Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

This is the second installment of a two-part story. Read the first installment <a href="https://www.copera.org/how-its-made-peras-financial-report-part-2" target="_blank" label="undefined (opens in a new tab)" rel="noreferrer noopener" class="broken_link">here</a>.



Incorporating a View from Outside



After changes for the next year have been discussed and approved, the legwork begins, usually in late fall. This means welcoming into the mix a group of external auditors. PERA has internal auditors, but bringing in a truly outside perspective helps ensure the information in the CAFR is rigorously checked and, consequently, accurate to a high degree of certainty.



The word “audit” might conjure up IRS dread for some, but auditors are a routine presence in accounting departments in organizations like PERA. “In the fall, the auditors do what they call walkthroughs,” Maninger said. “They do deep dives into our processes, meeting with the Investments, Benefits, and other departments to see how they do their work. For example, they might follow the contracting and funding of a new private equity investment through every step until the wire goes out the door.”



In addition to analyzing the ways in which work gets done, they do a significant amount of statistical analysis of the mountains of data PERA keeps, looking for any anomalies. Say the auditors analyze monthly benefit payments. PERA sends out more than 100,000 checks of varied amounts every month. You’d expect the last digit of each check amount to be evenly distributed—about the same number of checks ending in a twos (e.g. $975.72) as eights (e.g. $1,000.68). However, if thirty percent of all checks ended in a two instead of the expected ten percent, the auditors would likely flag this as an anomaly and look into it further.



An anomaly doesn’t indicate that something is wrong, just that something could be. After investigating, they might discover an error or a process that needs improvement. “Our goal is to make the CAFR as accurate and as complete as we can possibly make it,” Maninger said. “We have a lot of information to share with members, and this information affects lives.”



Putting it All Together



The structure for the CAFR is usually in place by the end of the year. When January 1 rolls around, final returns start rolling in. Some of these returns are available immediately. Global equity and fixed income, for example, have prices that are readily available on any given day. Anyone can track the prices of PERA’s top holdings in global equity at the end of 2019—Apple, Microsoft, and Amazon—on a daily basis.



But returns in other asset classes may take until early April to receive and record. PERA owns companies that aren’t publicly traded in its private equity asset class. Determining the value of these companies takes a much longer time, as it requires a detailed financial analysis to come up with an informed price as opposed to watching for a stock ticker run across the screen on CNBC. This is one reason the CAFR isn’t released until June.



Another reason is that actuaries assess PERA’s demographic information—how many people are starting jobs and leaving them, beginning retirement and passing away, along with an array of other data points. This information is critical as PERA must chart the course for decades into the future.



Once these pieces are finalized and everyone, including the external auditors, signs off, the CAFR is sent to the Board of Trustees. They review it and, with a vote, they approve and release the report to the public.



Where to Start



The CAFR is unlikely to be a choice for a book club or a beach anytime soon. But, like the view from a window several stories up, it contains the best perspective on all things PERA. Reading only a few pages can help lead to a much better understanding of how PERA works and where it’s going.



“If someone is going to read anything at all in the CAFR, they should read the Letter of Transmittal,” Maninger said. “Ron [Baker, PERA’s Executive Director] works hard to communicate the most important parts of the CAFR in that letter.” The letter in the <a href="https://content.copera.org/how-its-made-peras-financial-report-part-2/" target="_blank" label="undefined (opens in a new tab)" rel="noreferrer noopener">2019 CAFR</a> is found on page 3.



“If you’re interested in any changes or updates from past year, the section called Management’s Discussion and Analysis (page 29) will explain variances from one year to another,” she added



For those interested in PERA’s investments, Neugebauer said the Schedule of Investment Results (page 127) is the best place to see how PERA’s investments have done recently compared to their benchmarks.



Shelton said page 136 should be of interest to those who are saving and investing for retirement. “We have a number of options available for those who participate in 401k, 457, and DC plans, from investing in specific asset classes or using one of the Target Retirement Date Funds,” she said. “From my perspective, page 136 is important because it highlights the variety of options participants have and what the returns were for the most recent year. If they want to read more, descriptions of the investment options are on page 134.”



Meant to be Used



If you’re looking for a book to check out at your library, one method might be to look for the book that has tattered pages, dog-ears, and coffee stains. A book&#8217;s battered paper doubles as a public record of the value it&#8217;s brought to others.



That’s how Maninger, Neugebauer, and Shelton, view the CAFR. It’s not a yearbook, meant to commemorate a year that was: It’s a useful publication, meant to be picked up. “I have a copy at home,” Neugebauer said. “And in my office at work I have every copy going back to 1980.”



But the importance of the CAFR is perhaps best illustrated by a small action Shelton took months ago: “When we found out that we were starting to work remotely in March, I thought we were just going to be offsite for a week or two. But just in case, I grabbed my CAFR as I was going out the door.”

How It’s Made: PERA’s Financial Report, Part 2

A standard sheet of office paper weighs 4.5 grams. So, if you were to download and print the <a label="undefined (opens in a new tab)" href="https://content.copera.org/meet-the-new-chair-of-peras-board/" target="_blank" rel="noreferrer noopener">2019 Comprehensive Annual Financial Report</a>, you’d find yourself with 1.358 pounds of information about PERA—about the same weight as a bottle of Coke (though a much shorter <a label="undefined (opens in a new tab)" href="https://content.copera.org/how-its-made-peras-financial-report/" target="_blank" rel="noreferrer noopener">digital version</a> is also available).



Books known for their size—a dictionary, a telephone book—are often the authoritative text on their subject. The CAFR is just that; the go-to source for PERA’s financial situation, demographic information, funded status, and more. For a book with so many answers, however, there are often as many questions asked about it. Why is the 2019 report released halfway through 2020? How can any non-accountant possibly glean anything from the tables of information?



The best place to find answers to those types of questions isn’t in the CAFR, but with the people who help make it. About 40 people at PERA are actively involved in the production of the CAFR, about half of them accountants. Most of them work on a portion of the CAFR in addition to other roles. A smaller team of five—the “CAFR team”—spends much of their time throughout the year preparing it. Understanding the work that goes into creating the CAFR can unlock a better understanding of what’s inside.



361 On, 4 Off



If you just glance through a few of the 19 different CAFRs <a label="undefined (opens in a new tab)" href="https://content.copera.org/2016-legislative-session-wrap-up/" target="_blank" rel="noreferrer noopener">archived online</a>, they might appear to be identical, with the exception of the numbers in the tables. But changes and improvements take place every year.



Some changes are technical and more formal, made in order to comply with updated guidelines from the Governmental Accounting Standards Board (GASB). But other changes are the result of people like Catherine Maninger, PERA’s Controller and a member of the CAFR team, who go through the latest CAFR every summer, days after it was released, to see what could be done better, much like an NFL quarterback might stay up late Sunday night going over film from a game earlier that day.



Simplification and elimination of duplication were the themes for changes to the 2019 CAFR. Prior to this CAFR, a change to any of the actuarial assumptions PERA uses was described in written form. This year, that text was transformed into charts, allowing a person to visually grasp the changes quickly. Also, the section devoted to discussion and analysis by PERA management has been pruned back compared to past years, contributing, in part, to the 2019 CAFR being 20 pages shorter than last year’s.



Now that 2019’s version has been released, the CAFR team is setting their sights on next year. The team didn’t have long to rest after the 2019 CAFR was released on Friday, June 19. The kickoff meeting for the 2020 CAFR took place on June 24.&nbsp;



Seeing the Big Picture



The Accounting department is on the seventh floor of PERA’s building, southeast of downtown Denver. Most of the windows on this floor face east. From here, you can see the landscape of the city, as tall apartment buildings and dense neighborhoods nearer downtown give way to single-family homes miles away. On the horizon, you can make out where buildings dwindle altogether, replaced by open land.



It takes being seven stories up to get a perspective like this, allowing a person to take in vast swathes of information at once. It helps you see the forest among the trees. It’s hard to visualize that view with its many details while standing on the sidewalk below.



Gaining a broad perspective on the CAFR is a crucial part of its creation. Instead of traveling up an elevator to get it, however, the circle of those involved in its creation is expanded.



Any proposed changes to the following year’s CAFR are reviewed by PERA executives and the PERA Board of Trustees in the fall. “We have a very active Board Audit Committee,” Maninger said. “They take their fiduciary duty seriously and are really involved in reviewing the CAFR before it is published.” As an example, she said the committee posed more than 150 questions to PERA staff about the 2019 CAFR during their review this spring.



Rebecca Shelton and Joshua Neugebauer work in PERA’s Investment Division and also play a major role in the CAFR’s creation. “Investments and accounting work at things through different lenses,” Shelton said. “The CAFR needs to make sense from both an accounting standpoint and an investment standpoint.” These differing points of view are used to make the CAFR better.



Neugebauer said that evidence of one such collaboration can be seen in the 2019 CAFR. “We reviewed several CAFRs from other states last fall, and we noticed that a few other plans highlighted internal management costs”, he said. “Because that is such a compelling story—how we’ve structured the investment program—we thought we’d highlight that a bit more in this year’s CAFR.”



It’s a straightforward idea, but it required a lot of legwork. Determining how costs are assigned to investing activities ended up requiring a lot of work between multiple divisions. The end result—a chart on page 124—might not immediately stand out to the average reader and probably won’t grab any headlines. It wasn’t required by any regulatory agency or accounting rule. But this small change represents something much bigger: an ongoing internal commitment to finding new and better ways of sharing how PERA works.



Transparency is not a one-time event. A single, dramatic display of transparency can be indicative of a long overdue need for it. On the flip side, a culture of transparency is built by focusing on making incremental improvements, year after year. Over time, it adds up.







This is the first installment of a two-part story. Read the second installment <a href="https://peraontheissues.com/how-its-made-peras-financial-report-part-2/" target="_blank" aria-label="undefined (opens in a new tab)" rel="noreferrer noopener">here</a>.

How It’s Made: PERA’s Financial Report, Part 1

Colorado PERA’s Board of Trustees met on June 19. At the meeting, the Board approved the release of PERA’s 2019 Comprehensive Annual Financial Report. This report, which is covered at length in <a href="https://peraontheissues.com/pera-releases-2019-financial-returns/" target="_blank" rel="noreferrer noopener">another story </a>on PERA On The Issues, includes information on PERA’s investment returns for the 2019 calendar year. The total fund’s investment portfolio returned 20.3 percent, net-of-fees.



The Board covered a number of other <a href="https://www.copera.org/pera-board-discusses-investments-during-june-meeting" target="_blank" rel="noreferrer noopener" class="broken_link">agenda items</a>, including information about legislation, the PERA Board election, and updates on projects currently underway within the organization.



Top of mind for many, however, was the investment landscape so far in 2020. While the CAFR mentioned above contains a detailed, audited account of 2019, it does not contain information past December 31, 2019. Investment returns for 2020 will be released in 2021. However, the Board did receive investment reports about broad trends to consider.



PERA’s investment staff monitors market trends, and the Board receives an outside perspective on PERA’s investments with help from its investment consulting teams at Aon, a leading global professional services firm. Laura Flaum, a senior consultant at Aon, shared with the Board her view on the year thus far: “We do expect to see the PERA portfolio make up some of the losses that we [saw in the first quarter] given the portfolio’s exposure to global equities,” she said. <a rel="noreferrer noopener" href="https://www.copera.org/pera-on-the-issues/pera-board-discusses-investments-during-june-meeting" target="_blank">Global equities</a> make up just over half of PERA’s <a rel="noreferrer noopener" href="https://peraontheissues.com/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank">asset allocation</a>.



Flaum added that PERA’s second-largest asset class, <a href="https://peraontheissues.com/asset-class-depth-fixed-income/" target="_blank" rel="noreferrer noopener">fixed income</a>, has played an important role so far in 2020. Fixed income, which makes up about a quarter of PERA’s overall asset allocation, consists of bonds issued by both companies and governments. Flaum explained that fixed income serves as downside protection and a risk mitigation tool during market downturns.



During the volatile markets in the early part of the year, Flaum said that fixed income “did perform as it was intended to, and this really illustrates the benefits to having a diversified portfolio.”



The Importance of Staying the Course



PERA’s Chief Investment Officer, Amy C. McGarrity, spoke to the Board about PERA’s investment strategy during volatile times. “There’s no shortage of people with opinions on where the markets are going in the near term,” she said. “But, in my opinion, market timing is extremely difficult.”



McGarrity briefly shared an example to illustrate her point. If you invested $10,000 in the S&amp;P 500 on January 1, 2000, and left your money invested for the entire 20 years, your portfolio would have grown to $32,192 at the end of 2019.



But let’s say you miss just the five best days during those two decades. Your portfolio would be worth $21,359 today—48 percent smaller compared to those who were invested the entire time.



And, if you missed the 20 best days during that 7,305-day span, your initial $10,000 investment would be worth $10,145—virtually unchanged.



“The key, in my opinion, is to remain invested in markets,” McGarrity said, “because it’s very difficult to predict where it’s going in the near term.”



One way PERA’s investment team responded to volatility was to keep an eye on PERA’s asset allocation, ensuring that the overall portfolio stayed within the Board’s guidelines as values changed quickly. McGarrity said that doing so is crucial to meeting long-term objectives. “We think over time that the <a href="https://www.copera.org/2018-markets-year-in-review" target="_blank" rel="noreferrer noopener" class="broken_link">asset allocation</a> that [the Board has established] will achieve the results that we are expecting,” she said.

PERA Board Discusses Investments During June Meeting

The Colorado PERA Board of Trustees approved the <a href="https://www.copera.org/pera-releases-2019-financial-returns" target="_blank" rel="noreferrer noopener" class="broken_link">2019 Comprehensive Annual Financial Report</a> (CAFR) on June 19. The CAFR contains information about PERA’s investments, funded status, membership, and more. 



A Snapshot in Time



PERA releases this report every June. However, the information included in the CAFR actually changes on a daily basis. People start PERA jobs and leave them. People retire. The value of PERA’s investments fluctuate. Contributions come in, and payments go out. Compiling and analyzing all this data and having it audited by an outside firm takes a significant amount of time, too.



As a result, PERA follows the industry standard of compiling this data as it exists on a single day—in this case December 31, 2019. While the report is released in 2020, the 2019 CAFR doesn’t take into account any developments since December 31, 2019; they will appear next year in the 2020 CAFR.



Strong Investment Returns in 2019



PERA experienced a positive investment year in 2019. At the end of the year, the fund had a fiduciary net position of $51.7 billion, compared to $44.9 billion the year before. 



The total fund’s investment portfolio returned 20.3 percent, net of fees. Returns for the past 10 years are shown below:



<figure class="wp-block-image size-large"><img decoding="async" src="https://content.copera.org/pera-releases-2019-financial-returns/"" class="wp-image-3173"/></figure>



PERA’s Improved Funded Status



The CAFR also contains information about the projected time for PERA to reach full funding. Funding levels take into account many variables and assumptions, including investment performance and demographic information. 



The projected time needed for each division to reach full funding is listed below:



<figure class="wp-block-image size-large"><img decoding="async" src="https://content.copera.org/pera-releases-2019-financial-returns/"" class="wp-image-3174"/></figure>



The CAFR and the Automatic Adjustment Provision



The Automatic Adjustment Provision (AAP) modifies employer and employee contributions, the retiree annual increase, and the state’s direct distribution based on PERA’s progress toward its funding goals. This calculation is performed once a year, in conjunction with the CAFR’s release. The AAP was not triggered following the release of the 2019 CAFR.



When the AAP is triggered, the implementation of those changes are delayed for one year. The 2018 CAFR, which was released in June 2019, did trigger the AAP. As a result, those changes are going into effect on July 1, 2020, following the one-year delay. Member contributions for most Divisions will increase by a total of 1.25 percent to a total of 10 percent of pay. Employer contributions to PERA will also increase by 0.5 percent and will range from 14.2 percent to 23.6 percent of payroll. The annual increase paid to retirees will be restored this year at 1.25 percent for most eligible benefit recipients.



Learn Even More About PERA’s Finances



At 275 pages, the 2019 CAFR is longer than most people care to read. However, making this information available and accessible is a core tenant of PERA’s commitment to transparency. You can learn more about this report by exploring an <a href="https://www.copera.org/pera-on-the-issues/pera-releases-2019-financial-returns" target="_blank" rel="noreferrer noopener">interactive, digital overview</a> of the CAFR.



Another available resource is the <a href="https://www.copera.org/pera-releases-2019-financial-returns" target="_blank" rel="noreferrer noopener" class="broken_link">2019 Popular Annual Financial Report</a>. This 12-page report condenses and presents the information in a more traditional layout, similar to a popular annual report a corporation might release to shareholders.



Note: This story was updated on June 30, 2020.

PERA Releases 2019 Financial Returns

On Tuesday, July 9,
Colorado PERA conducted telephone town halls for members and retirees. These
town halls gave members and retirees a chance to ask questions and talk to PERA
leadership about the investment performance in 2018, PERA’s funded status, and
the impact of recent legislation. If you missed the calls, recordings are
posted <a href="https://www.copera.org/telephone-town-hall-frequently-asked-questions-3-2" class="broken_link">here</a>. 
 
A summary of the most asked questions and responses is below. Questions about
individual retirement benefits may be answered by contacting PERA Customer
Service at 1-800-759-7372.



What was PERA’s investment return in 2018? My investments did better in 2018.



For the year ending December 31, 2018, PERA’s investment portfolio returned a negative 3.5 percent. While last year’s return was disappointing, PERA is a long-term investor and the investment program is designed to perform over the long term. PERA’s investment program has returned 8.8 percent over 10 years.&nbsp; 



For most investors, 2018 was a
difficult year. Global equities, as measured by the MSCI ACWI, declined 9.4
percent in 2018, while the Bloomberg Barclays U.S. Aggregate Bond index was
flat for the year. When comparing investment performance, it’s important to
keep the time period in mind. Different time frames will lead to differences in
investment performance because the market can fluctuate from one period to the
next.



 
What is PERA’s funded status after 2018?
Why did the funded status decline?



The funded status
for the PERA defined benefit trusts at the end of 2018 was 59.8 percent,
compared to 61.3 percent at the end of 2017.The investment return is just one piece of what goes into the
plan’s funded status. We also make assumptions about factors such as salaries,
head count growth, the number of retirements, among others. Last year, many of
our demographic assumptions didn’t play out favorably. For instance, payroll
growth was stronger than we expected, and the School Division, PERA’s largest,
had more early retirements. These factors also impact the funded status. 



How is last year’s legislation working?



 In 2018, the Colorado General Assembly passed Senate Bill 200 which included provisions to help PERA adapt to changes in demographics or the market. The legislation is designed to help ensure the fund’s stability over time and put PERA on a path to full funding by 2047. The bill made changes to the plan that included increases in contributions and modifications to benefits. 



On July 1, active members, except
those who work in the Local Government Division, saw an increase in
contributions, and most members are now contributing 8.75 percent of their pay
toward their PERA benefit. PERA retirees are experiencing the second year of
the suspension of the annual increase (AI).



The legislation also included a
provision, called the automatic adjustment that is triggered when PERA falls
ahead of or behind schedule to reach full funding. These changes are not easy
on PERA members or retirees. They are, however, designed to make sure PERA
stays on the path that ensures retirement security today and tomorrow.



When will retirees get an annual increase?



Legislation in 2018 (SB 200)
suspended the annual increase for 2018 and 2019. The legislation also contained
“guard rails” (called the automatic adjustment) to keep PERA on the path to
full funding by 2047. The negative investment year in 2018 and other demographic
shifts affected PERA’s funded status, and the automatic adjustment will go into
effect in July 2020. This means that when the annual increase is restored in
July 2020, it will be 1.25 percent.



How does the automatic adjustment work, and how long will it take for
the AI to go back up and contributions to go down?



Last year’s investment losses
coupled with demographic shifts mean that PERA has fallen behind on its funding
goal, which has triggered the automatic adjustment. That means that the three
rates: member contributions, employer contributions, and the AI paid to
retirees, will all change beginning July 1, 2020.In July 2020, the AI paid to retirees will be set at a maximum of
1.25 percent.



SB 200 contained scheduled
increases for members (except for members in the Local Government Division) of
0.75 percent in July 2019, 0.75 percent in July 2020, and 0.5 percent in 2021. Due
to the automatic adjustment, member contributions will increase by an
additional 0.5 percent, on top of the scheduled increases, in July 2020. That
means in 2020, most members will contribute a total of 10 percent to PERA from
each paycheck.



The amount all employers contribute
to PERA will also increase by one half of one percent in July 2020. Total
employer contributions will range from 14.2 percent to 23.6 percent, depending
on the Division.



While it’s challenging to predict
exactly when the AI will go up and member and employer contribution rates will
go down, it may take a decade for these changes to go back to current levels.



Are PERA employees participating in cuts like we are?



The 300 PERA employees are also
PERA members and they began contributing more on July 1. They will also have to
wait three years before becoming eligible for a reduced AI in retirement. 



Can investment fees be reduced to fund the annual increase?



 PERA takes seriously our responsibility to be good stewards of the resources we manage on behalf of our members. The cost to invest $48 billion is competitive and low – 37 basis points, or 0.37 percent of assets. Administrative costs are also low when PERA is compared to our public pension peers across the country. 



About 60
percent of PERA’s assets are invested internally, by PERA employees. By
managing these investments in-house, PERA saves about $45 million a year.



Does PERA invest with a focus on environmental sustainability?



While PERA
recognizes the important role of all financially material factors, including
those that may pertain to sustainability, PERA does not make investment
decisions to suit personal beliefs of any person or group.



An investment strategy
based on personal value systems may be impossible to implement in a way that
reflects all our members’ individual beliefs. As a fiduciary, our highest
priority must remain the stability of the fund for all our members. 



The PERA Board has adopted a <a href="https://www.copera.org/pera-board-of-trustees-updates-divestment-policy-statement" class="broken_link">Statement
</a>that outlines PERA’s policy on divestment. PERA does not have the authority
to determine social, environmental, or economic policy, and exists to invest
for one purpose – to ensure the retirement security of Colorado’s current and
retired public employees.



Is PERA still a valuable benefit?



Yes,
absolutely. The PERA defined benefit plan is well-designed to meet the goal of
giving members the best replacement income in retirement. In other words, PERA
does a better job of replacing a member’s working income than any other
retirement plan on the market – including Social Security and 401(k) style
plans. When PERA defined benefit members retire, they continue to get a steady
PERA paycheck for the rest of their lives—even if, like some of our members,
they live into their hundreds. This is why PERA is a benefit you can’t outlive.
With a 401(k), once that account is depleted, the benefit is done. 



Also, it’s
important to remember that PERA members have benefits even when the unexpected
happens. For example, PERA members get survivor and disability benefits. And
they have access to a low-cost, world-class 401(k) and/or 457 plan. What’s more
is that PERA benefits are portable. You can move from one PERA employer to
another and your retirement plan will stay the same, meaning you have
flexibility in where you work throughout your career while continuing to grow
your retirement benefit.



What is PERA doing to eliminate the WEP?



PERA staff is meeting with members
of the Colorado Congressional delegation to educate and heighten awareness of
how this federal law impacts PERA members who may work for a PERA employer and
also work for an employer that participates in Social Security. There have been
efforts recently to change the calculation or eliminate the Windfall
Elimination Provision. Currently, U.S. Congressional Representatives Crow,
Tipton, and Perlmutter have signed on as co-sponsors of H.R. 141. You can find
more information on the status of WEP and federal legislation <a href="https://www.copera.org/july-2019-telephone-town-hall-faqs" class="broken_link">here</a>.
We encourage members to contact their congressional representative to let them
know how the WEP impacts them.



Is PERA going to increase the PERACare subsidy for retirees under 65
who aren’t yet eligible for Medicare?



We know the cost of pre-Medicare
health care coverage has increased significantly. We’ve been able to offer
lower cost plans to our retirees who have Medicare, but the pre-Medicare
coverage market remains a challenge for us, and this is true for most Americans.
We have been encouraged by efforts at the state level to explore ways to reduce
health care costs for Coloradans. But, increasing the subsidy for pre-Medicare
PERACare enrollees would negatively impact the financial status of the health
care trusts and also require legislation, and we don’t anticipate the Board
seeking or supporting legislation that would negatively impact the financial
health of the trusts.

July 2019 Telephone Town Hall FAQs

On June 21, the Colorado PERA Board of Trustees released the 2018 Comprehensive Annual Financial Report (CAFR). The report includes 2018 information on PERA&#8217;s financials, including the funded status of the plan and the 2018 investment performance. The report, as well as an abbreviated interactive overview, is available on the PERA <a href="https://content.copera.org/2016-legislative-session-wrap-up/">website</a>. 



For the year ending December 31, 2018, one of the major factors influencing the fund was passage of <a href="https://www.copera.org/contributions-to-colorado-pensions-lower-than-average" class="broken_link">SB 18-200</a>. This landmark legislation included major changes to the plan including provisions to help PERA stay on the path to reach full funding by 2047, even when there are departures from PERA&#8217;s core assumptions, including the investment return. When needed, these provisions will automatically trigger changes in contributions and annual increases.



For most investors, 2018 was a difficult year. For the year ending December 31, 2018, PERA&#8217;s investment portfolio returned a negative 3.5 percent, net of fees. Beyond economic conditions, changes in demographics also contributed to overall actuarial losses to the fund. The fund closed the year 2018 with a fiduciary net position of $45.2 billion, representing a $3.8 billion decrease compared with the year ending 2017. Over 30 years, the fund has increased the fiduciary net position by $37.2 billion. 



The <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" class="broken_link">automatic adjustment</a> is already working as intended: Last year&#8217;s investment losses coupled with demographic shifts mean that the automatic adjustment will be used in July 2020, adjusting member contributions, employer contributions, and the AI paid to retirees. Recall that SB 200 contained scheduled increases for members of 0.75 percent in July 2019 and 0.75 percent in July 2020. (Except for members in the Local Government Division.) In addition, the AI paid to retirees was suspended for the second year. Due to the automatic adjustment, member contributions will increase by an additional 0.5 percent in July 2020 and the AI paid to retirees will be set at a maximum of 1.25 percent. As such, starting in 2020, most members will contribute a total of 10 percent to PERA from each paycheck. The amount all employers contribute to PERA will also increase by one half of one percent in July 2020. Total employer contributions will range from 14.2 percent to 23.6 percent, depending on the Division, in addition to the $225 million direct distribution from the State of Colorado.



For more details, please see:



<a href="https://content.copera.org/how-its-made-peras-financial-report/">Colorado
PERA 2018 Financial Snapshot</a>



<a href="https://www.copera.org/pera-board-releases-2018-financials" class="broken_link">Colorado PERA 2018 ComprehensiveAnnual Financial Report Infographic</a>



<a href="https://www.copera.org/pera-board-releases-2018-financials" class="broken_link">Colorado PERA 2018 SummaryAnnual Financial Report</a>



<a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">Colorado PERA 2018 Comprehensive
Annual Financial Report</a>

PERA Board releases 2018 financials

Recent attention on the strong investment performance of public pension plans has generated questions for Colorado PERA about its own rate of investment return. This post will address those questions to make sure the public can make an accurate assessment of PERA’s investment program.



<ol>
<li>Timing matters. It is very important when considering investment performance that similar time frames are being compared. Many public pensions report financial performance on fiscal years that end on June 30. Others, such as PERA, use the calendar year-end date of December 31 to report returns. Different timeframes will certainly lead to differences in investment performance because the market can deliver dramatically different results from one month to the next. Comparing plans with different reporting timeframes is akin to comparing the weather in December to the weather in July.</li>



<li>Allocation matters. Each pension has its own investment strategy, which is reflected in the <a href="https://www.copera.org/2018-markets-year-in-review" class="broken_link">asset allocation</a> or percentage of the total fund dedicated to various investment classes. Asset allocation may differ from plan to plan depending on factors such as overall risk tolerance, liability structure, or state laws. The <a href="https://www.copera.org/recap-of-pera-boards-june-2021-meeting" class="broken_link">PERA Board of Trustees</a> determines the strategic asset allocation for PERA’s investment portfolio. Over time, the Board’s strategy and allocation have generated returns that have landed PERA in the top quartile of investment performance over the last 10 years (as of December 31, 2016) when compared with peer investors. In years when the global equity market is up, those investment programs with a large stake in that asset class might show a stronger performance. As a long-term investor, PERA has the responsibility to look at the long-term and not try to time the market.</li>



<li>Understanding these differences matters. These are differences with significant distinction. Certainly, it can be tempting to draw conclusions based on headlines or topline information – pension plans are complicated creatures. But, in the case of billion-dollar investment portfolios, the details matter. In the same way a smart traveler wouldn’t plan a ski trip at the beach in July, it is important to pay attention to what is happening and when – or risk some serious confusion when you show up with skis to build your sand castle.</li>
</ol>



Colorado PERA 2016 <a href="https://www.copera.org/comparing-apples-apples-rates-return-can-seemingly-vary-one-state-another" class="broken_link">Comprehensive Annual Financial Report</a>



<a href="https://www.copera.org/good-governance-is-standard-practice-for-colorado-pera" class="broken_link">Colorado PERA Statement of Investment Policy</a>

Comparing Apples to Apples: How Rates of Return Can Seemingly Vary from One State to Another

Conversation about PERA’s long-term financial health ongoing



Colorado PERA announced a 7.3 percent investment return, according to its 2016 Comprehensive Annual Financial Report (CAFR) released last week. The total fund—the combined assets of all five PERA member divisions—has now matched or outperformed the policy benchmark set by the PERA Board of Trustees for the one-, three-, five-, and 10-year time periods, net of fees. The long-term investment return for 35 years is 9.8 percent, gross of fees. (For more information on the Board’s responsibilities, including how it oversees PERA’s investment program, <a href="https://content.copera.org/colorado-pera-board-election-reminder/" target="_blank" rel="noreferrer noopener">see this PERA on the Issues post</a>.)



Those who have been following along with this year’s <a href="https://www.copera.org/pera-earned-7-3-percent-return-2016" target="_blank" rel="noreferrer noopener" class="broken_link">PERAtour effort</a> are likely aware that the PERA Board and staff are currently soliciting feedback from PERA members, retirees, employers, and the general public on ways to help reduce PERA’s overall risk profile going forward. In 2016, the PERA Board lowered the long-term investment return assumption to 7.25 percent from 7.5 percent, reflecting their expectations for future market performance. Additionally, the Board conducted an experience study which showed that PERA members are living longer—meaning that PERA must pay benefits for a longer period of time than previously expected. The numbers reported in this year’s CAFR reflect these changes.



PERA is required by statute to undergo an <a href="https://content.copera.org/pera-earned-7-3-percent-return-2016/" target="_blank" rel="noreferrer noopener">annual financial audit</a> overseen by the Office of the State Auditor, and conducted by an external audit firm. On June 22, 2017, the external auditor, CliftonLarsonAllen, reported to the PERA Board’s Audit Committee that they anticipate an unmodified “clean” opinion that the financial statements are presented fairly, in all material respects, for the seventh straight year.



In addition to the annual financial audit, the CAFR has <a href="https://www.copera.org/pera-earned-7-3-percent-return-2016" target="_blank" rel="noreferrer noopener" class="broken_link">consistently been recognized</a> by the Government Financial Officers Association (GFOA) for excellence in the area of governmental accounting and financial reporting. PERA’s CAFR received this recognition for the 31st straight year in 2016. PERA’s annual CAFR is a wealth of vital information regarding the fund, including details on financial, investment, actuarial, and statistical facts. Below is an infographic highlighting some of the important pieces of information that can be found within the report.

PERA Earned 7.3 Percent Return in 2016

A new analysis of reporting standards for public retirement systems was recently released by the <a href="http://slge.org/" target="_blank" rel="noreferrer noopener">Center for State and Local Government Excellence</a> (SLGE) confirming that Colorado PERA is getting it right when it comes to communicating the financial status of the plan. The report, “<a href="http://slge.org/wp-content/uploads/2017/04/Public-Pension-Reporting-and-Disclosure-2017-Report.pdf" target="_blank" rel="noreferrer noopener">Public Pension Reporting and Disclosure: The Current State of Practice and Examples of What Works Well</a>,” developed by SLGE with input and assistance from the <a href="http://www.nasra.org/" target="_blank" rel="noreferrer noopener">National Association of State Retirement Administrators</a>, finds 72 of the 83 systems in the sample follow the <a href="http://gfoa.org/" target="_blank" rel="noreferrer noopener">Government Finance Officers Association</a> (GFOA) reporting standards in producing their comprehensive annual financial reports (CAFR), with nearly half of the sample also developing a plain language or popular annual financial report.



Best practices include conducting an actuarial valuation once a year and an experience study every five years. PERA’s actuarial valuation is performed by an external consulting firm that reports to the PERA Board of Trustees. The actuarial valuation is posted on the <a href="https://content.copera.org/2016-legislative-session-wrap-up/" target="_blank" rel="noreferrer noopener">PERA website</a> along with the <a href="https://www.copera.org/investment-returns-beat-benchmark-in-difficult-year" target="_blank" rel="noreferrer noopener" class="broken_link">Comprehensive Annual Financial Report</a> (CAFR) and the <a href="https://content.copera.org/pension-communication-best-practices/" target="_blank" rel="noreferrer noopener">Summary Annual Financial Report</a> (plain language or popular report), which is also mailed to all PERA members in July.



SLGE included the disclosure of investment fees in the CAFR and online as well as using benchmarks to compare investment performance among the ways to promote transparency. (Investment expenses paid by PERA are on page 29 of the <a href="https://www.copera.org/investment-returns-beat-benchmark-in-difficult-year" target="_blank" rel="noreferrer noopener" class="broken_link">2015 CAFR</a> and asset class benchmarks are provided on page 123.)



According to the SLGE report, “Certain themes surface with regard to systems that have developed robust communication and financial reporting initiatives: the importance of active, two-way communication between the system and all stakeholders; the identification of communication and reporting as a priority by system leadership; the engagement of all stakeholders, even critics, before, during, and after the implementation of policy, benefit, and programmatic changes; and the openness to using social media technologies and/or establishing formal structures (e.g., advisory committees) to garner detailed feedback from a range of stakeholders.”



The <a href="https://www.copera.org/recap-of-pera-boards-june-2021-meeting" target="_blank" rel="noreferrer noopener" class="broken_link">PERA Board of Trustees</a> has as a priority the engagement of stakeholders and has a <a href="https://www.copera.org/policies-and-practice-shape-oversight-and-involvement-of-trustees-in-pera-investments" target="_blank" rel="noreferrer noopener" class="broken_link">standing committee</a> devoted to ensure a strong communications outreach effort is in place. SLGE noted that successful systems facilitate open communication “before, during, and after” the implementation of changes – a practice PERA is taking to the next level with the <a href="https://content.copera.org/pera-signal-light-divisions-orange-mean/" target="_blank" rel="noreferrer noopener">PERA Community Outreach Tour</a> website, the <a href="https://peraontheissues.com/">PERA on the Issues</a> and <a href="https://www.copera.org/pension-communication-best-practices" target="_blank" rel="noreferrer noopener" class="broken_link">The Dime</a> blogs, and <a href="https://www.copera.org/telephone-town-hall-frequently-asked-questions-3-2" target="_blank" rel="noreferrer noopener" class="broken_link">telephone town hall</a> meetings.

Pension Plan Financial Communication Best Practices and Colorado PERA

In June, the Board of Trustees of Colorado PERA released the <a href="https://www.copera.org/investment-returns-beat-benchmark-in-difficult-year" class="broken_link">Comprehensive Annual Financial Report</a> (CAFR). The CAFR disclosed the total PERA fund investment return from 2015, which was 1.5 percent.



“It was a very challenging year in terms of the investment markets,” noted PERA Executive Director Gregory W. Smith in the release of the CAFR. “We were able to achieve a positive return in an environment when a number of other public funds did not, which affirms PERA’s investment strategy and allows us to offer our retirees and the entire state a reliable source of economic stability,” Smith added.



Taking into account the 2015 investment return, the PERA trust fund is now 60 percent funded, meaning PERA’s current and future liabilities exceed its assets. For recent historical perspective, in 2010, PERA was threatened with insolvency and the General Assembly passed legislation to reduce benefits for members and retirees.



During the 2009 legislative session and as the significant decline in the financial markets associated with the Great Recession were recognized, the General Assembly directed the PERA Board to develop recommendations that would return the PERA trusts to long-term sustainability. Thus, the resulting <a href="https://content.copera.org/pera-board-of-trustees-remains-vigilant-about-funded-status/">2010 legislation</a> began as a recommendation from the Board after an extensive review and analysis process that included discussions with stakeholders throughout the state. The Board unanimously supported the reform measures of <a href="https://www.copera.org/preview?pageid=41010">Senate Bill 10-001</a> – even those Board members who were directly impacted by the personal sacrifice shared by all PERA members.



The most important responsibility of PERA Trustees is to act as <a href="https://www.copera.org/2018-board-election-underway" class="broken_link">fiduciaries</a>. Trustees are bound by a fiduciary obligation to act in the best interests of PERA members, retirees, and other beneficiaries, including survivors and those on disability. The changes that began in 2010 <a href="https://www.copera.org/puerto-rico-and-pensions" class="broken_link">brought PERA back to solvency</a>. Based on last year’s financial performance, it will take 44 years to reach 100 percent funding. While that is certainly a long time, PERA projections, along with independent projections performed for the Office of the State Auditor, show PERA will continue to be able to pay benefits now and into the future. Despite the continued solvency of PERA, the increased duration to reaching full funding is concerning.



The Board has just concluded two rigorous Request for Proposals (RFP) processes to select both an investment consultant and actuarial firm, making final selections in January and June, respectively. This positions the Board for in-depth analyses of the investment and actuarial assumptions that are used in assessing PERA’s financial health in the future.



The Board will share that information with members and a range of other stakeholders, including legislators who have the responsibility for setting PERA benefits and funding (the Board does not have that power). The PERA Board continues to remain open to all viable ideas that serve the members and their beneficiaries.



Learn more about the <a href="https://www.copera.org/recap-of-pera-boards-june-2021-meeting" class="broken_link">PERA Board of Trustees</a>.

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