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 What Now For PERA:Déjà Vu All Over Again?
 by Barry W. Poulson, Ph.D. Independence Institute Senior Fellow Member of Treasurer’s Commission to Strengthen & Secure PERA Americans for Prosperity Distinguished Scholar IP-2-2009 March 2009
13952 Denver West Parkway • Suite 400 • Golden, Colorado 80401-3141www.IndependenceInstitute.org • 303-279-6536 • 303-279-4176 fax
 
Page 1Executive Summary 
Colorado’s Public Employee Retirement Association(PERA) is experiencing a financial crisis. Thecurrent financial crisis has resulted in a significantdecrease in the value of PERA’s portfolio. But thefinancial crisis in PERA is not just the result of the current financial crisis. PERA’s defined benefitpension plan is fundamentally flawed; the problemsin the plan have emerged over several decades.While the current financial crisis has exacerbatedthese problems, PERA is facing a long-rundeterioration in its financial condition.The legislature has enacted several reforms over thepast decade to address PERA’s financial problems.These reforms have included changes in benefits,increased contribution rates, and administrativechanges. Unfortunately, these reforms have failedto address the fundamental flaw in PERA’s definedbenefit plan.This Issue Paper explores the financial crisis inPERA. Different measures of the magnitude of thecrisis are examined, and the flaws in PERA’s definedbenefit plan are analyzed. The failed legislativereforms of PERA are critically evaluated.The Issue Paper concludes that the legislatureshould consider declaring a financial emergencyand enacting the fundamental reforms needed tosolve PERA’s financial crisis. Other states havesuccessfully reformed their own state employeepension plans by replacing a defined benefit plan with a defined contribution plan.The legislature must not repeat the mistakes of thepast with band-aid solutions that fail to address theunderlying causes of the financial crises in PERA.This is no time for déjà vu all over again.
The Magnitude of the FinancialCrisis in PERA 
Unfunded Liabilities
During the past year the market value of the entirePERA portfolio fell precipitously, from $41.4 billionto $30.1 billion. The $11.3 billion decrease is a 27.2percent drop in the value of the portfolio. At thebeginning of the year unfunded liabilities, i.e. theexcess of the present value of assets over liabilities, was $12.3 billion. With the decreasein the value of assets over the past year, the unfunded liabilities havealmost doubled, to about $24 billion.
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  Another measure of the magnitudeof the crisis is the funding ratio,i.e. the ratio of the present value of assets to liabilities in the fund. Atthe beginning of the year the fundingratio was 78 percent; at the end of the year it was 57 percent.
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 Amortization Periods
To determine whether a pension fund is actuariallysound we can refer to standards set by theGovernment Accounting Standards Board (GASB).GASB statements No. 25 and 43 set a maximumamortization period of 30 years. In other words, todetermine if a pension plan is sound, actuaries mustdetermine if unfunded liabilities in the plan will bepaid off in a maximum of 30 years. This maximumamortization period is also set in Colorado law
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, which requires state and local government pensionplans meet the 30-year standard.The following tables show the unfunded liabilitiesand amortization periods of pension plans as of December 31, 2007. Table 2 includes both the Amortization Equalization Disbursement (AED)and Supplemental Equalization Disbursement(SAED). These additional contributions to the plansare required by laws enacted in 2004 and 2006, andare discussed later in this Issue Paper. Even with
With the decrease in the value of assets over the past year, the unfunded  liabilities have almost doubled, to about $24 bil- lion.
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these additional contributions, the state, school,and health care plans do not meet the standardmaximum amortization period of 30 years. Giventhe decreased value of assets in these plans over thepast year, it is likely that none of these plans meetthe 30-year standard.
Table 1. Unfunded Liabilitiesas of December 31, 2007
Trust FundUnfunded Liability(in Thousands)AmortizationPeriodState$5,169,615infiniteSchool$7,170,659infiniteLocal Gov.$670,35225 years Judicial$32,98294 yearsHealth Care$1,044,81938 years*From Comprehensive Annual Financial Report,December 31, 2007, as reported in Briefing Issue. FY2009-10 Joint Budget Committee Staff Budget Briefing,Department of Personnel and Administration, Dec. 22,2008
Table 2. Amortization Period (with AED andSAED) as of December 31, 2007
Trust FundAmortizationPeriod WithAEDAmortizationPeriod With AEDand SAEDStateInfinite69 yearsSchoolInfinite42 yearsLocal Gov.24 years14 years Judicial78 years22 yearsHealth Care38 years38 years*From Comprehensive Annual Financial Report,December 31, 2007 as reported in Briefing Issue. FY2009-10 Joint Budget Committee Staff Budget Briefing,Department of Personnel and Administration, Dec. 22,2008
Required Contribution Rates
 An alternative way to measure the magnitude of the financial crises in PERA is provided by GASB.This measure is the Annual Required Contribution(ARC) rate calculation to meet the maximum30-year amortization standard. The following tablecompares the ARC rate with the actual contributionrates for each fund, including the AmortizationEqualization Disbursement (AED). Table 3 showsthat actual contribution rates fell short of ARCrates for all the funds. The current shortfall incontribution rates is expected to be significantlygreater than it was at the beginning of the year.
Table 3. Contribution Rate Sufficiency December 31, 2007*
TrustFundARCEmployerContributionHealth CareContributionAEDContri-butionAvailableforFundingStateDivision18.45%10.15%-1.02%1.00%10.13%StateTroopersN/A 12.85%-1.02%1.00%12.83%SchoolDivision17.18%10.15%-1.02%1.00%10.13%LocalGov.11.95%10.00%-1.02%1.00%9.98% JudicialDivision17.66%13.66%-1.02%1.00%13.64%HealthCare1.10%N/A-1.02%N/A1.02%*From Comprehensive Annual Financial Report,December 31, 2007, as reported in Briefing Issue. FY2009-10 Joint Budget Committee Staff Budget Briefing,Department of Personnel and Administration, Dec. 22,2008N/A - Not Available
The Annual Required Contribution (ARC) ratescan be used to calculate the impact of the financialcrises in PERA on taxpayers. Legislative staff hascalculated the increased contribution into theState Division of PERA that would be required tomeet the maximum 30-year amortization periodstandard. According to a staff estimate, annual statecontributions to that fund would need to increase$111 million, from $136 million to $247 million. Thisestimate was based on data at the beginning of 2008.Given the dramatic decrease in the value of assets inthe fund over the past year, it is likely that requiredincreased contributions may be double that amount.
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