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.

The <a href="https://www.copera.org/recap-of-pera-boards-june-2021-meeting" target="_blank" rel="noreferrer noopener" class="broken_link">Colorado PERA Board of Trustees</a> is constantly monitoring the performance of the PERA fund and the long-term health and sustainability of each of PERA’s divisions (State, School, Local Government, Judicial, and DPS).



On August 14, 2018, PERA’s actuarial firm reported to the Colorado General Assembly’s Legislative Audit Committee that PERA’s divisions, after the effects of SB 200 are taken into account, now have green or dark green signal light indicators, meaning that all divisions are projected to be 100 percent funded by 2048.



One of the key aspects of performance that the Board considers is the risk profile for each division trust, essentially the likelihood that something negative could happen that would threaten any division’s sustainability and PERA’s ability to pay benefits over the long term.



To better communicate the fund’s risk profile in a straightforward way, the Colorado General Assembly’s <a href="https://leg.colorado.gov/committees/legislative-audit-committee/2018-regular-session" target="_blank" rel="noreferrer noopener">Legislative Audit Committee</a> in 2014 directed the Office of the State Auditor to contract with an actuarial firm to develop a methodology to simplify the understanding of PERA’s financial status. The result of this study was the creation of a signal light color framework to report on PERA’s financial status.



Using a signal light color framework, the tool indicates how long it will take each PERA division to reach full funding, where dark green status means that a division would be funded by 2041 (30 years from 2011) and dark red status means that a division would run out of money within 20 years, with additional categories in between to indicate a spectrum of risk.



<a href="https://content.copera.org/peras-signal-light-is-now-green-what-does-that-mean/" target="_blank" rel="noreferrer noopener">Last year</a>, most PERA divisions were in the orange category, meaning that the PERA Board should develop a corrective action plan to reduce the amount of time it will take PERA to be fully funded. The result was the <a href="https://www.copera.org/2018-pera-on-the-issues-legislative-preview" target="_blank" rel="noreferrer noopener" class="broken_link">Board’s recommendation</a> to the Colorado General Assembly that ultimately became <a href="https://www.copera.org/peras-signal-light-is-now-green-what-does-that-mean" target="_blank" rel="noreferrer noopener" class="broken_link">Senate Bill 18-200</a> (SB 200).



The two largest of PERA’s member divisions, State and School, are in the green category which means that these trusts are projected to be 100 percent funded by 2048 (30 years from 2018). The Local Government, Denver Public Schools, and Judicial Divisions are in the dark green signal light category and are projected to be fully funded by 2041 (less than 30 years from 2018).



<figure class="wp-block-image"><a href=""><img decoding="async" src="https://content.copera.org/peras-signal-light-is-now-green-what-does-that-mean/"signal light" class="wp-image-2033"/></a></figure>



Read the full <a href="https://peraontheissues.com/wp-content/uploads/2018/08/08-01-18-Colorado-PERA-Signal-Light-Reporting-2018_Final.pdf" target="_blank" rel="noreferrer noopener">Hybrid Defined Benefit Plan Signal Light Reporting Report</a>&nbsp;as presented to the Legislative Audit Committee on August 14, 2018.

PERA’s signal light is now green. What does that mean?

To briefly summarize the reasons why the PERA Board sought legislation in 2018 that would adjust benefits and increase contributions:



<ul>
<li>Full funding in 30 years complies with Colorado statute and the <a href="https://www.copera.org/despite-changes-in-accounting-standards-pera-remains-on-track" target="_blank" rel="noreferrer noopener" class="broken_link">PERA Board’s policy</a>.</li>



<li>Full funding in 30 years gives PERA the ability to withstand inevitable future market shocks.</li>



<li>Full funding in 30 years matches the employment pattern of Colorado’s public employees better, thus ensuring intergenerational equity.</li>



<li>Full funding in 30 years strengthens the <a href="https://content.copera.org/reviewing-the-positive-impact-of-sb-200/" target="_blank" rel="noreferrer noopener">State’s credit rating</a>.</li>
</ul>



Although the changes included in SB 200 are difficult, they were necessary to ensure the long-term retirement security of PERA members. Some of the positive outcomes of SB 200 are below.



Reducing liabilities. With the changes in SB 200 and the 2017 investment return, PERA’s liabilities were reduced by $3.4 billion. This is a significant amount that reflects the sharing of responsibilities for righting the system among current and future members (who will pay more, will potentially have to work longer, and will have to wait at least three years before becoming eligible for an annual increase), retirees (who will have no annual increases in 2018 and 2019 and then a 1.5 percent cap), employers (who will contribute more), and the State of Colorado’s payment of the <a href="https://www.copera.org/reviewing-the-positive-impact-of-sb-200" target="_blank" rel="noreferrer noopener" class="broken_link">direct distribution</a>.



Improving PERA’s funded status. The funded ratio is a measure of funds available today compared to current and future payable benefits and is expressed as a percentage. PERA’s funded status also increased as a result of SB 200 and 2017 investment returns, going from 58 percent at the end of 2016 to 61 percent at the end of 2017.



Accelerating the time to reach full funding. The time to reach full funding in each division is now within a 30-year time frame. By shortening the time it will take to reach full funding, the trust funds are better able to withstand inevitable fluctuations in the financial markets.



<figure class="wp-block-table"><table><tbody><tr><td>Division</td><td>Projected Period of Time to Reach Full Funding Prior to SB 200</td><td>Projected Period of Time to Reach Full Funding Post SB 200</td></tr><tr><td>State</td><td>58 years</td><td>27 years</td></tr><tr><td>School</td><td>78 years</td><td>30 years</td></tr><tr><td>Local Government</td><td>55 years</td><td>15 years</td></tr><tr><td>Judicial</td><td>54 years</td><td>15 years</td></tr><tr><td>Denver Public Schools (DPS)</td><td>56 years</td><td>17 years</td></tr></tbody></table></figure>



SB 200 changes positively recognized by S&amp;P. One of the primary reasons cited for needing to pass SB 200 this year was the possible negative effect PERA’s unfunded liability could have on the State’s credit rating. Last fall, the Standard &amp; Poor’s (S&amp;P’s) credit rating agency issued a warning that a potential downgrade to Colorado’s credit rating could occur, due in part to the State’s long record of underpaying its share of the PERA fund costs. After the enactment of SB 200, S&amp;P Global Ratings revised the outlook to stable from negative.



SB 200 is in line with PERA’s mission. The actions taken by the PERA Board, the General Assembly and Governor, alongside PERA’s membership and stakeholders are notable and fulfill a commitment to promote the long-term financial security of the PERA membership while maintaining the stability of the fund.



For more information, see <a href="https://peraontheissues.com/wp-content/uploads/2018/07/CoPERA_financialsnapshot-extension.pdf" target="_blank" rel="noreferrer noopener">The Positive Impact of SB 200</a>&nbsp;fact sheet.

Reviewing the positive impact of SB 200

On Friday, June 22, the Colorado PERA Board of Trustees announced that PERA’s funded ratio had increased to 61 percent from 58 percent as a result of changes included in Senate Bill 18-200 and 2017 investment returns. The announcement came as part of the release of PERA’s 2017 <a href="https://content.copera.org/good-governance-is-standard-practice-for-colorado-pera/" target="_blank" rel="noreferrer noopener">Comprehensive Annual Financial Report</a> (CAFR).



In addition, the time-frame for reaching full funding improved significantly for each of PERA’s five divisions, dropping to 30 years or less based upon actuarial projections, while unfunded liabilities were reduced by $3.4 billion. PERA’s diversified investment portfolio returned 18.1 percent in 2017, outperforming its <a href="https://content.copera.org/how-does-pera-measure-up/" target="_blank" rel="noreferrer noopener">policy benchmark</a> by more than 2 percent.



“With the modifications contained in SB 200, PERA will continue to provide 587,000 members and retirees with a secure benefit,” said PERA Board of Trustees Chairman Timothy M. O’Brien. “We know that the changes in SB 200 impact all segments of the PERA membership, but it is through this shared responsibility that PERA’s risk profile was significantly reduced and PERA was strengthened,” O’Brien concluded.



PERA’s annualized, net of fees, time-weighted rate of return for the last three years is 8.8 percent, the five-year return is 9.5 percent, and the 10-year return is 6.0 percent.



“While I want to recognize the strength of this year’s investment performance, it is important to remember that PERA is a long-term investor,” said Ron Baker, PERA Interim Executive Director. “Necessary changes were made to the plan to better weather the inevitable ebbs and flows of the market. The provisions of SB 200, particularly the automatic adjustment mechanism, are designed to do that,” Baker added.



Amortization Period for Each Division



<figure class="wp-block-table"><table><tbody><tr><td>Division</td><td>Period of Time to Reach Full Funding</td></tr><tr><td>State</td><td>27 years</td></tr><tr><td>School</td><td>30 years</td></tr><tr><td>Local Government</td><td>15 years</td></tr><tr><td>Judicial</td><td>15 years</td></tr><tr><td>Denver Public Schools (DPS)</td><td>17 years</td></tr></tbody></table></figure>



For an overview of the CAFR, see the PERA <a href="https://content.copera.org/pera-corrects-the-record-about-proposed-federal-legislation-2/" target="_blank" rel="noreferrer noopener">Financial Snapshot</a>.

Legislation passed in 2018 put PERA on the path to full funding within 30 years

A key component of <a href="https://content.copera.org/direct-distribution-of-225-million-helps-return-pera-to-full-funding/" target="_blank" rel="noreferrer noopener">SB 200</a>, the legislation passed at the end of the 2018 legislative session that will put PERA on a path to full funding within 30 years, is a direct infusion of funding from the state budget.



If this legislation is signed into law by Governor Hickenlooper, beginning on July 1, 2018, PERA will receive $225 million as a direct distribution from the state. By statute, payments will continue each year until PERA is fully funded, meaning that there are no unfunded actuarial accrued liabilities in any division of PERA that receives the distribution.



PERA will allocate the direct distribution as proportionate to the trust of each division (Denver Public Schools, Judicial, School, and State). The Local Government Division Trust Fund, which has a higher funded ratio, will not receive an allocation. Unlike the other divisions, SB 200 does not increase the employer contribution from the Local Government Division.



The $225 million allocation can be impacted by the auto adjustment provision in SB 200, but by no more than $20 million per year. Additionally, the disbursement is capped at $225 million.



All funds from the direct distribution will go toward paying off PERA’s unfunded liability.



For additional information on this provision of SB 200, please see <a href="https://peraontheissues.com/wp-content/uploads/2018/05/DirectDistribution-final.pdf" target="_blank" rel="noreferrer noopener">this fact sheet</a>.

Tag Archives:

PERA’s signal light is now green. What does that mean?

Reviewing the positive impact of SB 200

Legislation passed in 2018 put PERA on the path to full funding within 30 years

Direct distribution of $225 million helps return PERA to full funding

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