PERA Admits Problem – Blames Legislature


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.