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June 25, 2013 10:15 PM UTC

Colorado PERA Investment Staff Misses 2012 Performance Benchmarks Costing Taxpayers and PERA Members $175 Million; 2012 PERA CAFR Released.

  • 3 Comments
  • by: PolDancer

COLORADO GENERAL ASSEMBLY CONTINUES HISTORICAL UNDERFUNDING OF THE PERA PENSION (IN SPITE OF THE 2010, SB10-001, PERA CONTRACT BREACH);

PERA ACTUARY, PROVISIONS OF SB10-001 WERE STRONGER THAN NECESSARY TO MEET FEDERAL REGULATORY REQUIREMENTS;

PERA'S LONG-TERM INFLATION ASSUMPTION LOWERED TO 3.5 PERCENT, MATCHING THE CONTRACTED PERA COLA TAKEN BY THE COLORADO GENERAL ASSEMBLY.

Colorado PERA released its 2012 PERA CAFR (financial report) today.  Here are a few upbeat excerpts from Colorado PERA's announcement of the CAFR on the PERA website:

"Colorado PERA 2012 Investment Returns Exceed 12 Percent."

"Strong Investment Returns During 2012 Add $4.6 Billion to PERA Trusts."

"Colorado PERA investment returns for 2012 were 12.9 percent, according to the Comprehensive Annual Financial Report released by the PERA Board of Trustees today."

https://www.copera.org/pera/about/latestnews.htm#cafr

As expected, surging equity markets provided an excellent return for the Colorado PERA trust funds in 2012; but what's the "rest of the story"?

The 2012 Colorado PERA CAFR continues the documentation of the Colorado General Assembly's failure to pay its PERA pension bills.  The 2012 PERA CAFR documents the failure of Colorado PERA's investment professionals to meet investment performance benchmarks.  This failure cost the PERA trust funds approximately $175 million last year (by my estimation.)  It's easy to ignore PERA's investment underperformance while the PERA trust funds are earning double-digit returns; but we should remember that such PERA investment underperformance has been a contributor to the Colorado General Assembly's rationale for breaking Colorado PERA pension contracts.  Since the Colorado General Assembly has abdicated its policy-making authority regarding the PERA public pension system to PERA lobbyists, members of the Colorado Legislature (Finance Committees) pay scant attention to PERA's investment performance.  This is odd, since taxpayers will pick up any underperformance.

The 2012 PERA CAFR repeats the observation of Colorado PERA's actuary Cavanaugh MacDonald (made in earlier CAFRs) that the 100 percent funding ratio goal incorporated into the Colorado PERA statutory public pension contract by SB10-001 was much stronger than is necessary to meet federal regulatory (GASB) standards.  (Recall that Colorado PERA's Executive Director Greg Smith has written that changes to public pension plans must be the minimum changes necessary to solve the economic problems of the pension plan in order to pass constitutional muster.  This absurd 100 percent funding requirement placed in the PERA statutory contract by SB10-001 is clearly "not the minimum change necessary.")

Finally, the 2012 PERA CAFR reveals that the reduction of Colorado PERA's long-term portfolio return assumption from 8.5 percent to 8 percent by the Colorado PERA Board of Trustees continues to suppress the actuarial funded ratio of the PERA trust funds.  (I have no position on the PERA Board's portfolio return assumption, other than the fact that a policy decision by the PERA Board should not be used as a rationale for the breach of Colorado PERA pension contracts.  The accumulated PERA pension debt is unaffected by PERA Board policy or market conditions.)

Excerpts from the 2012 PERA CAFR, "Letter of Transmittal":

"On December 31, 2012, PERA's funded ratio was 61.9 percent with an unfunded liability of $24.2 billion based on the actuarial value of assets and an investment return and discount rate assumption of 8.0 percent."

From the 2012 PERA CAFR, page 125: "Colorado PERA pension divisions have a funded ratio of 63% based on the Actuarial Value of Assets and 64% based on the Market Value of Assets."

(My comment: The PERA portfolio is now about $40 billion.  PERA's actuarial funding ratio was 68.9 percent at the time of the contract breach in 2010.

February 14, 2011

Subcommittee on Courts, Commercial and Administrative Law, Committee on Judiciary

House of Representatives, Testimony of Keith Brainard, Research Director, National Association of State Retirement Administrators

“Only 30-40 years ago, most public plans were financed primarily on a pay-as-you-go basis.”

“Even after the most recent and unprecedented financial downturn, most state and local government pension trusts have plenty of assets to continue to pay promised benefits for years, and values already have rebounded sharply since the market low.”

A 2006 Federal Reserve paper, by Ronald A Wirtz, notes that public pension funded ratios in the 50 to 60 percent range were typical in the 1970s:

“From a long-term perspective, however, one can't really pin too much of the pension problem on the recent stock market pullback—in fact, it's [the stock market in recent decades] been a savior for most pensions.  Rewind 50 years, and almost all pension assets were invested in U.S. bonds and other fixed-income sorts of securities.  Though comparatively safe in terms of protecting assets, such a portfolio could not generate the returns necessary for pension funds to keep up with the benefits promised by generous government employers.  During the 1970s, funding ratios generally hovered between 50 and 60 percent.”

Silver and Gold Record, October 26, 2006:

“One attendee asked if there was any similar controversy in the 1970s, when PERA's unfunded liability went as low as 54.7 percent.  Williams said former Gov. Richard Lamm, who co-chaired the PERA commission, made that same observation last year when he recalled that there was no outcry when he was governor and the unfunded liability was below its current level.  Williams compared the unfunded liability to having a mortgage, and asked how many people have enough money on hand at any one time to pay off all or even half of their mortgages.”

https://www.cu.edu/sg/messages/5245.html

2012 PERA CAFR CONTINUES DOCUMENTATION OF THE GENERAL ASSEMBLY'S HISTORICAL UNDERFUNDING OF THE PERA PENSION SYSTEM.

The 2012 PERA CAFR, page 34, includes a chart illustrating the failure of the Colorado General Assembly to set PERA contribution rates at a level sufficient to meet PERA's "annual required contributions" (ARC).  The chart identifies Colorado PERA pension underfunding from 2008 to 2012, although the pension underfunding has been uninterrupted since 2001, [also occurring in the 1990s.]

Page 93 of the 2012 PERA CAFR identifies the historical underfunding of the Colorado PERA pension (failure of the General Assembly to pay the full ARC) by PERA division.

As we have seen, the failure of the Colorado General Assembly to pay its public pension bills has also been documented by the Center for Retirement Research at Boston College.  Note that while the Colorado General Assembly has failed to pay its contractual PERA public pension bills, it has simultaneously paid off $700 million in Colorado local government legacy pension debt (Old Hire Fire and Police Pensions) that ARE NOT the contractual obligation of the State of Colorado.  Having failed to pay its PERA pension bills, and directed state funds to pensions that ARE NOT the contractual obligation of the State of Colorado, the General Assembly now seeks to break PERA contracts.

At the 2013 Colorado legislative session, the Colorado General assembly made a final installment of $142 million to pay off Colorado local government Old Hire Fire and Police legacy pension obligations that ARE NOT the contractual obligation of the State of Colorado, while (according to the 2012 PERA CAFR) again underfunding its Colorado PERA contractual public pension obligations.

2012 PERA CAFR, page 35 – "ARC Deficiency."

"In 2012, the actual (PERA) contributions, as set in statute, were $143.4 million less than the ARC as calculated by the actuaries."

"During the past 10 years, this shortfall in funding . . . has been $3.4 billion."

https://www.copera.org/pdf/5/5-20-12.pdf

Colorado PERA Executive Director Meredith Williams' comments on February 23, 2012 to the House Finance Committee relating to the Legislature's historical underfunding of its PERA pension obligations:

"We've had a significant problem over the years, in that . . . contributions, payments by (PERA) employers into PERA have been kind of the last thing in the budget building process, and we have not made the required payments. Unfortunately, in our line of work, where we're involved in compounding shortfalls grow, particularly when the shortfalls continue year after year after year."

Recall the words of Colorado PERA's General Counsel (now Executive Director) Greg Smith.  On August 11, 2009, at the Denver meeting of the Colorado PERA “Listening Tour” Colorado PERA’s General Counsel Greg Smith blamed the Colorado General Assembly for the decline PERA’s actuarial funded ratio: “We have not been paid what’s called the actuarially required contribution.” “We’ve not been receiving that full contribution in any of our divisions for many years . . . seven years to be specific.”

http://www.copera.org/pera/about/listeningtour.htm

2012 PERA CAFR: PERA'S LONG-TERM INFLATION ASSUMPTION HAS BEEN LOWERED TO 3.5 PERCENT, MATCHING THE CONTRACTED PERA COLA TAKEN BY THE GENERAL ASSEMBLY IN 2010.

On page 95 of the 2012 PERA CAFR, Colorado PERA notes that it has recently reduced its long-term inflation assumption from 3.75 percent to 3.50 percent.

In 2010, the Colorado General Assembly enacted SB10-001 slashing the contracted inflation protection of Colorado PERA retirees by 42 percent, from 3.5 percent to 2.0 percent (for non-DPS retirees).  This taking by the Colorado General Assembly will cost many PERA retirees hundreds of thousands of dollars over their remaining lives.  The bill (SB10-001) took this money from Colorado PERA retirees in order to maintain Colorado's status as a "tax haven," the state with the lowest per capita state tax burden in the nation, and to "inflate away" the pension debt of PERA employers.

Back in 1993, when the "automatic" Colorado PERA COLA benefit was adopted, Colorado PERA's Director of Governmental Relations (Rob Gray) informed the Colorado Legislature (in testimony) that the "automatic" PERA COLA benefit they were placing into Colorado law would "come close to what the long-term inflation rate is."

On March 24, 1993 (1:32 PM – 2:28 PM) the House Finance Committee of the Colorado General Assembly heard House Bill 93-1324.

Rob Gray elaborated: “The (CPI up to) 3.5 percent increase is a reasonable level.”  “It will probably come close to what the long-term inflation rate is.”

(Note that the PERA COLA was in later years improved to a flat 3.5 percent rate, permissible as this improvement did not impair PERA retiree pension contracts.)

Rob Gray also noted that: “The PERA Board does support this bill.”  “We felt like it is something that is good pension policy . . . that it makes sense . . . THAT IT IS MAKING PERMANENT CHANGES, and also that it does help employers which is one of the goals of the bill.”  (Ironically, at the time, PERA employers thought they were getting a great deal by fixing an "automatic" PERA COLA benefit, only to break the contract two decades later.)

COLORADO PERA ACTUARIES: THE OBJECTIVE OF SB10-001 TO SEEK A 100 PERCENT FUNDING RATIO IS MUCH STRONGER THAN REQUIRED BY FEDERAL REGULATORS.

The 2012 PERA CAFR, page 126, includes the following statement from Colorado PERA's actuary:

Colorado PERA actuary Cavanaugh MacDonald Consulting, LLC:

"It should be noted that the changes made to the PERA structure as a result of SB10-001 had as a goal 100% funding of the accrued liability within 30 years for all divisions.  The results of the December 31, 2012, valuations combined with financial projections of all divisions indicate that this goal, WHICH IS A MUCH STRONGER POSITION THAN REQUIRED TO MEET CURRENT GASB STANDARDS, is still achievable with the exception of the Judicial Division."  (My comment: In my opinion, PERA's actuaries want this on the record when SB10-001 is declared unconstitutional.)

February 2011

Colorado PERA General Counsel (now Executive Director) Greg Smith writes in Government Finance Review: "Adjusting public pension benefits in Colorado: a fiduciary process": "Necessity is judged on two levels: 1) whether a less drastic modification could have been implemented; and 2) whether, even with modification, the state could have achieved its stated goals. To determine whether the changes were reasonable, the changes MUST BE THE MINIMUM CHANGES NECESSARY to solve the economic problems of the plan. (See United States Trust Co. v. New Jersey, 431 U.S. 1, 1977.)"

(The next year, [June 26, 2012 and again in the newly released CAFR] Colorado PERA’s independent actuary, Cavanaugh MacDonald Consulting, LLC, reports in the 2011 Colorado PERA CAFR: “It should be noted that the changes made to the PERA structure as a result of SB10-001 have as a goal 100% funding of the accrued liability within 30 years for all divisions.  The results of the December 31, 2011, valuations combined with financial projections of all divisions, indicate that this goal, WHICH IS A MUCH STRONGER POSITION THAN REQUIRED TO MEET CURRENT GASB STANDARDS, is still achievable with the exception of the Judicial Division.”)

http://www.leg.state.co.us/OSA/coauditor1.nsf/All/641A0AB5B97D073C87257A3A0072FEA3/$FILE/2067-12%20CAFR_6-26-12.pdf.)

http://www.thefreelibrary.com/Adjusting+public+pension+benefits+in+Colorado%3a+a+fiduciary+process.-a0290520595

Also from the 2012 PERA CAFR, page 43, "These benefits earned will be payable over the lifespan of members after their retirement and therefore, it is not necessary that the actuarially determined benefits equal the actuarial value of assets at any given moment in time."

So, why did the Colorado Legislature make this the goal of SB10-001??

UNDERPERFORMANCE BY COLORADO PERA'S INVESTMENT STAFF IN 2012 COSTS THE PERA TRUST FUNDS (AND COLORADO TAXPAYERS) $175 MILLION.

Page 29 of the 2012 PERA CAFR reveals that Colorado PERA's investment staff have failed to meet their investment performance benchmarks.  During 2012, Colorado PERA's investment staff achieved a rate of return of 12.9 percent while the PERA investment performance benchmark was 13.4 percent.  (By my estimation this underperformance by PERA's investment staff [53 basis points] cost the PERA trust funds approximately $175 million.)

Although the Colorado General Assembly and Colorado PERA are trying to push market risk onto PERA retirees, Colorado PERA retirees should not have to bear the cost of any historical PERA investment underperformance on the part of PERA's investment staff.  Again, PERA retirees "bear no market risk" in the PERA defined benefit pension plan.

"The Total Fund underperformed the policy benchmark return by approximately 53 basis points (0.53 percentage points) for the year ended December 31, 2012."

"Alternative Investments was the primary contributor to the underperformance . . ."

What has been the performance of PERA's investment staff historically?  In what years have they missed their benchmarks?  What has been the cost to the PERA trust funds?

Colorado PERA Executive Director Meredith Williams, February 23, 2012, on the Colorado PERA Board’s historical investing mistakes, and the impact of these mistakes on the Colorado PERA Trust Funds:

“Ten years ago we were pretty aggressive in real estate, very aggressive might be a better characterization.  We were very aggressive in what I’ll call private equity or alternatives.  At the board’s direction we’ve pulled in our horns substantially, about seven and a half of the portfolio in each of those two, used to be fifteen in each.  I think that the portfolio as we headed into the dotcom bust was far riskier than it is today.  We paid the price for that.”

(My comment: Meredith Williams tells us here that PERA “paid the price” for its past investing mistakes.  Here he admits that the Colorado PERA Board of Trustees has historically made mistakes in setting the asset allocation of the Colorado PERA trust funds.  I ask: Why should Colorado PERA retirees, who bear no “market risk” in their “defined benefit” pension plan, whose contractual public pension rights are “fully-vested,” why should these Colorado PERA retirees pay the cost of the PERA Board’s past investing mistakes by relinquishing their contracted pension benefits?)

THE 2012 PERA CAFR ON THE JUSTUS v. STATE LAWSUIT:

The 2012 PERA CAFR, page 82, addresses the Justus v. State PERA retiree lawsuit: "The maximum potential damages arising from this Civil Action consist of the payment of additional statutory benefits beyond those provided for by SB10-001.  In the event the pertinent portion of SB10-001 was held to be unconstitutional by an unappealable final court order, PERA would be required to pay the annual increase in effect prior to the passage of SB10-001.  The nature of the relief sought is a mandatory injunction requiring the payment of annual increases going forward based on the PERA statutes as they existed prior to passage and enactment of SB10-001."

A few final excerpts from the 2012 Colorado PERA CAFR:

From the 2012 PERA CAFR, page 136, "Benefits to retirees are funded at 77 percent, that is, assets reserved for benefits currently being paid are less than the liabilities for those benefits."

From the 2012 PERA CAFR, page 174, the average age of a current PERA retiree is now 70 years.

From the 2012 PERA CAFR, page 175, "For most benefit recipients, this is the only source of income in retirement as most PERA benefit recipients and their beneficiaries do not qualify for Social Security payments."

(My comment: It is unconscionable that the Colorado General Assembly has broken the PERA pension contracts of Colorado PERA retirees, who average 70 years of age, and are completely dependent on their contracted PERA retirement benefits.  All in order to keep taxes low in the 15th wealthiest state in the nation.)

Colorado PERA active and retired members, support public pension contractual rights and the rule of law in Colorado.  Contribute at saveperacola.com and "Friend" Save Pera Cola on Facebook!

Comments

3 thoughts on “Colorado PERA Investment Staff Misses 2012 Performance Benchmarks Costing Taxpayers and PERA Members $175 Million; 2012 PERA CAFR Released.

  1. Colorado PERA and a large part of the educational establishment have been self congratulating themselves in the passage of SB10-001, demonstrating what Hank Brown calls "Colorado Courage".  Indeed, there has been a tremendously effective propaganda campaign demanding "intergenerational equity", "shared sacrifice" and "100% funding", which has been embedded in a constant stream of PERA news releases and publications, including recent CAFRs.  Will the Colorado courts be persuaded to show "Colorado Courage" and uphold SB10-001?  What does that mean to the enforcement of contracts in Colorado?  

    The Denver District Court has ruled the PERA retiree fixed annual increase of 3.5% (aka COLA) is neither contractual nor guaranteed.  However, the Colorado Court of Appeals has determined the fixed COLA is contractual, but not absolute.  Thus, I'd like to coin a new legal phrase unique to Colorado jurisprudance … "contractual gratuity".  Sounds like the courts are having trouble following the letter of the law, and are trying to redefine the contract clause in the state constitution … perhaps discovering the "spirit" of the law, that is, contractual gratuity.

    The United States are composed of fifty sovereign governments, and the price of sovereignty is to honor and enforce contracts, especially its own.  The courts should not try to weasel out of them.  Also, public pension obligations are only a quarter of total government debt.  Why breach contracts with PERA retirees and not the other three quarters of its debt? 

       

  2. IF THE COLORADO PERA COLA IS NOT CONTRACTUAL, IT IS ILLEGAL UNDER COLORADO'S "ANTI-GRATUITY" CONSTITUTIONAL PROVISION.

    From the Marcucci “outline”:

    “Does your jurisdiction have an anti-gratuity clause in its constitution?  If so, then almost by default there needs to be a contract component to pension benefits.”

    (My comment: As we have observed earlier, the Colorado Constitution does indeed have “an anti-gratuity clause.”  Over the last couple of years, I’ve wondered how any court might possibly conclude that Colorado PERA pension COLA benefits are non-contractual pension benefits. Such a conclusion would require that PERA COLA benefits necessarily be gifts from the State of Colorado to PERA retirees, that is, a “gratuity” prohibited by the Colorado Constitution.)

    The Colorado Constitution's "anti-gratuity" clause:

    Article 5, Section 34 of the Colorado Constitution prohibits the Colorado General Assembly from using public funds “for benevolent purposes to any person.”

    The National Association of Public Pension Attorneys (NAPPA) makes the Marcucci “outline” available to the public on its website.  To access the complete Marcucci “outline” of constitutional public pension rights (a Word document) paste the following into Google: “Constitutional Issues When Altering Public Pension Benefits Marcucci.”

    Support public pension contractual rights and the rule of law in Colorado.  The fact that the Colorado General Assembly and Colorado PERA are attempting to steal from old people in order that Colorado's state taxes remain the lowest in the nation truly diminishes our state.  Colorado is the 15th wealthiest state in the nation, we can afford to pay our debts!

    Contribute at saveperacola.com, "Friend" Save Pera Cola on Facebook!

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