countered efforts to highlight that by filtering contributions through its networks of state and local PACs and issue committees. When I worked at Watchdogwire.com, one of the mantras among the state editors was, “If it’s happening in your state, it’s happening in other states.” This helped give us the incentive to write certain stories, but getting people to read them and connect them to what was not yet going on locally was another matter.
In addition, when more conservative-minded groups such as ALEC or the State Policy Network of state-level policy groups have tried the same thing, they’ve been attacked as conspiracies by the left, and their sponsors and donors have been the targets of hate campaigns.
I found the arguments opposed to the tax compelling. Both Colorado and California have already diverted alleged anti-tobacco money to other purposes, and in any event, after the first year, you never really know how much money is “supposed” to go to these programs, anyway, so any tax increase really becomes an excuse for the state spend on whatever it likes (and more importantly to the politicians, whomever it likes). This was the logic that helped defeat a large general income tax increase back in 2013, although cigarette smokers are always an attractive target for tax increases.
Although I don’t smoke, don’t use tobacco, and despite being from Virginia, never have, I think I’ll vote against giving the government more money to spend.
Marjorie Haun has been doing yeoman work following the story of the BLM land closures. In this podcast, I talk to some of the players – a business-owner whose customers will find themselves with less road to ride; an activist who’s working the legal side; and a member of the Mesa County Board of Commissioners who filed a protest.
In the story, we reference the BLM’s Resource Management Plan. You can find the map of it here.
And a copy of the form letter protest denial can be found here.
One of my fondest desires has been to produce a This American Life or RadioLab, only for free-market and conservative ideas. Thanks to Stacy Petty, I’ve actually been given a chance to do this.
In one of his own podcast interviews, Dan Carlin of Hardcore History fame says that his goal has been to produce, for radio, a long-form edition of what a newspaper column would look like. That’s kind of what I’m aiming for here, as well. Edited, polished, but also using the illustrative and mood-setting background sound that radio give you, but newspapers don’t.
It’s unclear exactly what the format will be going forward, but here’s the first attempt, discussing PERA, the forthcoming State Auditor’s report on an early warning system, and small planes. It runs 10:30, but I’m hoping to bring future editions in at exactly 10:00.
“If you want to send a message, call Western Union.” – Samuel Goldwyn
Much if not all of the Trump boomlet is fueled by a frustration with and distrust of a party establishment that seems not only cozy with progressives, but comfortable with progressivism. Articles by both Reihan Salam and Glenn Reynolds have made this point, and it’s one that Mark Steyn has talked about. Americans are happy to play politics between the 40-yard-lines. Given a perpetual choice between 49-yard-lines, though, they rebel.
The problem is that this rebellion isn’t necessarily coherent, and is usually destructive. In 1968, Democrats sent a message to Lyndon Johnson, and got Richard Nixon elected. In 1992, Republicans sent a message to George H.W. Bush in the form of Pat Buchanan, and got Bill Clinton elected.
A close analogy is here in Colorado in the 2010 governor’s race. Unpopular incumbent Democrat Bill Ritter decided not to run for re-election amid rumors of personal scandal. The Republicans, with festering dissatisfaction at the “establishment” after losing marquee statewide races in 2004, 2006, and 2008, had a choice between stalwart conservative, but presumed establishment favorite, Rep. Scott McInnis of Glenwood Springs, and unknown, blank-slate, self-professed Tea Party businessman Dan Maes. When fellow Republicans satisfied a personal vendetta by leaking allegations of plagiarism just before the primary election, many Republicans registered their complaints by either not voting for McInnis or voting for Maes, who squeaked by with a major upset win.
The other factor was a widespread, small-l libertarian-fueled distrust and honestly hatred of the party officials and party officialdom. I was at Denver party breakfasts in 2008 when Dick Wadhams was raked over the coals by the Ron Paul people, and that resentfulness has percolated (and been stoked by the large-l Libertarians) ever since. It certainly was around in 2010.
Maes, frankly, had no business being the nominee, and no business being a statewide candidate. He had no idea what he was doing, no interest, apparently, in the nuts and bolts of an active campaign, no willingness to spend endless hours on the phone raising money. And the Republican party blew as good an opportunity as we ever had in the Tea Party year of 2010 to reassert control over state government.
The current national dynamics eerily and scarily resemble those of 2010 here in Colorado. Candidates actually capable of uniting the various factions of the party, or bringing a unique and valuable message, are getting shut out of the process because it’s All Trump All The Time.
While I remain convinced that there’s no way on God’s green earth the party will actually nominate Donald Trump as its presidential candidate, he’s sucking oxygen from as deep and talented a field as I’ve seen in my lifetime at the national level.
That depth, by the way, is also in large part the result of a 20-year effort to grow the party at the state legislative level. It’s meant letting each state party find its way and find horses for courses, as the saying goes. That’s resulted in Republican government in states as diverse as Michigan and Alabama, but it’s also meant that those state parties differ much more from each other than they might once have. The only person capable of uniting a national party is a presidential candidate, and the nominating process is a means of having the debate to decide where we want to go nationally.
A political party is a coalition of diverse interests, but there are elements outside the party who can’t stand that fact, and would be perfectly delighted to see the national party dissolve into factional bickering and resentfulness. There’s absolutely no good reason to let that happen, or to nominate less than our best this year.
In what has to be one of the worst misappropriations of public funds since that study about why lesbians are fat, Colorado is going to sponsor “affordable housing” (sic) for artists in rural communities:
Gov. John Hickenlooper announced the plan Monday at an artists’ community in Loveland. The governor says that the state will help sponsor a $50 million plan to create artist housing in nine rural communities, starting with Trinidad.
Why should Denver have all the bad public art?
The housing will have income caps. Artists who qualify for housing can’t make more than 60 percent of their area’s median income.
Well, at least we have some standards.
Private foundations are joining the effort. A state spokeswoman says it’s not clear how much of the $50 million will be paid by the government.
How about $0? Does $0 work for you?
The program will have a generous definition of “artist.” The program will accept architects, filmmakers – even beer and liquor makers.
Gotta get those creative juices flowing somehow.
The argument we hear from the Democrats all the time is, “We need to have a conversation about what we want the government to do, and then fund it appropriately.” This is the sort of nonsense you get when you start from that end of the deal. Of course when you start by asking, “What is it you want?” you end up with a wish list like me in a book store. The phrasing completely hides the fact that you’re actually making choices – either about what the government will do with its limited resources, or with what you can do with your own.
Try phrasing it differently: “We need to decide how much we really want to pay for government, and then use that money appropriately.” Aha, now it’s clear that there’s only so much money to go around, and if you want to spend your own money on this sort of thing, you’ll be paying for it before you fund your food, your mortgage, your kids’ education, and your retirement.
Naturally, the Democrats hate that part of the conversation, so much so that they try, every step of the way, not to let you have it. They want to have the “What do you want us to do for you?” part of the discussion, and then, once you’ve committed to buying Pierre the Failed Art Student his rent and bitters, tell you how much it costs. And when you decide maybe your dental bill is more important, they want to insist that, no, we’ve already decided that IPAs for Pierre are in the budget, and it’s no fair going back on that and changing the deal on poor Pierre, once he’s pulled up stakes and moved to Ouray.
It’s the main reason they hate TABOR so much. Unless it’s a really good budget year, and the government just happens to have money sitting around burning a hole in its pocket, TABOR makes them actually ask you whether or not you want to pay for Pierre’s studio loft.
The next time someone comes up with a harebrained idea like this, the first question should be: “Instead of what?”
Even as Colorado’s state public pensions seek to add risk to their portfolio, California CalPERS is seeking to reduce risk and volatility in its own plan. In doing so, it sends up a flare for other pension plans. It also confirms one of the key assertions of defined benefit plan critics: the aggressive return assumptions, combined with permissive discount rate assertions, in US public pension plans incentivize those plans to chase those returns, and add risk in doing so.
In a piece I wrote back in March for Watchdog Arena, I noted that Colorado PERA’s Board of Trustees had voted to shift several percentage points of investment from stocks and bonds into riskier alternative assets and real estate. This portfolio isn’t necessarily out of line with the majority of US public pension asset allocations, but it does represent adding risk – and therefore volatility – in an attempt to increase returns.
Yesterday, Pensions and Investments reported that CalPERS is looking at reducing its expected 7.5% rate of return to as low as 6.5%. Doing so, the plan says, would allow it to shift its investments out of stocks and alternative assets into more predictable, less volatile bonds.
“It is essential that we do this,” said California Controller Betty T. Yee in an interview with P&I. Ms. Yee added that if CalPERS does not reduce volatility, it could jeopardize its ability to pay retirees in the future….
Ms. Eason said lowering the rate of return would also enable officials to build a portfolio less vulnerable to market swings. The current 7.5% rate of return has a 12% volatility rate. Reducing the rate to 7%, as one scenario does, would translate to a 10% volatility rate. A 6.5% rate of return would equate to a volatility level of 8.5%, she said.
In doing so, CalPERS doesn’t implicitly accept the critics’ assertions – it explicitly accepts them. They would lower the expected rate of return specifically so they could “safely” move assets into less risky (albeit less remunerative) investments. Public pension officials in the US have long denied a linkage between the two, so it will be interesting to see how they react to this admission.
By most measures, CalPERS is better funded that Colorado PERA, although not particularly well-funded. It admits to a funding level of 77%, compared to PERA’s claimed funding level of 62%. These claims both discount the pension liabilities at 7.5%, the assumed rate of return. Lowering CalPERS’s expected rate of return to 6.5% would, correspondingly, lower its funded level by lowering its discount rate. A study by State Budget Solutions, however, using the states’ cost of borrowing as the discount rate, placed the funding levels at 39% and 32%, respectively.
Colorado PERA released its 2014 Comprehensive Annual Financial Report on Tuesday, and there were no real surprises, which isn’t to say it was particularly good news for the state’s retirees, government employees, or taxpayers. For the most part, it showed more of what we already knew: a system in trouble, and unlikely to earn its way out of that trouble any time soon, if ever.
The rate of return on investment was 5.7%, which is 1.8% short of the expected rate of return of 7.5%. PERA will no doubt point to the fact that it met the benchmark return, but all that means is that the funds weren’t grossly mismanaged. The net result is that the unfunded liability, as acknowledged by PERA, climbed from $23.3 billion to $24.6 billion.
In reality, the future liability should be discounted not at the expected rate of return – an accounting gimmick that is only available to US public pensions – but by the borrowing cost of the governments involved. In this case, that would mean a discount rate of about 4.5%. Running that out 15 years, we end up with an eye-popping unfunded liability of $60 billion. A 30-year window raises it to an almost unimaginable $116 billion. That’s the unfunded liability – the promises made for which we have no money.
Overall, the funding levels fell to 64.2% from 65.2%, but the two biggest funds are much worse off than that. The State Fund’s funding level slipped to 59.8%, the School Fund to 62.8%. These calculations are done using the market value of the assets, rather than the smoothed actuarial value, as they have in the past. That actually makes the funding levels look better, as the investments age out the miserable 2011 investment year, but it gets the direction right, and funds can only spend and invest actual dollars, not smoothed ones.
The amortization periods – how long it would take to get to full funding – also ballooned to 45 years for the State Fund, and 48 years for the School fund, after accounting for the future increases in the AED and SAED supplemental payments. PERA rightly points out that these numbers don’t account for the decrease in benefits for future hires, which probably shorten the amortization periods by a few years.
I’ll have a lot more to say about this, but the short version is that there’s nothing to be cheerful about here. PERA will claim that everything is still on track to be fully-funded decades hence, but then, PERA always thinks nothing’s wrong right up until the point that they come to the legislature for more money.
Photo Credit: Todd Shepherd & Complete Colorado