PERA’s unfunded liability often comes into sharper after a year of low returns. \u00a0Its 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). \u00a0Its defenders argue that a single year’s returns are less important than the long-term (they are). \u00a0They then point to a time frame, say, the last 7 years, where PERA has averaged 9.7%.<\/p>\n

But it’s not just average returns that matter. \u00a0It’s cumulative returns, and there, even a couple of bad years can wreak havoc on a defined benefit plan.<\/p>\n

Let’s look at PERA’s returns since 1990:<\/p>\n

<\/p>\n

A\u00a0few really bad years to start off the century, and we all remember 2008. \u00a0But aside from that, mostly above expected, and a few years slightly below expected. \u00a0If you had invested $100 in PERA Mutual Fund in 1990 and let it sit for a quarter century, you’d be about where\u00a0you should be, based on each year’s expected rate of return. \u00a0Most years, you’re even ahead of the game, before the dot-com burst and the housing bubble burst bring you back to earth.<\/p>\n

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But of course, you don’t put $100 in in 1990 and let it sit. \u00a0You put $100 in every year. \u00a0Instead of looking at this from the perspective of each year going forward, let’s choose\u00a0the perspective of 2015 looking back at each year. \u00a0That is, for each year where you’ve invested $100, let’s see how you end up in 2015.<\/p>\n

<\/p>\n

For $100 invested in 1990, you’d expect to have about $800, and we already know that that’s what you’ve got. \u00a0For $100 invested in 2000, though, you’d expect that to be worth $355 today, but it’s only appreciated to $228. \u00a0That’s because in January 2000, you invested\u00a0before<\/em> the bad years of 2000-2002. \u00a0So money invested in\u00a0every year from 1995-2003 <\/em>is worth less now than PERA’s expected return would project. \u00a0In 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.<\/p>\n

Not surprisingly, this means that your PERA Mutual Fund is short of expectations in 2015, by just over 9%. \u00a0You’d expect to have just over $9000, but instead you’re just under $8200.<\/p>\n

Naturally, PERA’s actual situation is much more complex than this. \u00a0But 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. \u00a0 In order to keep the plan solvent, you need to do better than that.
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