An independent review found that the state’s public pension could be underestimating the scope of its financial problems by billions of dollars. This raises fresh concerns about the Colorado Public Employees’ Retirement Association (PERA) and its tenuous finances. For the first time since 2018, a review committee is considering whether to recommend further reforms to the system.
PERA manages the retirement benefits of more than 700,000 current and former public sector workers. The concerns stem from a series of disquieting updates this summer. An annual financial report in June suggested that PERA is in far greater danger of becoming insolvent than its own financial advisors expect.
A draft of the independent review, presented earlier this month to the legislature’s Pension Review Subcommittee, highlighted problems with several assumptions PERA uses to calculate its unfunded debt to retirees. The report suggested that the pension’s $27.5 billion funding gap could be as much as 10% higher than PERA believes. The report recommended that the state provide a cash infusion of $2 billion to prevent what it described as a “material risk of reaching a point of no return” where PERA could not make its payments to retirees.
Lawmakers, however, balked at the $2 billion price tag, calling it a political nonstarter. “I don’t think it’s ever going to happen,” said Sen. Chris Kolker, D-Centennial, who chairs the subcommittee.
PERA’s advisors rebutted the independent review’s findings, stating that the review did not provide enough data to substantiate its claims. Nonetheless, PERA’s own analyses indicate there’s as much as a 30% chance of a financial setback in 2025, triggering another round of benefit cuts and contribution hikes. PERA is scheduled to update its demographic assumptions in early 2025, a once-every-four-years exercise that has previously led to significant financial corrections.
Independent review raises PERA issues
This impending update has raised concerns among the oversight panel about potential automatic cuts. “We’re in a risky situation right now,” said former Sen.
Jack Tate, a Republican panel member who co-sponsored the 2018 pension reforms, would welcome some recommendations for the plan’s financial security, no matter how poorly received by the legislature.
Despite these discussions, sweeping legislative changes remain unlikely unless a financial crisis occurs. The state faces budget constraints, and the 2018 pension reforms were designed to keep the pension on financial track without political intervention.
Colorado has two potential adjustment rounds if PERA’s board and the state legislature don’t intervene. “I don’t see any glaring legislative changes,” Kolker said. However, he added that the panel would draft a recommendation letter for the Pension Review Commission, which can propose legislation.
The independent review pinpointed two significant issues. First, it argued that PERA is banking on unrealistic investment returns, reiterating a longstanding debate. To meet its funding targets, PERA needs its portfolio to grow by 7.25% annually, higher than the national median of 7% for other public pensions.
While PERA has largely exceeded its investment targets in recent years, averaging 7.8% growth over the past decade and 8.3% over the last 30 years, the review raised concerns about future performance. The more pressing issue highlighted by the report is that PERA’s demographic assumptions have been consistently inaccurate since the pandemic, adding $2 billion to the pension’s unfunded debt. Public sector workers have received larger pay raises in recent years than PERA expected, translating to larger pension payments when they retire.
PERA is currently reviewing its investment portfolio, and some board members are advocating for investing in higher-risk assets like private equity to improve long-term returns. As the state and PERA navigate these financial uncertainties, the future of public sector pensions remains a contentious and significant issue for Colorado lawmakers and employees alike.
