PERA TRANSPARENCY

Barry W. Poulson, Ph.D.Independence Institute Senior FellowMember of Treasurer’s Commission to Strengthen & Secure PERAAmericans for Prosperity Distinguished Scholar April 2009

Introduction

The purpose of this web site is to provide taxpayers with information regarding thefinancial crises in Colorado’s Public Employee Retirement Association (PERA). Thecurrent financial crisis has resulted in a significant decrease in the value of PERA’sportfolio. But the financial crisis in PERA is not just the result of the current financialcrisis. PERA’s defined benefit pension plan is fundamentally flawed; the problems inthe plan have emerged over several decades. While the current financial crisis hasexacerbated these problems, PERA is facing a long run deterioration in its financialcondition.On this website different measures of the magnitude of the crisis are examined, andthe flaws in PERA’s defined benefit plan are analyzed. The failed legislative reforms of PERA are critically evaluated.The website also explores policy reforms to address the financial crisis in PERA. Thelegislature should consider declaring a financial emergency and enacting thefundamental reforms needed to solve PERA’s financial crisis. Other states havesuccessfully reformed their own state employee pension plans by replacing a definedbenefit plan with a defined contribution plan.

THE MAGNITUDE OF THE FINANCIAL CRISIS IN PERA

Investment Performance

A decade ago PERA administrators had most of the assets of the plan in equities.When the stock market bubble broke in 2001, PERA suffered a sharp drop in thevalue of assets in the portfolio. PERA then shifted more of the portfolio into fixedincome assets, and promised to pursue more prudent investment policies. Recentevidence reveals that PERA administrators continue to repeat mistakes they havemade in the past, resulting in accumulation of even greater unfunded liabilities in theplan.The following table shows the current market value of assets in the PERA portfolio. Atthe beginning of 2008 PERA had 60 percent of assets in domestic and internationalequities. During the past year the market value of the entire PERA portfolio fellprecipitously, from $41.4 billion to $30.1 billion. The $11.3 billion decrease is a 27.2percent drop in the value of the portfolio. PERA appears to have made the sameinvestment mistakes it made a decade ago.

Table 1. Market Valuation of PERA Investment Portfolio

InvestmentTypeMarketValueDec.31,2007Percentof TotalMarketValueMarketValueDec.12,2008Percentof TotalMarketValueDomesticEquity$17,894,97643.3%$10,931,74536.3%InternationalEquity$6,501,56715.7%$3,764,37512.5%FixedIncome$9,903,35423.9%$7,709,44025.6%2

Alternative$3,204,4597.7%$3,162,07510.5%Real Estate$3,120,3627.5%$3,222,30510.7%Timber$462,2551.1%$451,7251.5%Cash andShort Term$286,4310.7%$873,3352.9%Total$41,373,404100.0%$30,115,000100.0%*From Comprehensive Annual Financial Report, December 31, 2007 as reported inBriefing Issue. FY 2009-10 Joint Budget Committee Staff Budget Briefing,Department of Personnel and Administration, Dec. 22, 2008

Unfunded Liabilities

At the beginning of the year unfunded liabilities, i.e. the excess of the present valueof assets over liabilities, was $12.3 billion. With the decrease in the value of assetsover the past year, the unfunded liabilities have almost doubled, to about $24billion.

Another measure of the magnitude of the crisis is the funding ratio, i.e. the ratio of the present value of assets to liabilities in the fund. At the beginning of the year thefunding ratio was 78 percent; at the end of the year it was 57 percent.

Table 2. Unfunded Accrued Liabilities(in thousands)VALUATIONDATEACCRUEDLIABILITIESASSETSASSETS/ACCRUEDLIABILITIESUNFUNDEDACCRUEDLIABILITIES12/31/98$23,916,060$23,069,58296.5%$846,47812/31/99$25,846,691$26,643,394103.1%($796,703)12/31/00$28,166,241$29,625,878105.2%($1,459,636)12/31/01$31,367,312$30,935,47898.6%$431,83412/31/02$34,595,733$30,554,14088.3%$4,041,59312/31/03$40,492,108$30,596,6675.6%$9,895,456

Legislative Staff, Briefing Issue, FY 2009-10, Joint Budget Committee Staff Budget Briefing, Departmentof Personnel and Administration, Dec. 22, 2008