Category: Legislation & Governance

PERA Presents at Legislative Audit Committee Hearing

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PERA presented to the Legislative Audit Committee on July 27. The primary agenda was a review of PERA’s financial returns. PERA staff and outside analysts were on hand to present and answer questions from committee members.

Financial Audit

Every year, an independent auditor hired by the Office of the State Auditor conducts a review of PERA’s financial status and fiscal controls. CliftonLarsonAllen LLP, which has been auditing PERA’s annual statements since 2015, audited the 2019 Comprehensive Annual Financial Report. The auditors gave the 2019 CAFR a clean audit, and committee members heard an overview of results from the annual report.

Signal Light Reporting

In 2014, the Legislative Audit Committee directed the Office of the State Auditor to contract with an actuarial firm to develop a methodology to simplify the understanding of PERA’s financial status. The result was the development of a tool called Signal Light Reporting, which PERA submits annually to the committee. This report summarizes the funded status of each PERA Division by using a color scale. The scale resembles a stop light, from green, indicating that PERA is projected to be on track to fully funded status, all the way to red. PERA submitted and shared the latest report, which shows that all divisions are on track to reach fully funded status by 2048 (green).

Ongoing Oversight at the Capitol

PERA reports to numerous committees at the State Capitol, including the Legislative Audit Committee, Joint Budget Committee, Joint Finance Committee, Pension Review Subcommittee, and Pension Review Commission. These regular check-ins provide lawmakers the chance to learn more about PERA and ask questions to PERA management. They also provide additional forums in which PERA members can learn more about how PERA works. For those not able to listen to the live broadcast, a recording can be found on the Colorado General Assembly’s website.

How It’s Made: PERA’s Financial Report, Part 2

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

Incorporating a View from Outside

After changes for the next year have been discussed and approved, the legwork begins, usually in late fall. This means welcoming into the mix a group of external auditors. PERA has internal auditors, but bringing in a truly outside perspective helps ensure the information in the CAFR is rigorously checked and, consequently, accurate to a high degree of certainty.

The word “audit” might conjure up IRS dread for some, but auditors are a routine presence in accounting departments in organizations like PERA. “In the fall, the auditors do what they call walkthroughs,” Maninger said. “They do deep dives into our processes, meeting with the Investments, Benefits, and other departments to see how they do their work. For example, they might follow the contracting and funding of a new private equity investment through every step until the wire goes out the door.”

In addition to analyzing the ways in which work gets done, they do a significant amount of statistical analysis of the mountains of data PERA keeps, looking for any anomalies. Say the auditors analyze monthly benefit payments. PERA sends out more than 100,000 checks of varied amounts every month. You’d expect the last digit of each check amount to be evenly distributed—about the same number of checks ending in a twos (e.g. $975.72) as eights (e.g. $1,000.68). However, if thirty percent of all checks ended in a two instead of the expected ten percent, the auditors would likely flag this as an anomaly and look into it further.

An anomaly doesn’t indicate that something is wrong, just that something could be. After investigating, they might discover an error or a process that needs improvement. “Our goal is to make the CAFR as accurate and as complete as we can possibly make it,” Maninger said. “We have a lot of information to share with members, and this information affects lives.”

Putting it All Together

The structure for the CAFR is usually in place by the end of the year. When January 1 rolls around, final returns start rolling in. Some of these returns are available immediately. Global equity and fixed income, for example, have prices that are readily available on any given day. Anyone can track the prices of PERA’s top holdings in global equity at the end of 2019—Apple, Microsoft, and Amazon—on a daily basis.

But returns in other asset classes may take until early April to receive and record. PERA owns companies that aren’t publicly traded in its private equity asset class. Determining the value of these companies takes a much longer time, as it requires a detailed financial analysis to come up with an informed price as opposed to watching for a stock ticker run across the screen on CNBC. This is one reason the CAFR isn’t released until June.

Another reason is that actuaries assess PERA’s demographic information—how many people are starting jobs and leaving them, beginning retirement and passing away, along with an array of other data points. This information is critical as PERA must chart the course for decades into the future.

Once these pieces are finalized and everyone, including the external auditors, signs off, the CAFR is sent to the Board of Trustees. They review it and, with a vote, they approve and release the report to the public.

Where to Start

The CAFR is unlikely to be a choice for a book club or a beach anytime soon. But, like the view from a window several stories up, it contains the best perspective on all things PERA. Reading only a few pages can help lead to a much better understanding of how PERA works and where it’s going.

“If someone is going to read anything at all in the CAFR, they should read the Letter of Transmittal,” Maninger said. “Ron [Baker, PERA’s Executive Director] works hard to communicate the most important parts of the CAFR in that letter.” The letter in the 2019 CAFR is found on page 3.

“If you’re interested in any changes or updates from past year, the section called Management’s Discussion and Analysis (page 29) will explain variances from one year to another,” she added

For those interested in PERA’s investments, Neugebauer said the Schedule of Investment Results (page 127) is the best place to see how PERA’s investments have done recently compared to their benchmarks.

Shelton said page 136 should be of interest to those who are saving and investing for retirement. “We have a number of options available for those who participate in 401k, 457, and DC plans, from investing in specific asset classes or using one of the Target Retirement Date Funds,” she said. “From my perspective, page 136 is important because it highlights the variety of options participants have and what the returns were for the most recent year. If they want to read more, descriptions of the investment options are on page 134.”

Meant to be Used

If you’re looking for a book to check out at your library, one method might be to look for the book that has tattered pages, dog-ears, and coffee stains. A book’s battered paper doubles as a public record of the value it’s brought to others.

That’s how Maninger, Neugebauer, and Shelton, view the CAFR. It’s not a yearbook, meant to commemorate a year that was: It’s a useful publication, meant to be picked up. “I have a copy at home,” Neugebauer said. “And in my office at work I have every copy going back to 1980.”

But the importance of the CAFR is perhaps best illustrated by a small action Shelton took months ago: “When we found out that we were starting to work remotely in March, I thought we were just going to be offsite for a week or two. But just in case, I grabbed my CAFR as I was going out the door.”

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 for more information.

Recap of PERA Board’s September Meeting

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Colorado PERA’s Board of Trustees met on Friday, September 11. In the meeting, the Board reviewed a report assessing its governance procedures and heard reports from staff, among other agenda items.

Staff Reports

PERA Executive Director Ron Baker noted the continuing ways in which PERA has adapted to a vastly changed environment. Baker shared with the Board up-to-date membership statistics:

Bar chart with data table depicting PERA Membership as of July 31, 2020. State Membership was noted with: -Benefit Recipients: 41,627 -Active Members: 56,693 -Inactive Members: 90,226 School Membership was noted with: -Benefit Recipients: 69,773 -Active Members: 121,714 -Inactive Members: 160,192 Local Government was noted with: -Benefit Recipients: 8,087 -Active Members: 13,097 -Inactive Members: 29,570 Judicial was noted with: -Benefit Recipients: 409 -Active Members: 353 -Inactive Members: 17 DPS was noted with: -Benefit Recipients: 7,132 -Active Members: 16,062 -Inactive Members: 15,991 Total Membership was noted with: -Benefit Recipients: 127,028 -Active Members: 207,919 -Inactive Members: 295,996

PERA’s Chief Investment Officer, Amy C. McGarrity, updated the Board on market conditions and PERA’s portfolio. She noted that the quick recovery seen in public equities has been as much as a surprise as the onset of the global pandemic and swift market decline.

This recovery, however, has been uneven as a few companies account for a significant portion of the recovery while other economic indicators, like employment, still face serious challenges ahead.

She added that, while the investment team did reallocate funds within asset classes in the preceding months, these changes were made within the framework of the Board’s asset allocation policy rather than a tactical move.

Patrick Lane, PERA’s Chief Benefits Officer, shared a report outlining PERA’s service delivery so far this year. The number of retirements through July 31 is nearly identical to 2019. And, despite PERA’s physical buildings being closed to the public since March, PERA counselors have performed nearly as many individual counseling sessions as in 2019. However, PERA has processed nearly 15% more benefit estimates and 20% more applications to purchase service credit compared to last year.

Other details Lane shared include:

  • Member savings in PERAPlus 457 plans recently crested $1 billion for the first time.
  • The call center has answered 122,976 calls through July 31. The most frequent questions have been about health care, web access, and retirement planning.
  • 93,347 people are enrolled in PERACare plans.
  • The Field Education team quickly moved their curriculum to online-based webinars and have reached more than 15 times as many people through digital means compared to 2019.

Governance Review

The Board routinely has third parties assess its procedures and operations. Cortex Applied Research, the Board’s governance consultant, analyzed the Board’s governance framework and fiduciary best practices. Their findings included:

  • PERA’s Governance Manual “ranks very highly; it is consistent with the published standards in almost all respects and generally meets or exceeds the practices of the peer group.”
  • The Manual “is among the most detailed and comprehensive manuals in the Peer Group.”
  • “The code of conduct was also particularly strong.”
  • PERA’s Governance Manual is held up as an example in multiple industry publications.

Recently Introduced Divestment Bill Would Affect PERA Investments

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In this story:

  • A new divestment bill would limit PERA’s investment options
  • PERA’s Board has stated that PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants

A bill recently introduced in the Colorado House would limit the investments PERA has access to, which could affect the ability to maximize the long-term risk-adjusted return for members.

Bill Summary

If passed, the bill, HB 21-1246, would do the following:

  • Require PERA’s Board to create an exclusion list of all direct investments PERA has in fossil fuel companies.
  • Within 6 months after completing the exclusion list, the Board would be required to determine whether divestment from the companies on the exclusion list complies with the Board’s fiduciary obligations.
  • If the Board determines that divestment from any company on the exclusion list does comply with its fiduciary duty, the Board would be required to divest from those companies on the exclusion list.
  • And the Board would be required to cease new direct investments in any company that is a fossil fuel company.
  • Beginning one year after the effective date of the bill, the Board would be required to ensure that no money or assets of the fund are invested in an indirect investment vehicle unless the Board is satisfied that such indirect investment vehicle is unlikely to have in excess of 2% of its assets directly or indirectly invested in fossil fuel companies.

The Position of PERA’s Board

PERA opposes divestment efforts unless such opposition is inconsistent with its fiduciary duty and recommends the legislature thoughtfully consider such proposals with caution and fiduciary care.

Per the Board’s Statement on Divestment, PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants. Global issues are difficult to prioritize and proper recourse falls beyond the duty of the retirement system.

The Problem With Divestment

Divestment is expensive.

Requiring PERA to divest comes with significant costs – including costs to research, sell, and replace its fossil fuel investments. This bill would cost millions of dollars just to implement and does not include the opportunity cost of continued investment in the securities that meet the stated criteria.

Divestment is a slippery slope.

Just in the past several years, advocacy campaigns have pressed pension funds to divest from countless industries for varying reasons. Divestment could cost PERA members more by limiting the investable universe and PERA’s ability to generate the investment returns that make their retirement benefit possible. PERA’s investment program has generated over $69 billion over the last 30 years – returns that fund benefits and fuel local economies across the state.

Divestment is not effective.

Divestment mandates are a blunt instrument designed to impose economic hardship on the subject companies, but often result in assets simply being transferred from one investor to another with no impact on the company’s financial position. To make a change you need a voice and divestment means leaving the conversation entirely. PERA prefers engagement with companies to promote responsible business practices because it has a real and lasting impact.

PERA’s Investment Framework

PERA’s investment framework has been the focus of previous PERA On The Issues stories, including:

Legislative Q&A with PERA’s Public and Government Affairs Manager

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In January, we spoke with Michael Steppat, PERA’s Public and Government Affairs Manager. As the Colorado legislative session winds to a close, we checked back in to get his thoughts on a number of different topics.

The legislative session usually ends in early May. However, this year’s legislative session started with a multi-week recess due to COVID-19. So where does that put us now?

The state legislature can meet for no more than 120 days. The delay essentially just extended the deadline for the general assembly to adjourn sine die—the formal term used when the legislative session ends for the year. The number of days they were on recess can just be tacked on to the end of the original end date. That means the legislature must adjourn on or before June 12.

Two bills related to PERA have passed. What can you tell us about them? What effect will they have for PERA members?

PERA retirees who go back to work at a PERA employer in retirement must follow certain rules set by law. House Bill 21-1136 modified the provisions created for judges who work in retirement. These changes were made in order to address the massive caseload backlog caused by the pandemic and only affect retired judges.

Another bill, Senate Bill 21-228, set aside funds in the current fiscal year to be used by the state for future employer contributions or disbursements to PERA. This bill does not change anything about how PERA works. This bill was created primarily to give lawmakers additional flexibility to operate within Colorado’s state budget rules.

What is the status of last year’s direct distribution, which was part of across-the-board cuts the legislature made to the budget? Will this year’s $225 million direct distribution be made to PERA?

PERA did not receive the $225 million direct distribution in 2020, however the full direct distribution to PERA was restored going forward, including this year’s payment.

Do you expect any other PERA-related bills to come up this session?

I don’t expect any more bills that are directly related to PERA.

Many pieces of major federal legislation have been passed in the past few months. Do any of these impact state finances in a way that will affect PERA?

Anything that impacts state finances can potentially have an indirect effect on PERA, as we saw last year with the budget cuts that had to be made. However, there isn’t anything we’ve seen in any of the pandemic-relief-related federal legislation that would affect PERA directly. It’s also important to keep in mind that federal law prohibits state lawmakers from using the funds sent to them in recent COVID-related legislation for pension-related purposes.

As is the case most years, there is a bill to repeal the Government Pension Offset and Windfall Elimination Provision in Social Security. What is the state of that bill?

House Resolution 82, which would repeal the GPO and WEP, was introduced earlier this year. While it has gained cosponsors since it was introduced in January, we haven’t seen it move through legislative process.

A second bill has also been introduced recently. While this second bill would not repeal these Social Security-related measures, it would make some changes to the WEP. See more about House Resolution 2337.

2021 Proposed Legislation Status

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Below you’ll find summaries of proposed legislation affecting Colorado PERA. The status of each bill will be updated regularly.

Any position the Colorado PERA Board takes on a bill will be reflected below as soon as it becomes available.

Last updated: Aug. 31, 2021

SB 21-228

Bill Title: PERA Public Employees Retirement Association Payment Cash Fund

Concerning the creation of the PERA payment cash fund to be used for future payments to the public employees’ retirement association, and, in connection therewith, making an appropriation.

Bill Summary: The bill creates the PERA payment cash fund (fund) and appropriates $380 million from the general fund to the fund for the 2020-21 state fiscal year. The state treasurer is required to use the money in the fund for the $225 million direct distribution payment to PERA on July 1, 2022, subsequent direct distributions, and any of the state’s employer contributions or disbursements.

Sponsors: Sen. Chris Hansen and Sen. Dominick Moreno, Rep. Julie McCluskie and Rep. Kim Ransom

Bill Status: Signed into law by Gov. Polis on May 4, 2021

Bill History:

  • May 4: Signed by the Governor
  • April 5: Introduced in Senate
  • April 6: Passes Senate Appropriations Committee with amendment
  • April 8: Passes Senate second reading
  • April 9: Approved by Senate, introduced in House
  • April 13: House Committee on Appropriations refers unamended to Committee of the Whole
  • April 14: Passes House second reading
  • April 15: Approved by House

PERA Board position: The PERA Board did not take a position on this bill.

HB 21-1246

Bill Title: PERA Public Employees’ Retirement Association Divestment From Fossil Fuel Companies

Concerning divestment action by the public employees’ retirement association against companies financially involved with fossil fuel companies.

Bill Summary: The bill would require the PERA Board to create an exclusion list of all direct investments PERA has in fossil fuel companies.

Within 6 months after completing the exclusion list, the Board would be required to determine whether divestment from the companies on the exclusion list complies with the Board’s fiduciary obligations. If the Board determines that divestment from any company on the exclusion list does not comply with its fiduciary obligations, the Board will remove the company from the exclusion list.

If the Board determined that divestment from any company on the exclusion list does comply with its fiduciary duty, the Board would be required to divest from those companies on the exclusion list. And the Board would be required to cease new direct investments in any company that is a fossil fuel company.

Beginning one year after the effective date of the bill, the Board would be required to ensure that no money or assets of the fund are invested in an indirect investment vehicle unless the Board is satisfied that such indirect investment vehicle is unlikely to have in excess of 2% of its assets directly or indirectly invested in fossil fuel companies.

The Board would be required to issue periodic reports to the members of the pension review commission of the General Assembly outlining all actions taken to comply with the requirements of the bill.

Sponsors: Rep. Emily Sirota and Rep. Sonya Jaquez Lewis

Bill Status: Postponed indefinitely

Bill History:

  • March 25: Introduced in House
  • March 19: Postponed indefinitely by House Finance Committee

PERA Board Position: Per the Board’s Statement on Divestment, PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants. Global issues are difficult to prioritize and proper recourse falls beyond the duty of the retirement system. PERA opposes divestment efforts unless such opposition is inconsistent with its fiduciary duty and recommends the legislature thoughtfully consider such proposals with caution and fiduciary care.

HB 21-1136

Bill Title: Judicial Division Retirees Temporary Judicial Duties Compensation

Concerning modifications to the policies governing judicial division retirees returning to temporary judicial duties.

Bill Summary: Retired judges may currently perform judicial duties for 60 or 90 days with written permission from the chief justice of the Colorado Supreme court. This bill would allow retired judges to do the same for 20, 30, 60, or 90 days per year. In addition, under current law a retired judge must enter into the agreement prior to retirement or within thirty days prior to the retirement anniversary in the next five years of retirement. This bill would remove that limitation.

Sponsors: Rep. Kerry Tipper and Rep. Terri Carver

Bill Status: Signed into law by Gov. Polis on May 4, 2021

Bill History:

  • May 4: Signed by the Governor
  • April 26: Senate passes on third reading
  • April 23: Senate passes on second reading
  • April 23: Senate Appropriations Committee refers to Committee of the Whole
  • April 14: Senate Judiciary refers unamended to Senate Appropriations Committee
  • April 9: Introduced in Senate
  • April 8: Passed by House
  • April 7: House passes with amendments
  • April 5: House Appropriations Committee refers to Committee of the Whole with amendments
  • March 1: Introduced in House

PERA Board Position: The PERA Board does not have a position on this bill.

HB 21-1213

Bill Title: Conversion Of Pinnacol Assurance

Concerning the conversion of Pinnacol Assurance from a political subdivision of the state into a stock insurance company owned by a mutual insurance holding company.

Bill Summary: This bill would convert Pinnacol Assurance, which provides workers’ compensation insurance, into a private company. As part of this conversion, Pinnacol would disaffiliate from PERA and make a payment to PERA to cover its portion of PERA’s liabilities. Current Pinnacol employees would become inactive PERA members after the disaffiliation date but would be eligible for future benefits. Current PERA retirees who were employed by Pinnacol are not affected by this bill.

Sponsors: Rep. Matt Soper

Bill Status: Postponed indefinitely

Bill History:

  • March 22: Postponed indefinitely by the House State, Civic, Military, & Veterans Affairs Committee
  • Introduced March 5

PERA Board Position: The PERA Board holds that all disaffiliations should be treated the same and the methodology used to determine the cost for disaffiliation should align with the framework provided by the general assembly under current statute.

PERA Board Meeting Recap: Trustees Elect New Chairman

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Colorado PERA’s Board of Trustees met virtually on Friday, November 20. The Board elected a new Chairman and Vice-Chairman and voted to maintain the 3% interest rate for member accounts, among other agenda items.

PERA Board Officer Elections

Colorado PERA’s Board of Trustees elected Marcus Pennell to be the Board’s next Chairman. Pennell, a physics teacher in Jefferson County Public Schools, is currently the Board’s Vice Chairman.

The outgoing Chairman, Timothy M. O’Brien, has been a PERA Board member since 2011. O’Brien has been the Denver City Auditor since 2015 and was the Colorado State Auditor from 1984 to 1995.

The Board elected David Hall Vice Chairman, filling the seat vacated by Pennell. Hall is a Sergeant with the Colorado State Patrol.

Pennell and Hall assume their new leadership roles in January 2021.

Member Interest Rate

For many PERA retirees, account balances don’t play a significant role in their retirements. For example, account balances do not determine the amount of most PERA monthly benefits. In fact, most retirees receive the balance of their account through benefit payments about five years into retirement.

But account balances do play a more important role for some PERA members. For these members, the interest added to their account increases the value of being a PERA member. At the meeting, the Board voted to maintain the 3% interest rate that member accounts earn.

The following scenarios show how the interest rate on member accounts can affect PERA members:

  • Refunds | Some PERA members choose to refund their account when they leave employment in lieu of a monthly benefit in retirement. Members who refund their account receive their contributions plus interest. In some cases, they also receive a match.
  • Retiring with less than 5 years of service | PERA members who do not have five years of service credit are still eligible to receive a monthly benefit in retirement. However, this benefit is not calculated using the familiar formula that includes service credit, age, and highest average salary. Instead, the money purchase calculation determines the amount. This calculation does use a member’s account balance along with life expectancy at the time of retirement.
  • Moving to a job outside of PERA | Not every PERA member remains in public employment for their entire career. Those who leave before retirement age can leave their account at PERA and still receive a monthly benefit when they become eligible later in life. One potential downside: the purchasing power of a static highest average salary decreases over time—the result of inflation. To help offset this phenomenon, PERA calculates what the benefit is using the money purchase calculation, described above. The retiree receives the larger of the two calculations.
  • Survivor benefits | Survivor benefits provide income for qualified survivors if a PERA member dies before retirement. If a member dies but does not have any qualified survivors, the account balance goes to the named beneficiaries the member chose.

Other Agenda Items

During the meeting, the Board adopted new mission and vision statements, which are covered in another PERA On The Issues story. They also reviewed and adopted updated actuarial assumptions, which will be covered in a future PERA On The Issues newsletter.

Polis Budget Plan Includes PERA Direct Distribution

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Gov. Jared Polis included PERA’s direct distribution in his 2021 state budget proposal.

The state legislature passed a bill in 2020 suspending the $225 million payment for one year due to historic revenue shortfalls and consequential budget cuts. PERA On The Issues has covered the 2020 suspension in depth in previous articles.

It’s up to the state legislature to ultimately create and pass a budget, but the governor’s budget proposal helps get the budget conversation underway.

Direct Distribution – a Summary

The landmark SB 18-200 included a number of changes that work in concert to bring PERA to full funding. The direct distribution was one of these changes. In short, it is a $225 million annual payment from the state. Every dollar goes toward paying off PERA’s unfunded liability.

This payment was more than a commitment of budget writers in 2018. The direct distribution was written into statute, to occur every year until all unfunded actuarial accrued liabilities from all divisions of PERA are eliminated.

2020 Crisis

The global pandemic led to a precipitous drop in state revenue. Billions of dollars of expected income vanished. The Joint Budget Committee (JBC), the bipartisan group of senators and representatives who write the state budget, faced an unenviable task: reducing or eliminating a large number of previously budgeted items in order to balance the budget. The direct distribution was one of many emergency cuts.

2021 Budget Process

We won’t know what next year’s budget will look like for a while. Typically, the JBC releases their budget in late March or early April. However the process of creating the budget takes months.

The governor’s budget plan is one of the first waypoints of this process. While the governor does not write the budget, he can signal priorities via this plan. Restoring the direct distribution is a key part of his proposal, which he released on November 2.

Next Steps

The status of the direct distribution won’t be official until the state legislature passes a budget next year. However, learning about the priorities of everyone involved in the budget process, like the governor, can bring some focus to an otherwise hazy picture.

Another opportunity to gain clarity is when the state releases its revenue forecasts periodically. Revenue forecasts supply JBC members with crucial information about how much money they can expect to work with.

Remember, these forecasts are estimates and can change over time. But they are important in setting expectations as the JBC does their work.

“The September revenue forecast painted a slightly less grim picture of the state’s revenue situation as the economy continues to rebound,” said Michael Steppat, PERA’s Public and Government Relations Manager. “But all eyes will be on the upcoming December forecast as state and local leaders ponder the best response to currently surging COVID cases across the state.”

PERA On The Issues will continue following the budgeting process and post updates as they occur.

Editor’s note: this story was updated on 11/11 for clarity.

2020 Experience Study: Preparing for a Secure Future

Posted on by planeteria

Key points from the story:

  • PERA plans for the long term by projecting how income, assets, and costs will change over time.
  • The Board sets actuarial assumptions, which are the underlying factors that affect these projections.
  • Every four years, the Board reviews the actuarial assumptions it uses with something called an experience study.
  • The Board completed this work in November.

Imagine you were asked to make a budget. Not just for this year but for the next 30. You know your income today, but you’d need to estimate how much you’ll be making one, two, three decades from now. You’d need to estimate the price of groceries and gas will change. You’d need to project how what you spend your money on changes over time—maybe childcare expenses go down but medical expenses go up.

PERA is in the business of thinking about the long term, too. A 35-year-old PERA member trusts that the contributions sent to PERA today are building a secure retirement 30 years down the line. So how does PERA go about planning for 2050?

Budgeting for the Future at PERA

PERA isn’t exactly creating a household budget, but the analogy is a good place to start.

Instead of income, PERA must project how contributions change over time as staffing levels and salaries fluctuate. It must consider what investment returns to expect over the long term and the many ways in which the long-term interest rate has an impact.

And instead of expenses like gas and groceries, PERA must project the amount retirees—both current and future—will receive during their retirements.

This might seem like a straightforward task, but it’s not. Because members and cobeneficiaries can’t outlive their pension, the amount they receive is tied to their lifespan. So PERA must project how long retirees live. Because the amount a member receives depends on length of service, salary, and age, PERA must project how these factors will change as well.

The cost of paying these benefits to current and future retirees is called PERA’s liability. It isn’t all due at once—that 35-year-old still has a few decades before collecting a pension—but it still counts as a liability today.

Calculating these figures far into the future is the first step in sound financial planning.

The Language of the Future

PERA plans for these future changes and conditions using something called actuarial assumptions.

Actuarial assumptions are grouped into two categories—economic and demographic. Economic assumptions include information like inflation, salary increases, and the projected growth in the number of employees hired by PERA employers. Demographic assumptions include information like the ages at which PERA members retire and how long people tend to live.

While most assumptions deal with factors outside PERA’s control, understanding them is essential.

Comparing Assumptions to Experience

Setting actuarial assumptions is not a one-time event. PERA’s Board regularly reviews actuarial assumptions using something called an experience study.

“The Board’s responsibility to set the actuarial assumptions of the plan is a task that’s very important,” said Ron Baker, PERA’s Executive Director. “This is a critical step to make sure PERA is accurately measuring and reporting on our financial status, and that’s a responsibility the PERA Board takes very seriously.”

An experience study compares what actually happened over the last few years against what PERA projected would happen. The Board can then adjust the assumptions PERA will use for the next four years. This rigorous review process keeps projections as accurate as possible. This process is an industry best practice for all pension systems.

PERA’s liability changes when an actuarial assumption changes. It’s as if the person making a household budget for the next 30 years determined that health care would likely cost a different amount in 2050 than originally planned and adjusted his or her retirement plan accordingly. Although those aren’t bills that need to be paid today, having a clearer goal of what those bills will be in the future makes it easier to prepare for when they do come due.

2020 Experience Study

At its November meeting, the Board reviewed the 2020 experience study conducted by their actuarial consultant (Segal) and voted to adopt the recommendations made by Segal on the assumptions PERA will use going forward.

Changes to assumptions include:

  • Lowering the inflation assumption from 2.4% to 2.3%
  • Lowering the payroll growth rate assumption from 3.50% to 3.00%
  • Lowering the active member growth assumption for each division. Current growth assumptions range from 1.00% to 1.25%. Recommended growth assumptions range from 0.25% to 1.00%.
  • A number of changes to the mortality assumptions.

Assumptions that didn’t change include:

  • Maintaining the investment return assumption of 7.25%
  • Maintaining the administrative expenses assumption of 0.40% of payroll

Using New Assumptions

The actuarial assumptions adopted have an effect on a number of calculations performed by PERA. For example, the calculations for reduced (early) retirement and the cost of purchasing service credit use these assumptions. Those calculations use factors, like longevity, that change when assumptions change.

The benefit checks that current retirees receive are not an actuarial assumption. Retirees won’t see any change to their monthly benefit because of the experience study.

These assumptions will also be used in the 2020 Comprehensive Annual Financial Report, which will be released in June 2021. This report contains a calculation of PERA’s liabilities using the actuarial assumptions adopted by the Board.

The ultimate goal of the experience study is to provide the most accurate portrait of the future possible. The routine and rigorous examination of this portrait enables PERA to prepare for the future and to provide retirement security for all of its members.