The PERA Pay Back

In 2020, while facing a $3.3 billion budget deficit due to the COVID pandemic, the General Assembly cut its $225 million direct contribution to PERA. This annual contribution is required under SB18-200 to make up for the state’s past underfunding of PERA. Later that year, as revenue returned, the General Assembly restored funding for many of programs and projects that it had to cut, except for the $225 million direct contribution for PERA. When PERA posted a 17.4% rate of return for 2020, the loss of the $225 million was exacerbated.

Fast forward to this fall, the Pension Review Commission, which oversees the Fire and Police Pension Association (FPPA) and PERA, approved a bill draft that would pay back that missed 2020 contribution plus lost earnings for a total of $303.57 million. This direct contribution would be in addition to the $225 million direct contribution required for 2022. The bill draft is set to be bipartisan and carried by Representatives Shannon Bird and Shane Sandridge and Senators Chris Kolker and Kevin Priola.

The bill draft isn’t official yet. It must be approved by the Legislative Council of the General Assembly, an oversight committee comprised of party leadership that reviews all legislation developed by interim committees such as the Pension Review Commission. If the Legislative Council approves the bill draft, it will be introduced in the 2022 session starting in January.

Secure PERA’s top priorities for 2022 are ensuring the state makes it annual $225 million direct contribution and pays back the missed 2020 direct contribution.

Why is this important? The state’s direct contribution is a critical component of the plan to reach full funding by 2040. In addition to increases in employee and employer contributions and reduction in the COLA for retirees, the state committed in SB18-200 to make this annual contribution. Without this annual contribution, there will be more adjustments that will be needed, and public employees and retirees will have to carry that burden.

Strong Returns for 2020, but Auto-Adjust Still Triggered

This month, PERA released its 2020 Comprehensive Annual Financial Report, also known as the “CAFR”. The CAFR provides a full summary of how PERA and its investments performed each year and the overall funded status of the pension plan. It is released every June.

Despite the tumultuous year, PERA’s rate of return for 2020 was 17.4%. This is significantly higher than the 7.25% assumed rate of return that PERA uses for its benchmarking and future planning.

Even with this high rate of return, employee and employer contributions rates will increase and retirees’ annual increase will drop again starting in July 2022. That’s because last November, PERA adjusted some of their main assumptions, namely that PERA participants are living longer than expect and the workforce has not increased as previously assumed. These changes have such an impact on the long-term costs of PERA that last year’s rate of 17.4% could not offset them. Therefore, the auto-adjust provision will get triggered to put PERA’s funded status back on track.

According to PERA’s CAFR, the number of years, or projected amortization period, that it will take until each division is fully funded increased from where it was in 2019. With the implementation of an auto-adjust provision, the amortization period improves as detailed in this chart.

Division 2018 2019 2020 2020 (with AA)
State 28 22 23 20
School 34 24 26 22
Local Government 29 14 11 8
Judicial 21 12 8 7
Denver Public Schools 17 11 8 7

Starting in July 2022, employee and employer rates will increase by 0.5% and the annual increase for retirees will decrease by .25%. The following chart from PERA’s 2020 CAFR details the changes.

The continued auto-adjustments, particularly after two years of double-digit rates of returns, highlight the challenges that continue to face PERA – primarily past years of government underfunding the pension. The state legislature’s decision to not make its 2020 contribution of $225 million is the most recent example. PERA’s actuaries noted that the loss of this contribution meant a $990 million long-term loss to the pension overall due to not having the investment returns or compounding interests that the $225 million would have generated over time. The Colorado Sun covered the board meeting and issue here.