Another month, another report showing the country’s pension problem to be worse than we thought, Colorado’s pension problem to be among the nation’s worst. This time, it’s a report from the non-partisan State Budget Solutions, “Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers.”
In three significant measures, Colorado ranks in the bottom third of the nation’s public pensions: Its funded ratio is the 11th-lowest in the country, at 32.8%; the per capita unfunded liability is 15th-worst, at $16,158 per head; and as a percentage of the state’s GDP, Colorado is 16th-highest, at just over 31%. These dire rankings corroborate a recent Moody’s study that had Colorado’s unfunded pension liability in the bottom 10 as a percentage of state government revenues, another measure of the state’s ability to cover these debts.
They calculate the actual unfunded liability at just under $84 billion, nearly four times what PERA admits to, and $27 billion more than is estimated in an upcoming Independence Institute report. It should be noted, however, that the authors include five plans managed by the state’s Fire and Police Pension Association, much smaller plans which are not part of PERA.
The report takes issue with most public pensions’ investment return expectations, which usually vary between 7% and 9%, and the aggressive discounting oliabilities that most plans engage in. Instead of the optimistic – some would say wildly optimistic – return assumptions, the report’s authors use 3.225%, the 15-year Treasury rate. They also use that number to discount plans’ liabilities, arguing correctly that the discount rate should reflect a plan’s risk to its investors, not its returns on its investments. They argue that since these plans approach being risk-free investments, they should be discounted as such.
Personally, I think both the return assumption and the discount rate are too low. Even if 8% is unrealistic, and I’m not sure that it is, funds tend to have their money in diversified portfolios which will average returns higher than Treasuries. In addition, the plans are covered by state obligations, not federal ones. Investors have long recognized that state obligations carry more risk than do federal “risk-free” obligations, a fact reflected in the higher interest rates carried by state debt.
That said, the study makes two useful contributions to the debate. By making the return and discount assumptions it has, the report effectively sets an upper bound on the problem; surely no lower interest or discount rates could reasonably be chosen.
More concretely, by showing us to occupy the same neighborhood as such well-known pension basket cases as New Jersey and California, the report shows the foolishness of the approach of Amendment 66 – raising taxes, while appropriating all of the increased short-term revenue to ongoing operations.