Month: January 2019

Trend: States make adjustments to retiree cost-of-living payments

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By now, Colorado PERA members are well aware that their annual increase (AI), or cost-of-living adjustment (COLA), has undergone some belt-tightening changes with the passage of Senate Bill 200 last year. What members and retirees may not know is that this action followed a broader trend for public pension plans throughout the U.S. In the past decade, pension funds in 18 states, including Colorado, have enacted reforms that changed COLAs for existing retirees. Seven states have adjusted COLAs for current employees and new hires, and another six have changed them for new hires only.

While there are many types and variations of annual increases and COLAs (ad hoc, fixed, simple, compounding), essentially the adjustments to retirement benefits are meant to counterbalance inflation, which reduces the purchasing power of a fixed income. These adjustments are of additional importance to states such as Colorado, where a majority of public employees do not participate in Social Security. But unlike Social Security, defined benefit plans, including PERA, typically pre-fund COLAs via employee and employer contributions over the course of employees’ careers.

The structure of pension plans varies widely, so it’s only natural that COLAs do, too. PERA’s COLA is automatic, or predetermined by a set formula; and it’s compounded, meaning that annual benefit increases are calculated based on the original benefit plus any prior benefit increases. PERA’s annual COLA changes are influenced by the financial performance of the fund. For some PERA retirees, the COLA is based on factors such as the rate of inflation and the health of the Annual Increase Reserve for each membership division.

The COLA may also be affected by a person’s age, date of hire, or years of service and the length of time in retirement. If all of this seems complex, it is – because it varies for different PERA members. For a full explanation of how PERA’s COLA calculations work in practice, refer to the Annual Increase (AI) fact sheet.

The primary reason so many states have targeted COLAs in their pension reform efforts is cost, along with the U.S. economy’s recent track record of historically low inflation. The NASRA research (on page 3) notes that a compounded automatic COLA of 1.5 percent will add 11 percent to the lifetime cost of a retirement benefit, and a 3 percent COLA adds 26 percent to that cost.

The changes to PERA’s pension fund were enacted by the State Legislature, as is often — though not always — the case with pension alterations around the country. One key component of the Colorado General Assembly’s efforts in 2018 was the addition of an automatic adjustment provision, which could enable COLAs to decrease or increase depending on PERA’s progress toward reaching full funding within a closed 30-year time frame. The upshot for PERA members and retirees: The recent changes to the pension plan are not without pain and angst, but they’re part of a national trend toward protecting the long-term viability of public pension funds as well as stabilizing the funded status of the PERA plan which benefits all stakeholders.

2019 legislative session kicks off

Posted on by planeteria

The First Regular Session of Colorado’s 72nd General Assembly convened on Friday, January 4, 2019. Unlike 2018, when PERA’s sustainability was a major issue at the State Capitol, the PERA Board of Trustees has not identified any legislative agenda items for consideration this year. However, bills will undoubtedly be introduced that could impact PERA.

As is typical, the first day of session was mostly ceremonial; more substantive policy discussions will begin in the coming weeks. Legislators elected in November were sworn in, and each chamber officially approved their new leaders, who were chosen shortly after the election. The leaders of each caucus then addressed the entire body regarding their priority issues for the next 120 days. Finally, the first group of bills were officially introduced. The election’s results should drive the agenda this session, and there are many issues likely to dominate the headlines through May 3.

Education

Governor Jared Polis, sworn-in January 8, made education a key part of his campaign, particularly full-day kindergarten funding and expanded access to preschool. This pledge, coupled with Amendment 73’s failure at the ballot box and the Democratic sweep of the legislative branch, will lead to a much broader debate on education funding. Improving teacher salaries, increasing per-pupil funding, paying down the negative factor, and addressing teacher recruitment and retention are all issues that lawmakers will seek to address.

Transportation

Two measures (Proposition 109 and Proposition 110) intended to increase funds dedicated to transportation projects failed on the ballot in November. This result automatically triggers a provision contained in 2018 legislation that places another measure on the ballot in November of 2019, unless this General Assembly acts on the issue first.

Health Care

The 2019 session will surely see bills introduced dealing with health care. Many candidates campaigned on expanding access, improving quality, and driving down costs.

General Business

As a result of the State Senate flipping from Republican to Democratic control, bills from the past two years that had passed the Democratic-controlled House but were postponed indefinitely (killed) in the Republican-controlled Senate are likely to reappear. Examples include a nationwide effort to strike the criminal history box on employment applications, known as ‘ban the box;’ and the creation of a Family Medical Leave Insurance Program, or ‘FAMLI,’ that is intended to offer a state solution for paid family leave. Other proposals have included creating a state-sponsored retirement program for private sector workers and giving local governments the ability to set their own minimum wage.

Energy and the Environment

Though in November voters rejected Proposition 112, a statutory measure intended to increase setbacks for new oil and gas development to 2,500 feet from occupied structures or vulnerable areas, this will still be an issue at the Capitol. Other proposals mentioned by lawmakers and interest groups include a moratorium on new drilling permits and giving local communities more control over oil and gas projects, as regulation of them is currently a matter of statewide concern.

TABOR and Gallagher Amendments

Finally, many key policy issues are dependent on increased funding in an environment that is fiscally limited under current law. An interim committee met throughout the summer of 2018 to try and come up with solutions to address funding challenges by recommending changes to the Gallagher Amendment. It will be key to watch whether there is political appetite in the General Assembly to pass such a bill, and ultimately assess whether voters would approve any changes in November.

PERA staff will be actively tracking 2019 legislation closely, so stay tuned for updates throughout the session.

Retirement Roundup: Is retiring before age 60 wise?

Posted on by planeteria

A digest of timely information and insight about finance, investing, and retirement.

More people are saying they want to retire before 60. Is that wise? | MarketWatch
When it comes to retiring — especially if you hope to retire early — look before you leap. Americans are apparently more optimistic about their financial prospects, saying they intend to retire on average at age 62, two years sooner than they did five years ago, according to MassMutual’s 2018 State of the American Family survey. Additionally, four in 10 intend to retire before age 60, up from 32 percent when the survey was last conducted. This optimism may be misplaced. While financial markets and 401(k) balances have trended higher in the past five years, many Americans may have a false sense of security when it comes to being ready to retire. Pre-retirees should gauge their readiness for retirement by checking, and potentially adjusting, both their financial and emotional state.

Index investing: Not as passive as you might think | Pensions & Investments
Index investing isn’t really passive, according to a University of Toronto faculty member. “Rather than being passive in any meaningful sense, index investing simply represents a form of delegated management,” wrote Adriana Robertson, assistant professor in the University of Toronto law faculty, in a paper, “Passive in Name Only: Delegated Management and ‘Index’ Investing,” issued in November. “Not only are these indexes managed portfolios in the strictly financial sense, by their construction they imply a substantial amount of delegated decision-making authority.”

Retiring abroad in 2019? Consider these top 5 locations | CNBC
If you’re leaving the U.S. in search of a retirement paradise, be sure to look south. That’s because the top retirement haven for globe-trotting retirees is Panama, according to a new report from International Living. Using its Annual Global Retirement Index and evaluating countries based on 13 categories, including the cost of living, retiree benefits and more, the travel website ranked its top destinations for retirees. “There are three or four perennial favorites in the top, including Mexico and Panama,” said Dan Prescher, senior editor at International Living. “These places are just so logistically easy to get to, and they have established expat communities, so they’re easy to settle into,” he said. Just be sure that you give your financial planner and accountant a ring before you board the plane. You should know how a move overseas could affect your taxes.

Retirement is a transition, not a destination | Forbes
It’s less important to think about what you’re retiring from and more important to think about what you’re retiring to. Some industries no longer have a mandatory retirement age, so the decision may be up to you. Many of you can now negotiate if, when, and how you want to retire. This reality may be both exciting and daunting. It can be complicated if you’re an individual living alone and even more complicated if you’re in a relationship.

Why Alaska should return to a defined benefit plan to retain good teachers | Anchorage Daily News
The University of Alaska has an ambitious goal to grow its own teachers and double the number of education graduates hired by 2025. Homegrown Alaskan teachers do tend to stay and have longer careers in Alaska. But the state university’s initiative to double the number of locally grown teachers produced and hired in Alaska won’t happen until the Legislature rectifies the retirement structure for these professionals. The public needs to be aware of the many significant financial factors impacting young teachers’ decisions and influencing Alaska’s 20-30 percent teacher turnover rate. Outreach and mentoring will not be enough to reduce it.

Retirement Roundup: The confusion surrounding retirement planning

Posted on by planeteria

A digest of timely information and insight about finance, investing, and retirement.

Effective retirement plan communications are understandable, accessible | PlanSponsor
Employees need to understand their retirement plan options so they can make the best decisions for their future, but the general public often misunderstands words that are commonly used by financial providers, employers and others in the retirement planning industry, according to a new report from the Empower Institute.

As retiree health care costs soar, public employers turn to private insurers | Governing
The cost of retiree health care is spiraling out of control. In just two years, according to a recent S&P Global Ratings report, unfunded retiree health-care liabilities across the 50 states increased by $100 billion to now just under $700 billion. In response, some public entities are scrapping government-sponsored health plans and instead paying for retirees to purchase a plan on a private health insurance exchange. The change is expected to save some cities hundreds of millions of dollars and make their annual retiree health-care costs more predictable.

Six things you learn after retirement | US News
Retirement is a graduation of its own kind and a transition from one phase of life to another. Lessons from people who have already been retired for a while are sometimes encouraging, sometimes challenging, but they’re all valuable in their own way.

The bucket approach to spending reduces the stress of retirement | Ventura County Star
Anyone retiring in 2019 could understandably be feeling a little skittish. There’s retirement research showing market declines in the first few years can devastate a portfolio’s chances of providing enough income for life, and recent volatility after a nearly decade-long bull market is worrisome. Interest rates moving higher could be a good sign, in theory, for someone hoping to build ladders of CDs, for example. On the other hand, if it also ushers in an era of rising inflation, that’s troubling, too. And a prolonged government shutdown could have even more of an impact on the economy. But if delaying is no longer an option, either because of health, the job market or simply your own conviction, consider building in a few contingency plans.

Worried you’re never going to be able to retire? | Kiplinger
Some people spend more time thinking about retirement than others, but most everyone has at least a few ideas about what their life will be like when they don’t have to work anymore. Unfortunately for many, hoping and dreaming is about as far as they get in the planning process. They don’t know whether they can really achieve their goals because they haven’t taken the steps necessary to prepare for them. If that sounds like you, and you’re anywhere close to the age you think you’d like to be when you retire, be forewarned: Your retirement reality could be far different from the lifestyle you’ve imagined. And if it is, it likely will be because you ignored one or more of five basic threats.

Colorado named 3rdbest state for retirement | The Denver Channel
Colorado continues to be a great place for retirees, according to a new ranking released by personal finance website WalletHub. The Centennial State came in third on WalletHub’s list of the best states in which to retire, falling one spot from last year’s list. Florida was once again named the best state for retirees. WalletHub based its rankings on three main factors: Affordability, quality of life and health care, taking into consideration things like tax rates, cost of living, activities available for seniors, and cost and quality of health care, among others.

2018 Markets Year In Review

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After benefiting from strong returns during 2017, investors found 2018 far more challenging. A generally positive start to the year, for stocks in particular, gave way to concerns over rising interest rates, a continuing trade dispute between the U.S. and China, weakening corporate profit growth, and concerns about China’s slowing economic growth rate. As a result, asset price volatility returned to markets in 2018 after a long period of relative calm, and the year ended on a negative note.

As a reminder, Colorado PERA invests in multiple asset classes, including public equities, bonds, private equity, real estate, and opportunistic assets. PERA achieves a return in each of these areas through public and private market investments. The diversification of PERA’s $46 billion portfolio helps to maintain a more stable return stream, even during volatile times, such as 2018.

Looking at specific areas of investment, global stock markets faced significant headwinds last year, which only worsened in the final three months of 2018. The MSCI All Country World IMI Index, which is PERA’s Equities asset class benchmark, and which measures the performance of stocks of all sizes in both developed and emerging market countries, fell 10.1 percent (in U.S. dollar terms and net of taxes) during 2018. This index was actually up 3.7 percent during the first nine months of the year, only to fall 13.3 percent in the final quarter, as the aforementioned economic worries emerged.

Regionally, stocks saw divergent results for the first three quarters, while falling across the globe in the fourth quarter. In the U.S., the total return for the flagship S&P 500 Index was a positive 10.6 percent through the end of September. The final three months of the year saw a sharp reversal, as the index dropped 13.5 percent, creating a yearly total return loss of 4.4 percent. The rest of the developed world did not benefit from the same good start as the U.S., as the MSCI World ex U.S. Index fell 1.5 percent in the first nine months, before dropping 12.8 percent during the final three months and losing 14.1 percent for the full year. Emerging market shares fared even worse than those in developed nations, shedding 7.7 percent through the end of September, losing 7.5 percent in the final quarter, and costing investors 14.6 percent for the full year.

Fixed income securities also exhibited significant volatility last year. The U.S. 10-Year Treasury Note saw its yield move from 2.40 percent at the beginning of the year to a peak of 3.26 percent in early October, before ending the year at 2.68 percent. The 2-Year Note had even more extreme yield moves, starting at 1.88 percent, peaking at 2.97 percent, and ending at 2.49 percent. Treasuries appeared to benefit from a “flight to safety” in the final quarter of 2018, as investors sold falling stocks and bought bonds, causing bonds prices to rise and bond yields to fall.

While 2018 was disappointing with regard to investment market returns, PERA continues to focus on a multi-decade investment horizon, consistent with the long-term needs of our members. Because approximately one-fifth of the portfolio is not publicly traded and publicly valued (real estate and private equity investments), PERA’s official 2018 investment results have yet to be finalized.

The final investment return results for 2018 will be known once the financial audit overseen by the Office of the State Auditor is completed and the financial statements have been reviewed by the PERA Board of Trustees in late June. These results will be used as part of the calculations that determine PERA’s progress toward the funded goals laid out in last year’s SB 18-200 legislation, which included an automatic adjustment provision designed to keep the system on track to full funding.

Why public pensions benefit everyone

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For all the talk about how much public pensions cost state and local governments—and by extension, taxpayers who don’t work in the public service sector—the positive economic effects these plans have on virtually every state and city in the country have received far less attention.

A new report by the National Institute on Retirement Security (NIRS) provides a much clearer picture of just how significant this contribution is. On January 10th, NIRS released “Pensionomics 2018: Measuring the Economic Impact of Defined Benefit Pension Expenditures,” which quantifies how much public service retirees spend in and around their communities.

These amounts could hardly be more significant: In 2016, retiree spending of pension benefits created $1.2 trillion of economic output and supported about 7.5 million jobs across the U.S., which is almost 5 percent of the country’s entire workforce. These funds also poured $202.6 billion into federal, state, and local coffers in the form of taxes.

About the results, NIRS executive director Diane Oakley said, “Pension expenditures are especially vital for small and rural communities where other steady sources of income may not be found if the local economy lacks diversity.”

When retirees receive their monthly check, the ripple effects begin. In 2016, almost $295 billion was paid to about 10.7 million retired state and local public service workers and their beneficiaries. These people then use this money to pay for goods and services such as food, health care and retail products, and most of this everyday spending, of course, happens where retirees live. The report concludes that each dollar paid in pension benefits in 2016 supported $2.13 in total economic output nationwide.

But that’s not all. By their nature, public pensions invest much of what they receive as contributions from employees and employers, which means that thanks to pensions’ strong long-term investment returns and the shared funding model, in 2016, each taxpayer dollar that went to supporting these pensions generated $8.48 in total economic output.

This already impressive return on investment has an even more acute impact in Colorado, where 90 percent of the state’s retirees choose to live after they end their careers instead of heading for retirement hotspots such as Arizona or Florida.

Economic and business analysis firm Pacey Economics calculated the economic impact of benefits paid to retirees in the Colorado PERA system, and found that these retirees generate about $6.5 billion in annual economic output on $4.1 billion in benefits paid, which supports about 35,000 non-public service jobs statewide.

As the accompanying chart illustrates, in almost half the counties in Colorado, PERA benefit distributions amount to at least 10 percent of area payroll, and that number rises to more than 25 percent of payroll in four counties. And per Oakley’s comments, Colorado’s more sparsely populated areas see the greatest impact from these funds.

The political and economic discussions around public pensions are complex and thorny. But as these debates continue, it’s worth remembering what invaluable contributors they are to the national as well as local economies.

In almost half the counties in Colorado, PERA benefit distributions amount to at least 10 percent of area payroll, and that number rises to 25 percent of payroll in four counties.