Month: July 2020

How It’s Made: PERA’s Financial Report, Part 1

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A standard sheet of office paper weighs 4.5 grams. So, if you were to download and print the 2019 Comprehensive Annual Financial Report, you’d find yourself with 1.358 pounds of information about PERA—about the same weight as a bottle of Coke (though a much shorter digital version is also available).

Books known for their size—a dictionary, a telephone book—are often the authoritative text on their subject. The CAFR is just that; the go-to source for PERA’s financial situation, demographic information, funded status, and more. For a book with so many answers, however, there are often as many questions asked about it. Why is the 2019 report released halfway through 2020? How can any non-accountant possibly glean anything from the tables of information?

The best place to find answers to those types of questions isn’t in the CAFR, but with the people who help make it. About 40 people at PERA are actively involved in the production of the CAFR, about half of them accountants. Most of them work on a portion of the CAFR in addition to other roles. A smaller team of five—the “CAFR team”—spends much of their time throughout the year preparing it. Understanding the work that goes into creating the CAFR can unlock a better understanding of what’s inside.

361 On, 4 Off

If you just glance through a few of the 19 different CAFRs archived online, they might appear to be identical, with the exception of the numbers in the tables. But changes and improvements take place every year.

Some changes are technical and more formal, made in order to comply with updated guidelines from the Governmental Accounting Standards Board (GASB). But other changes are the result of people like Catherine Maninger, PERA’s Controller and a member of the CAFR team, who go through the latest CAFR every summer, days after it was released, to see what could be done better, much like an NFL quarterback might stay up late Sunday night going over film from a game earlier that day.

Simplification and elimination of duplication were the themes for changes to the 2019 CAFR. Prior to this CAFR, a change to any of the actuarial assumptions PERA uses was described in written form. This year, that text was transformed into charts, allowing a person to visually grasp the changes quickly. Also, the section devoted to discussion and analysis by PERA management has been pruned back compared to past years, contributing, in part, to the 2019 CAFR being 20 pages shorter than last year’s.

Now that 2019’s version has been released, the CAFR team is setting their sights on next year. The team didn’t have long to rest after the 2019 CAFR was released on Friday, June 19. The kickoff meeting for the 2020 CAFR took place on June 24. 

Seeing the Big Picture

The Accounting department is on the seventh floor of PERA’s building, southeast of downtown Denver. Most of the windows on this floor face east. From here, you can see the landscape of the city, as tall apartment buildings and dense neighborhoods nearer downtown give way to single-family homes miles away. On the horizon, you can make out where buildings dwindle altogether, replaced by open land.

It takes being seven stories up to get a perspective like this, allowing a person to take in vast swathes of information at once. It helps you see the forest among the trees. It’s hard to visualize that view with its many details while standing on the sidewalk below.

Gaining a broad perspective on the CAFR is a crucial part of its creation. Instead of traveling up an elevator to get it, however, the circle of those involved in its creation is expanded.

Any proposed changes to the following year’s CAFR are reviewed by PERA executives and the PERA Board of Trustees in the fall. “We have a very active Board Audit Committee,” Maninger said. “They take their fiduciary duty seriously and are really involved in reviewing the CAFR before it is published.” As an example, she said the committee posed more than 150 questions to PERA staff about the 2019 CAFR during their review this spring.

Rebecca Shelton and Joshua Neugebauer work in PERA’s Investment Division and also play a major role in the CAFR’s creation. “Investments and accounting work at things through different lenses,” Shelton said. “The CAFR needs to make sense from both an accounting standpoint and an investment standpoint.” These differing points of view are used to make the CAFR better.

Neugebauer said that evidence of one such collaboration can be seen in the 2019 CAFR. “We reviewed several CAFRs from other states last fall, and we noticed that a few other plans highlighted internal management costs”, he said. “Because that is such a compelling story—how we’ve structured the investment program—we thought we’d highlight that a bit more in this year’s CAFR.”

It’s a straightforward idea, but it required a lot of legwork. Determining how costs are assigned to investing activities ended up requiring a lot of work between multiple divisions. The end result—a chart on page 124—might not immediately stand out to the average reader and probably won’t grab any headlines. It wasn’t required by any regulatory agency or accounting rule. But this small change represents something much bigger: an ongoing internal commitment to finding new and better ways of sharing how PERA works.

Transparency is not a one-time event. A single, dramatic display of transparency can be indicative of a long overdue need for it. On the flip side, a culture of transparency is built by focusing on making incremental improvements, year after year. Over time, it adds up.

This is the first installment of a two-part story. Read the second installment here.

Retirement Roundup: ESG is Easier Said Than Done

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A digest of news from publications around the nation about finance, investing, and retirement.

Investors Love ‘Socially Responsible’ Companies. But Sorting the Good from the Bad Is Harder Than It Looks | Money

ESG funds—those that screen investments for environmental, social, and governance factors—have risen in popularity in the past few years. But distinguishing “good” from “bad” can quickly become complicated. Black and white quickly become gray when assessing global companies with dozens or hundreds of product lines, clients, and supply chains. One researcher compared various ESG funds and found an average correlation of 0.54. This suggests that, while the concept of ESG is gaining popularity, finding a consistent model to implement is not as easy as ABC.

US Public Pensions Bounce Back from Dismal First Quarter | Chief Investment Officer

You might have heard the term “V-shaped recovery” (a recovery that’s as swift as the decline) when experts discuss the future of the economy. While many components used to measure the economy have not fully recovered, like the unemployment rate, many investors have seen their portfolios recoup much of their earlier losses, including many public pensions. The 100 largest public pension systems regained $308 billion in market value between March and July. Experts quoted in the article state that, despite the quick market recovery, the future remains uncertain.

Take this Social Security quiz and see if you are smarter than the average American | CNBC

Social Security is a program entirely separate from PERA. However, many PERA members rely on their own or a spouse’s Social Security benefit to some extent in retirement. Understanding Social Security is not easy according to a 12-question poll conducted by insurance company MassMutual. One in two respondents received a grade of D or F when asked true-false questions about the program. How does your knowledge stack up against the average?

The ‘Dirty Dozen’ Tax Scams Of 2020: $27 Billion Hit To Business | Forbes

Tax scams peak after tax day, which was delayed until July 15 this year. Last year, the FBI received about 300,000 complaints about possible scams, though they suspect that if every scam were reported that number would be closer to 20 million. This article summarizes common scams so you can be better prepared to spot them. Nobody thinks they’ll be scammed, but the truth is that scams cost Americans billions every year.

PERA Retirees Have a Big Effect on Colorado’s Economy

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As the global economy continues to fluctuate in reaction to the COVID-19 pandemic, PERA members continue to inject over $4 billion into the state and local economies. The economic role PERA retirees play in the areas in which they live is the focus of the recently released Economic and Fiscal Impacts 2020 report, prepared by Boulder-based Pacey Economics, Inc.

The Value of a Defined Benefit Plan

In a defined benefit plan, employee and employer contributions go into a trust. Funds in this trust are invested. Any investment returns increase the trust’s overall value. Funds in the trust are used to pay retiree benefits.

Economists at Pacey calculated that PERA employer contributions account for about three percent of the overall budgets of participating employers. Once those contributions arrive at PERA, they get put to work. Over the past three decades, investment returns have been the largest source of additions to the fund (61%), ahead of employer contributions (22%) and employee contributions (17%).

“We feel that this is a much more efficient use of money than a 401k plan or Social Security,” said Jeffrey E. Nehls, an economist at Pacey Economics. “If we were to put the same money in a 401k or Social Security, we wouldn’t have as good of an outcome, as much money for retirees to spend.”

Nehls said that Social Security is a regressive benefit. Middle-class income earners in Social Security recoup a smaller percentage of their total contributions compared to PERA retirees. One contributing factor is the way in which contributions are invested. “Social Security is required to invest in Treasuries,” he said. “So, they don’t earn as much interest on their earnings compared to PERA, making it a much less efficient use of contributions.”

Taking the Guesswork Out of Retirement

Nehls added that a retiree with a defined benefit plan doesn’t need to guess about longevity when making a retirement budget, while a person relying on a defined contribution plan like a 401(k) does. Those in a defined contribution plan must predict how long they might live when determining how much to withdraw each year. Erring on either side has financial consequences. Overestimate your lifespan, and you curtail your spending and leave money on the table. Underestimate, and you find yourself without needed income later in life.

It’s unlikely any person can guess their lifespan in advance, so most people will end up overestimating or underestimating to a certain degree. “But in a defined benefit plan,” Nehls said, “you avoid that problem of having to adjust risk in spending.”

Additionally, 401(k) plans are less efficient because participants often dial down risk, and potential returns, as they near retirement, as well as throughout retirement. Funds in a defined benefit plan can remain more fully invested in investments with higher potential returns.

The PERA Retiree Impact on Colorado’s Economy

The report illustrates the ways in which retirees are an integral part of their local economy. Because 106,059 PERA retirees live in Colorado, the statewide effect is significant.

Nehls said that if he had to convey this concept with a single image from the report, he would choose this one:

This image details how the income PERA retirees receive ($4.11 billion in 2019) ends up producing $6.66 billion in economic output. That’s because retiree income has, in the language of economics, a high velocity of money.

Velocity of money is a measure of how many times a dollar gets moved from person to person during a set amount of time.

Someone who is employed might save some for retirement, save some for a down payment on a home or car, save some for a college fund for a child. Saving money is good for the individual in this instance, but it removes money from actively flowing through the economy. This results in a low velocity of money.

On the other hand, retirees, especially those who receive a steady income, tend to spend a higher percentage of their income as long-term saving is less of a priority. This results in a high velocity of money, which can have powerful downstream effects. Pacey economists calculated that retiree spending in Colorado results in supporting 32,772 jobs.

A Constant Amid Uncertainty

“The other big takeaway,” Nehls added, “is that when there is an economic downturn, like the one we are experiencing now, retiree spending acts as a huge stabilizer. People in a defined benefit plan like PERA have the same paycheck every month. While some people lose some or all of their income, retirees have money to keep the economy going. A defined benefit plan is not volatile, unlike the labor market or stock market.”

This stabilizing effect is especially important in Colorado’s rural areas, where retiree income makes up a greater share of area payroll. In 26 Colorado counties (nearly all rural), these distributions represent at least 10 percent of the county’s total payroll.

PERA retirees play an integral role in their communities. They provide leadership. They continue to do important work, often volunteering their time. The economic benefit they provide is another way in which their communities rely on them. As the introduction to the report states, “the stability and size of PERA’s monthly benefit payments will continue to grow and help Colorado’s economy weather and recover more quickly than if this 89-year investment by Colorado wasn’t continued and secured on behalf of the citizens of the state and for our civil servants who help us all to continue to make our wonderful home of Colorado better.”

Highlights of the Economic and Fiscal Impact Study of Colorado PERA—State of Colorado

Retirement Roundup: Money Advice that Motivates

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A digest of news from publications around the nation about finance, investing, and retirement.

Follow these 5 money rules while you’re still young—or ‘regret it later in life,’ says finance expert | CNBC

If your idea of effective financial advice sounds like a fitness instructor who pushes you to get better, read this article. The author pairs time-tested wisdom with some important hard truths. The importance of saving for the future, for example, is a universally accepted money mantra but isn’t universally achieved. Excuses for not saving wither under the author’s tough observation: “Accept that living below your means requires suppressing your ego to below your income.”

10 Important Ages for Retirement Planning | US News

Pop quiz: At what age can you contribute more to your 401(k)? What’s the earliest you can leave your job and start withdrawing from your 401(k)? When do you need to sign up for Medicare? For answers to these and other age-related retirement questions, consult this summary from US News.

Inflation, Deflation | NPR

Inflation has held relatively steady for years. The last time the inflation rate swung 5% up or down in one year was 1990. This radio piece from NPR addresses the question: will COVID-19 change this? Trying to read traditional economic metrics isn’t as easy in current conditions. We’re simultaneously experiencing a supply shock, as businesses shut down for months reducing output, and a demand shock, as millions of people lost jobs, hours, and those who didn’t still were reducing spending. A recovery is unlikely to be linear, as hot spots pop up and are put down. “There are so many things broken in our economy that our future depends on which one of them gets better first,” said host Robert Smith. “If demand picks up first before supply you get inflation. And if supply is raring to go but there’s no demand, we might get deflation.”

Will ‘Whiplash’ Volatility Continue in Q3? Most Likely. | PlanSponsor

After a tumultuous March and April, the stock market roared back in May and June. Meanwhile, millions remain out of work. Is the worst over? Will the recent uptick in cases have ramifications for investors? This analyst can’t predict where we’re going but won’t be surprised if we see turbulence along the way.

Telephone Town Hall Addresses Member Questions

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PERA’s telephone town hall is an annual event in which members can hear Colorado PERA Executive Director Ron Baker and Chief Investment Officer Amy C. McGarrity address their questions. This year’s telephone town hall took place on July 8.

The telephone town hall traditionally takes place soon after the release of PERA’s Comprehensive Annual Financial Report. This gives members the chance to ask questions about the report, which contains a detailed picture of PERA’s financial and demographic situation. As usual, PERA hosted one meeting for retirees in the morning and another in the evening with active members.

Below is a recap of the types of questions answered during the town halls. (You will also be able to listen to a recording of the entire event soon.)

How are PERA’s investments doing?

PERA had a very strong investment performance last year. At the end of 2019, PERA’s investments delivered an annualized return of 20.3% (net of fees) versus the benchmark return of 19.8%.

All of our asset classes had a positive return last year. The Fixed Income portfolio returned 9.2%. PERA has a vast majority of its portfolio in global public equities and that portfolio returned 29.5%. We were also able to make some gains in our private market asset classes. Our Private Equity portfolio returned 13.7 percent last year. Our Real Estate portfolio had a total return of 8.4 percent, and the Opportunity Fund closed the year up 6.4 percent.

The global pandemic not only has caused a significant disruption in investment markets: It has changed our everyday lives. PERA won’t have official data about this year until the 2020 CAFR is compiled and audited, about this time next year.

What is PERA’s funded status?

Recent changes to PERA, which include increased contributions and reduced annual increases, have been difficult for everyone, but they help build a secure, sustainable retirement benefit for Colorado’s public employees and equip PERA to adapt to the unexpected ups and downs the future will bring. It’s important to point out that PERA remains not only a secure benefit, but it also is very competitive and continues to offer employers an effective recruitment and retention tool for a highly qualified, modern workforce.

PERA’s funded ratio at the end of 2019 was 61.9%. Another way to look at that is the number of years it will take us to achieve full funding, which is the projected funding needed to cover projected liabilities based on actuarial estimates. We are projected to reach full funding in 24 years.

Will I get an annual increase this year?

Yes, all eligible benefit recipients will see a 1.25% increase with their July benefit checks later this month.

Where does my increased member contribution go?

Contribution rates increased for active members and their employers on July 1. Most of our members are now contributing 10% to their PERA member account, and most employers are contributing 20.9%. You can find your contribution rate, which is based on where you work, on the PERA website.

Member contributions – and the interest earned – only ever go to fund each individual member’s retirement account. Every dollar contributed by a member will be returned to that member either through a monthly lifetime benefit or a refund/rollover upon termination of employment.

What changes did the legislature make to PERA to help balance the state budget?

The most significant change affecting PERA was the one-year suspension of the Direct Distribution from the State of Colorado to PERA, which was implemented as part of the reforms in 2018. This payment to PERA goes to pay down the unfunded liability, and is in addition to the contributions the State makes to PERA as an employer. The PERA Board, as fiduciaries and pursuant to their funding policy, oppose any reductions in contributions to PERA as well as increases in benefits. However, we understand these unprecedented times require tough decisions in order to balance the state budget.

The end result of the legislation means we will not receive this year’s distribution, and any reduction in funding to PERA increases the likelihood of triggering the Automatic Adjustment Provision in future years. The CAFR we just released already reflects this change, and no adjustment is necessary next year.

What is PERA doing to protect the fund from market volatility during these uncertain times?

PERA is built to withstand ups and downs in the market and maintains a long-term outlook with its investment program. Just last year, the Board reviewed and updated PERA’s investment policies, including the asset allocation of its investments and the way PERA manages risk. We can’t predict the future, but our seasoned investment team is prepared to navigate these uncertain conditions. We have the mechanisms in place to keep our focus on providing financial security to our current and future retirees.

Bottom line, PERA plans for the long term and will continue to pay benefits and offer our members a secure retirement.

The Importance of Stewardship in Uncertain Times

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The year so far has been marked by changes—unexpected, difficult, and sometimes disorienting changes. Colorado PERA has been around since 1931. It has been through a world war and a cold war, the dotcom crash and the digital revolution. In other words, while 2020 has been tough, it is neither the first nor the last year of seminal change.

In June, PERA released its Comprehensive Annual Financial Report. It answers, among other things, a common question about PERA: “How did PERA’s investments perform last year?” This is an important question to ask. Another question, asked a little less frequently, is this: “How is PERA positioning its investment portfolio for the future, a future that will continue to see changes?”

That question is answered in the recently released 2020 Investment Stewardship Report. Stewardship means “taking care of something.” In this case, “something” is members’ dollars. This report helps demonstrate the ways in which PERA is continuously evolving, adapting to an ever-changing environment, while keeping its fiduciary duty to members at the center of decision-making processes.

Highlights of the report include:

  • PERA created the Investment Stewardship Division. Having resources dedicated to formalizing and advancing investment stewardship initiatives demonstrates PERA’s commitment to this organizational priority.
  • By consistently focusing on the most compelling expected risk-adjusted returns, PERA’s Real Estate portfolio has generally earned strong returns from investments in green buildings and affordable housing, as well as local Colorado properties, among many other investments.
  • As an institutional investor, PERA uses its voice to advocate for transparency and disclosure in financial markets. Making information about PERA’s investment activities more accessible to our members and others who have a stake in PERA’s success is equally important. To that end, PERA is also increasing the transparency of its own investments by producing a number of short videos, hosted on copera.org.

Change seems especially acute in 2020, but the truth is that it’s an ever-present factor. Building an organization that can nimbly adapt to change and that takes the initiative to integrate a variety of considerations into investment decisions helps keep PERA relevant, innovative, and, ultimately, a source of value to our members.

You can find the complete 2020 Investment Stewardship Report as well as the Executive Summary here.

PERA On The Issues will be highlighting key sections in the coming months.