Month: January 2021

News You Should Know: DB Retirees Have $1.3 Trillion Economic Impact

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Pensionomics 2021 | Measuring the Economic Impact of DB Pension Expenditures | NIRS online

Retirees with a pension generated $1.3 trillion in total economic output in 2018, according to this recently released study. That economic activity supported nearly seven million jobs. The study included public sector and private sector pension systems and is similar to a report PERA releases.

Financial planning considerations after the loss of a spouse | NJ.com

The death of spouse is not only difficult—it also often results in making changes like where to live, how you spend your time, and, yes, finances. This article walks readers through some of the financial changes surviving spouses might need to address. Thinking through these scenarios as part of your planning process now, as opposed to waiting until you are forced to deal with it later, can prevent unnecessary stress.

More Americans Are Saving Than Ever Before, Though in Unequal Amounts | Yahoo Finance

This article unpacks a study that looked at long-term savings trends. One big trend is that, since 1989, more people own some type of financial asset. But the details tell a murkier tale. For example, more Black and Latino families have financial assets of any type, but the average value saved is 10 times less than white families, on average. Single parents of any race also face similar gaps in saving amounts.

Mark Your Calendar: 6 Birthdays to Know for Retirement | Kiplinger

Turning 65 is an important milestone to reach when it comes to retirement. Why? That’s when you become eligible for Medicare, which can significantly reduce healthcare costs. But that’s not the only birthday that’s important when you’re thinking about retirement. Here are a few other ages to keep in mind.

News You Should Know is a digest of news from publications around the nation about finance, investing, and retirement.

New Report Compares Inflation to Annual Increase

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Key points from this story:

  • PERA prepares a SB 10-001 report every five years
  • The report must show two things: how the annual increase compares to inflation and what progress has been made toward eliminating the unfunded liability
  • The 2020 report shows that inflation has risen an average of 1.5% per year since 2010 while the annual increase has risen an average of 1.4%

Although the annual increase retirees receive has decreased in recent years, it is generally keeping pace with inflation over the long term — one of the key findings in a report PERA delivered to the General Assembly this month.

Background of the Report

In 2010, the General Assembly passed Senate Bill 10-001, which made structural changes to PERA. In addition to these changes, the bill required PERA to prepare and submit a report to lawmakers every five years.

The report is required to show two things: the progress made toward eliminating unfunded liabilities and an analysis of how the annual increase retirees receive compares to inflation.

PERA prepared the first such report for the General Assembly in 2015. On January 1, 2021, PERA submitted a report that updates the original report with data from 2015-2020.

The Annual Increase and Inflation

The annual increase in 2020 was 1.25%. In 2021, the annual increase will also be 1.25%. This amount has changed many times throughout PERA’s history. The formula used to determine the annual increase amount changed most recently with the passage of SB 10-001 and again with SB 18-200.

The annual increase helps retirees keep pace with inflation throughout retirement. That does not mean that the annual increase will equal inflation in any given year, however. In 2017, for example, the annual increase was higher than inflation (2.0% vs 1.0%) while, in 2019, inflation was higher (2.5% vs 0.0%).

As part of this report, PERA is required to compare how the annual increase, over time, compares to inflation. The 2020 report showed that inflation rose an average of 1.5% per year since 2010 while the PERA annual increase rose 1.4% per year since 2010. Between 2010 and 2019, inflation rose a total of 16.2% while the annual increase rose 14.9%.

Measuring Inflation

It’s also important to note that inflation is measured using a specific measure, called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) (learn more about the CPI-W here).

The CPI-W accurately captures broad changes to the cost of food, energy, housing, and more. This is useful as PERA has retirees that live throughout the United States.

However individuals don’t experience inflation at a national level — you experience the inflation of the area in which you live. For example, in any given year a person living in Grand Junction might experience inflation at a rate higher than the national average while someone living in Alamosa might experience a lower rate of inflation. Or vice versa. Additionally, the cost of health care has been rising faster than inflation for years.

Managing these changes can be difficult. However, a secure lifetime benefit with an annual increase that compounds annually remains a valuable tool to have in retirement over the long term.

Progress Toward Eliminating PERA’s Unfunded Liability

The report also included an update on PERA’s progress toward the goal of eliminating all unfunded liabilities (this information is also provided publicly every year in PERA’s Comprehensive Annual Financial Reports).

The report states that the changes in SB 10-001 led to an immediate reduction in $8.9 billion of liabilities and the SB 18-200 changes reduced liabilities by another $3.9 billion.

PERA’s liabilities aren’t a static figure, however, and are updated every year. For example, strong investment returns in 2019 led to PERA making faster-than-expected progress.

Demographic changes are another factor that can affect PERA’s liabilities. PERA undergoes an experience study every four years to ensure that the projections it uses for inflation, retiree lifespans, the ages at which members retire, and more are as accurate as possible (the experience study is covered in-depth here).

The most recent experience study showed that, among other things, the trend of retirees living longer than originally projected continues. This trend adds liabilities to PERA, as longer lifespans mean a larger lifetime benefit will be owed to retirees on average.

A likely result of these adjustments is that the automatic adjustment provision (AAP) will go into effect after the release of the next CAFR, in June 2021 (the final determination regarding the AAP is part of the CAFR process and is released with the release of the CAFR). If this happens, the changes would go into effect in July 2022.

While changes like these can be difficult, they have resulted in a more secure and resilient plan members can rely on in the future.

Meet the New Chair of PERA’s Board

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In November, PERA’s Board elected a new chair and vice chair. This is the first of a two-part series introducing these new leaders.

This month, Marcus Pennell begins a two-year term as the chair of PERA’s Board of Trustees. Pennell is new to the role but certainly not new to the Board. He brings with him nearly 15 years of experience on the Board, where he most recently served as vice chair.

Pennell recently spoke to PERA On The Issues about his background and his perspective on the work the Board does. The conversation is summarized below.

Thanks for joining us, Marcus. Before we get to PERA, tell us a bit about yourself.

I grew up in Washington. My mom’s a nurse and my dad’s a welder and mechanic. I’ve been teaching in Colorado since 2001 and currently am a physics teacher at Ralston Valley in Arvada. My wife is a principal. I have two kiddos: a 14-year-old who is freshman in high school and a 22-year-old who is in law school.

What made you interested in running for the Board in the first place?

I believe that public service is a good thing for every person to do. What you do depends on your skillset.

Some people volunteer at their church. Some at a soup kitchen. There are lots of places where you can volunteer and lots of things you can do. Find something you can do that will benefit others. Not as a stepping stone to something else—something where you’re truly doing it for others.

This is my skillset. I understand how pensions work. I understand how systems work. I understand how to get people from point A to point B in their thinking.

What should others know about your approach to leadership as you assume the responsibilities of chair?

I think as a leader I am much more interested in process, not an agenda. How we go about doing our business is often as important as the business itself. I want to hold fast to the tenets of: having good information; having a clear picture of where PERA stands in relation to its goals; of knowing what our business practices are, what our CAFR looks like, the results of our audits, etc. It’s our job to make well-reasoned decisions and then constantly evaluate as we go.

We live in a probabilistic world. If we knew what was going to happen in the future, we could just put PERA on cruise control. Part of the reason the Board exists is to provide good decision-making in a changing world.

How do you explain the role of PERA’s Board to other PERA members?

When I’m asked that question, I ask how long that person can talk with me. If they have 10 or 20 minutes, it usually ends up being a better conversation. PERA is sophisticated. It’s hard to communicate in soundbites.

Ultimately, the Board is a group of people willing to lend their expertise to make the high-level decisions to give the organization direction. We don’t do the investing. We don’t advise the legislature on particular wording deep in some bill. We do set high-level expectations for management. We oversee how PERA is run at a high level, make sure it is transparent. We are making sure PERA is a well-run organization.

How do you describe the value that PERA delivers?

PERA exists because it’s more efficient to provide retirement benefits when you invest as one big fund. Over time, you can make more money this way compared to hundreds of thousands of individuals on their own. The efficiencies you find with our economies of scale are one of the biggest driver of saving money.

All of that is good for members. PERA provides for member retirements in a way that is economically feasible and sustainable. And PERA is doing a great service not just for members, but also for the state of Colorado. If you can fund all these member retirements in a way that’s cost effective, then the cost to the state and to the different PERA employers ends up being less than it otherwise would be. That’s a good deal for everybody.

What’s one thing about PERA that can be difficult to understand?

PERA’s Board isn’t the only body with a role. The state legislature also plays a big role, for example. In fact, they lay out the specifics of the Board’s role in statute. If you don’t take the time to figure out which role belongs to which body, it can be easy to point a finger at the wrong body.

There’s a lot of thoughtful, informed, caring people on the Board, within PERA staff, and in the state legislature. Those people aren’t always in agreement about what the best way to do things is, but people agree that the goal is to provide the best benefit at the lowest cost.

If you are interested in learning more, you can learn about the levers at our disposal. But there is no SparkNotes version of PERA.

What’s one thing about PERA that you’d like more people to be aware of?

That there is a culture of service to members that goes above and beyond merely complying with laws and regulations. The letter of the law and rules are important, and we also strive to transcend that – to be an organization that is honorable, one that carries itself in a manner befitting the important and good work we do for people.

The Year Ahead for Colorado’s Legislature

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Key points from the story:

  • Like last year, COVID-19 will influence the legislature’s priorities…and its calendar
  • Leaders have signaled they will pause the legislative session, possibly resuming in mid-February
  • Some committee work, including budget writing, will continue throughout this pause
  • All eyes are on the state of the economy

Last year’s legislative session took a strange turn in March. In 2021, it will be unusual off the bat.

On January 13, the legislature will formally start, or “gavel in,” to meet a legal requirement. But it is expected to “gavel out” soon after. This doesn’t mean that session will end. Instead, it will be put on pause until at least mid-February – similar to the mid-session pause we saw last year.

As Colorado’s 100 legislators veer away from the deep ruts of tradition in response to the global pandemic, what will guide them? How will important work get done? What issues will they tackle, and which issues might be pushed aside? These are just some of the many questions Coloradans have as this unusual session begins.

When will work get done?

“The key word still is uncertainty,” said Michael Steppat, PERA’s Public and Government Affairs Manager. “What happens in the building is totally dictated by the external environment.”

Lawmakers don’t have a set date to come back because there’s no way to tell what the public health situation will look like next week, let alone next month.

Lawmakers are still constitutionally bound to meet for no more than 120 days, but last year’s state supreme court ruling means that, during an emergency, the days between gaveling out and gaveling back in don’t count against that limit. This gives increased flexibility to leaders.

What work will get done?

Just because the full legislature won’t meet, that does not mean that legislative work will grind to a halt. Some committees, including the Joint Budget Committee, will continue to meet and move forward with their work.

It might sound obvious, but Steppat said “Lawmakers’ top three priorities are the pandemic, the pandemic, and the pandemic. Everything ties to it.”

As far as PERA-related legislation, Steppat said he’s keeping an eye on the status of PERA’s direct distribution, covered more below. Like the past few years, there’s also a possibility that lawmakers consider legislation related to PERA’s investment program.

Writing the budget

One important waypoint in the legislative calendar is passing a budget. Colorado’s constitution requires lawmakers to pass a budget before they stop work for the year. The Joint Budget Committee (JBC) writes the budget before it’s brought to the full House and Senate.

“Writing a budget isn’t easy, even in a surplus year” Steppat said. “The JBC just went through an unprecedented budget writing process, and that’s not going to get any easier.”

The JBC starts the budget writing process in November and typically completes its proposed budget by late March. The House and Senate usually debate, amend, and pass the budget in the first few weeks of April. From there, it goes to the governor for a signature.

The state’s fiscal year ends on June 30. Steppat said lawmakers likely view that date as a de facto deadline for passing a budget, even if they plan to continue other work into the summer or even fall.

The state of the economy

The sudden shutdown of the nation’s economy led to last year’s budget emergency. As state revenue streams dried up in historic fashion, lawmakers sprinted to cut billions from previously planned spending. Cuts included the $225 million direct distribution to PERA, which PERA On The Issues has covered previously.

Parts of the economy have recovered, but some sectors still face dire circumstances. Overall, uncertainty still looms over everything. To this end, keeping an eye on periodic budget forecasts produced by Legislative Council and the Office of State Planning and Budgeting is a good way to stay abreast of any changes.

Governor Polis indicated support for resuming the direct distribution in his budget proposal. Steppat said he is optimistic the direct distribution will be included in the budget that lawmakers send to the governor’s desk.

Tracking this unusual session

While it will look different, the 2021 legislative session is bound to be consequential as lawmakers steer Colorado through these choppy waters. PERA On The Issues will monitor and share updates on any legislation related to PERA.