The Public Employees’ Retirement Association had a good investing year in 2010 but still is feeling the hangover of the market drop in 2008.

Greg Smith, Meredith Williams, Maryann Motza
Meredith Williams, PERA executive director (center) makes a point during a hearing on July 11, 2011. At left is general counsel Greg Smith, with board vice chair Maryann Motza at right.

The pension system’s annual comprehensive financial report, released along with an annual outside audit on Monday, showed that the market value of PERA’s portfolio rose 14 percent in 2010 to a net asset value of $38.7 billion. The actuarial value, a different calculation used for forecasting, is about $39.2 billion.

“We had a pretty good year,” said Meredith Williams, PERA executive director.

PERA’s annual financial report is submitted about this time every year to the Legislative Audit Committee and is of high interest to the system’s 476,235 active, inactive and retired members, well over half of whom are in education. The system also covers state and judicial branch workers and some local government employees. (Figures for 2010 also include addition of assets from the former Denver Public Schools retirement system, which was merged into PERA at the beginning of the year.)

The system had assets with a market value of $41.1 billion in 2007, which plunged to $29.3 billion in 2008, the year the bottom dropped out of the economy.

The 2008 market drop had a huge impact. PERA’s three-year rate of return is -.3 percent, and the five-year rate of return is 4.7 percent. Over the last 25 years, the return has been 9 percent.

Unaudited numbers for the first six months of 2011 put market value at $40.2 billion, an increase of about 5 percent.

The continued hangover from 2008 also has affected the funded status of PERA’s five divisions.

The school division was 69.2 percent funded in 2009, dropping to 64.8 percent last year. The DPS division was 88.3 percent funded two years ago and 88.9 percent funded in 2010. The state, local government and judicial divisions all dropped.

“This has been a very, very difficult decade for the pension system,” Williams said.

The 2010 legislature passed a sweeping reform plan that reduced cost-of-living increases for retirees and made other benefit and eligibility changes that will make pensions less rich for new employees going forward. A lawsuit challenging that law recently was thrown out.

The law was intended to make the pension system 100 percent funded in 30 years, and officials told the committee Thursday they still believe that will happen.

“We’ll be close to 100 percent funded in 30 years,” said Thomas Cavanaugh of the actuarial firm Cavanaugh Macdonald Consulting, which advises PERA.

The PERA “rescue” plan approved last year includes the assumption that PERA assets will grow an average of 8 percent a year over the next 30 years, an assumption that some legislators question.

Republican Rep. Jim Kerr of Lakewood and Sen. Scott Renfroe of Greeley both raised that issue Monday, but the discussion was brief and low key.

Cavanaugh said that even if returns average 6.5 percent in the next 30 years, the system will remain solvent but will take longer to reach 100 percent funding.

“Even at 6.5 percent the fund is sustainable,” he said.

Chart of PERA assets
Chart of PERA assets over time. Source: Cavanaugh Macdonald Consulting. (Click to enlarge.)
Many observers trace PERA’s troubles to the late 1990s, when the legislature sweetened benefits but reduced contributions to the system. That’s “when we gave away the store … that’s the root cause of this,” Williams said.

In the middle of the last decade the legislature did increase contributions on a staggered schedule that continues for the next few years. But that has created financial pressures outside the pension system. School district contributions, for instance, are scheduled to top out at 20 percent of payroll, a cost that’s creating additional pressures on district budgets at the same time that state aid has been cut and local property tax revenues are shrinking.

The 2011 legislature saw several attempts to tinker with PERA, including Republican bills to change the makeup of the pension system’s board, convert the whole system to a 401(k)-type program and to allow school boards to shift more of the contribution burden to teachers. All failed, but PERA is expected to be an issue again in 2012.