Back in November of 2010, in the warm afterglow of Senate Bill 1, the so-called “PERA fix,” Meredith Williams, then the executive director of Colorado’s Public Employees Retirement Association, declared that:
“PERA is not the problem. Retirement security is a big problem. Instead of dumbing down PERA to the level of everything else, why don’t we try to raise everything else up to the PERA level? Where our members do have a very secure retirement.”
“On the final slide here tonight, Slide 14, you see a number of allegations about defined benefit plans, and I think that’s just what they are. The bottom line is that defined benefit plans are the low-cost leader in producing retirement benefits for retired members. There is no better way.”
The recent news report that PERA saw a paltry 1.9% return on its investments in 2011 calls into question those bold claims by Williams (who announced in April that he would resign June 30.)
In fact, PERA claims at this point, to be only 59.9% funded, with an unfunded liability that has grown from an estimated $14 billion to just over $25 billion in this one year. In fact, that likely understates the problem considerably. It assumes a “hysterical, laughable” average 8% return over the next 30 years (quoting New York Mayor Michael Bloomberg’s analysis of the public pension situation in his state.)
Even if PERA anticipated an annual return of 6.5%, it would barely have 50 cents of the dollar it needs to cover its projected liabilities, almost $37 billion of which remain unfunded.
Even that likely understates the problem. According to new Government Accounting Standards Board rules, the unfunded portion of the liability needs to be discounted – not at the expected rate of return, as in the above estimates – but at a lower, long-term cost of borrowing for the state, which for Colorado is about 4.5%.
Among the “allegations” that Williams mentioned in 2010 is that public defined-benefit plans assume investment returns that are too high, and that they are headed towards insolvency.
Where would anyone get that idea? (Hint: Central Falls, R.I..)
Almost all private corporations have moved away from defined-benefit plans to defined-contribution plans, realizing that they simply couldn’t meet the promises they had made without bankrupting their companies. The dynamics of public pensions are no different, and will eventually do the same to the communities that sponsor them.