The state’s public pension system last year paid out more than it took in, auditors and system officials told the Legislative Audit Committee on Monday.
The value of all funds administered by the Public Employees’ Retirement Association, known as PERA, declined $1.2 billion, or 2.8 percent, to about $39.9 billion, according to the pension system’s annual report, which was presented to the committee. PERA’s annual report and audit come before the committee every July.
The 483,467-member system covers all Colorado teachers and several thousand higher education employees. PERA’s financial health and its costs also are closely watched by the state’s school districts, whose pension contributions are scheduled to rise to about 20 percent of payrolls by 2018.
Was the decline “just because of market conditions?” asked committee member Rep. Jim Kerr, R-Lakewood.
“There was a significant decline in overall returns … PERA was generally in line with the overall market” in 2011, said auditor David Eberly of KPMG, which audited the pension system for the state auditor’s office.
PERA’s investment income actually rose last year, up $724 million, a return of about 1.9 percent. The system also recorded employer contributions of just over $1 billion and employee contributions of $855 million.
But the system paid out benefits of nearly $3.3 billion, accounting for the year’s loss.
The pension system has been in the Capitol spotlight since 2008, when the national economic downturn caused a 26 percent loss in PERA assets.
Major legislation passed in 2010 was intended to help restore PERA’s long-term financial prospects by tightening various eligibility and benefit rules. Increased employer contributions were set by earlier legislation.
But some legislators, particularly Republicans, are nervous about PERA’s future, particularly PERA’s current assumption of 8 percent average investment returns over the next 30 years.
Kerr, a leading legislative critic of PERA, noted that the system’s rate of return over the last 10 years is less than 6 percent and said, “I’m curious why you haven’t modified your (assumptions) to reflect that real number.”
Gregory Smith, PERA interim executive director, said the system’s board has studied the issue carefully and received lots of professional advice: “The process has resulted in a belief by the board, or at least the majority of the board, that 8 percent is a realistic figure.”
Kerr continued pushing his point, saying, “Why does the board continue to use a number that hasn’t been sustained for 10 years?”
“The board listens to experts,” Smith replied.
“Are these the same kind of experts who are with the city of San Bernardino?” Kerr asked, referring to a California municipality that recently declared bankruptcy.
“I don’t know who the experts are for the city of San Bernardino,” Smith replied.
Sen. Lois Tochtrop, D-Thornton and a PERA supporter, used a different statistic – a 10 percent rate of return over three years – to conclude, “Overall, PERA is pretty stable.” Tochtrop later made a point of complimenting PERA on a clean audit by KPMG.
After she praised PERA executives for “good work,” Republican Sen. Scott Renfroe of Greeley quipped, “I don’t know if I call a billion-dollar loss good work.”
Jennifer Paquette, the system’s chief investment officer, told the committee that 2012 investment returns through May are running at about 5 percent. She also noted that PERA’s 2011 investment performance was higher than market benchmarks.
Educators major part of PERA membership
The schools division of PERA, which covers most of the state’s teachers, has 51,861 retirees, 116,415 active members and 100,203 inactive members. A separate Denver Public Schools division has about 13,500 members; Denver’s pension system recently merged with PERA.
PERA also has separate divisions for state employees (including higher education), participating local governments and court employees. Each division has a separate trust fund that can be used only for its own members.
Teachers contribute 8 percent of their salaries to PERA, while districts contribute 15.73 percent of payroll, an amount scheduled to rise to about 20 percent by 2018.
The average annual pension for a schools division retiree is $34,740. PERA members aren’t eligible for Social Security. The division’s trust fund is about 60 percent funded and is estimated to be fully funded in 35 years, if the average 8 percent rate of return holds up.
The pension system is governed a 16-person board, including 11 elected by the members, three appointed by the governor and a non-voting member representing DPS retirees. State Treasurer Walker Stapleton, a Republican and a vocal critic of PERA, also sits on the board and has sued the agency over release of some retiree information.
The board is chaired by Carole Wright, a retired Aurora teacher. Six board members have education ties.
Republican lawmakers regularly introduce bills to make major changes in PERA, including the composition of the board. The board has no power over benefits or employer contribution rates; those are set by the legislature.
Such bills have gone nowhere in recent sessions, generally dying in the Democratic-controlled Senate.
Missing from Monday’s meeting was Meredith Williams, PERA executive director for 11 years and a key figure in fending off attempts to change the system and upend the 2010 restructuring. Williams now heads the California-based National Council on Teacher Retirement.