Could people be catching on to the shell game \/ ponzi scheme that is Colorado’s public pension system? \u00a0If the\u00a0Denver Post<\/em> can start running critical articles, then anything’s possible.<\/p>\n

Yesterday (“‘Alarm bells’ raised: PERA stability again under scrutiny<\/a>“), the\u00a0Post<\/em> noted that even PERA is admitting that it’s going to take longer to reach fully-funded status than had been previously estimated.<\/p>\n

Wow! \u00a0Who could have predicted this? \u00a0It’s a shame nobody’s been around to tell them this might happen.<\/p>\n

PERA is paying particular attention to the Judicial Fund, which is projected never to crash and burn, but never to achieve fully-funded status. \u00a0It’s like a pension version of\u00a0Purgatorio<\/em>. \u00a0We’ve been here before with larger funds, and indeed, the Denver Public Schools Fund\u00a0also\u00a0<\/em>has an infinite amortization period.<\/p>\n

The Judicial Fund is tiny. The DPS fund isn’t huge itself. \u00a0The state could easily just pay these pensions out of current cash.<\/p>\n

The State and School Funds, however, are gigantic by comparison, and have the potential to crush state and school budgets. \u00a0Their amortization periods are now around 45 years, and headed in the wrong direction. \u00a0The 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.<\/p>\n

PERA with good amortization. A small difference in the funded level doesn’t change the date much. \u00a0This is ok, as long as you don’t drift too far off center.<\/em><\/p>\n

<\/p>\n

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. \u00a0You just don’t want to be operating in this region.<\/em><\/p>\n

<\/p>\n

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. \u00a0But they’re not the best guide to what the risk is to the fund, the retirees, and the citizens of the state. \u00a0The paradox is that even as average returns converge, where you end up at the end of 30 or 40 years spreads out.<\/p>\n

It’s like the pension version of “gas expands to fill the available space.” \u00a0Imagine if I brought a canister of chlorine gas into the room and took the top off of it. \u00a0Sure, the center point would stay the same, but pretty quickly we’d be all DIA murals<\/a>.<\/p>\n

In the same way, the expected returns converge to the mean, but the number of things that\u00a0can happen<\/em>, the number of different balances you can end up with, grows, and therefore so does the risk of one of those balances being negative.<\/p>\n

PERA itself has acknowledged this. \u00a0Its\u00a0own 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:<\/p>\n

<\/p>\n

When\u00a0PERA runs into trouble, it will likely be because of low investment returns. \u00a0The state will then likely try to come to the taxpayers to bail it out. \u00a0It may even be forced to do so by the courts.,<\/p>\n

The problem is, the taxpayers have their retirement money in mostly the same places of PERA, and\u00a0will have also<\/em> been seeing low returns on their own retirement portfolios. \u00a0Basically, the state will be demanding money from people who don’t have it, in order to honor promises they didn’t make.<\/p>\n

As a taxpayer, I’m mad. \u00a0But I’d also be mad if I were in the legislature. \u00a0Here’s PERA Executive Director Greg Smith:<\/p>\n

\u201cYou all put together a 30-year plan to recover from that,\u201d Smith told lawmakers. \u201cWe\u2019re six years in, and we\u2019re behind. And we\u2019re going to go and talk about how can we get back on track for what that plan was.\u201d<\/p><\/blockquote>\n

“You all?” \u00a0Yes, that’s true. \u00a0The Legislature had to vote on the plan. \u00a0But 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. \u00a0Every year, every time the question has come up, PERA’s Smith has said that things were just fine. \u00a0Every 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.<\/p>\n

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. \u00a0Legislators 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. \u00a0But 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.<\/p>\n

Moving to a 401(k)-style plan, or even a cash balance plan, would help insulate\u00a0everyone<\/em> from the politics here.
\n