Friday, the PERA Board decided to make two significant changes to their actuarial assumptions<\/a>. \u00a0First, they lowered their expected return on their portfolio from 8% to a more realistic 7.5%. \u00a0Second, they lowered their inflation expectation from 3.5% to 2.8%.<\/p>\n

This is being advertised as a more realistic set of assumptions, in effect, an admission against interest that outside players such as Treasurer Walker Stapleton have been agitating for for some time. \u00a0The lower rate of return will, according to the\u00a0Denver Post<\/em> report, raise the unfunded liability from $23 billion to $29 billion.<\/p>\n

It’s true that the 7,5% rate is more conservative than 8%, and closer to the average rate of return being assumed by most public pension funds around the country. \u00a0On that basis, the change is to be welcomed. \u00a0But for a long time, I’ve felt that the rate of return was very much out of line.<\/p>\n

In fact, the lower rate of return should have no effect on the unfunded liability. \u00a0The only reason that the unfunded liability will grow is that PERA will use the lower rate of return as the new discount rate. \u00a0Of course, as we’ve discussed before, the discount rate should be independent of the rate of return; it should be the state’s long-term cost of borrowing, or even the risk-free rate of return, the 30-year US Treasury rate.<\/p>\n

In addition, many of the benefits of the lower rate of return are more than offset by the lower inflation rate. \u00a0Before, the real rate of return was 8 – 3.5, or 4.5%; now it’s 7.5 – 2.8, or 4.7%. \u00a0PERA is decreasing the increase in future liabilities here, by lowering the expected future increase in salaries. \u00a0This means that the net effect of both changes is to\u00a0increase<\/em> the real rate of return.<\/p>\n

Unfortunately, we won’t know exactly how this plays out until PERA releases its next CAFR – next July, 8 months from now.
\n