DENVER–As a consequence of the economic crash caused by the government’s response to the coronavirus, state and local tax revenues are projected to fall short of previous projections by $5 billion over the next three years. As part of a broader state spending outline, the legislative Joint Budget Committee (JBC) staff has recommended a number of cuts or delays to state contributions to the Public Employees Retirement Association (PERA), the state’s public pensions.
On Monday, Ron Baker, PERA’s executive director, appeared before the committee, giving the public a first look not only at staff’s recommendations but also at the effects those cuts are projected to have on PERA’s funding going forward.
According to Baker, PERA will report about a 20% return for 2019, better than many had anticipated, and enough to help make up somewhat for a decidedly lackluster 2018.
Looking at PERA’s required quarterly Securities and Exchange Commission (SEC) filings, its equities holdings are down roughly 20% from the end of 2019 to the end of the first quarter of 2020, ending March 31. Global equities account for a little over half of PERA’s target investment allocation. However, April and May have seen something of a rebound, and Chief Investment Office Amy McGarrity reported that overall, PERA had seen an estimated 8% decline in PERA’s total asset portfolio thus far this year.
The menu of options recommended by JBC staff includes:
- Suspending the $225 million statutory contribution required under Senate Bill 18-200 for the upcoming fiscal year, and moving future years’ payment from the first day of the fiscal year (July 1) to the last day of the fiscal year (June 30), in effect pushing off the payment for two years.
- Postponing two years’ worth of employer and employee 0.5% contribution increases, costing PERA roughly $100 million this fiscal year.
- Postponing scheduled employee contribution increases of 0.75% and 0.5% for a year, costing PERA $68 million this fiscal year.
- Shifting 2.5% of the employer contribution to the employees for the 2020-21 fiscal year.
- Reducing the supplemental AED and SAED payments into the State Fund from 5% to 2.5%, costing PERA $154 million this fiscal year.
The Amortization Equalization Disbursement (AED) and the Supplemental Amortization Equalization Disbursement (SAED) are adjustable additional payments made by the state to PERA’s trust funds, begun in 2004 and 2006 respectively.
PERA consists of five different divisions, each with its own trust fund: the State Division, the School Division, the Local Government Division, the Judicial Division, and the Denver Public Schools Division. The School Division is the largest of the trust funds and had a funding ratio of 57% at the end of 2018, meaning that it had 57 cents on hand for each dollar of promised benefits.
PERA presented a chart showing the School Division’s projected funded level for the next 40 years, with the end of 2018 as a baseline. It then added projections from the end of 2019, varying the rate of return for 2020 from 0% to -5% to -10%. Those projections assume that all JBC staff recommendations will be implemented, and are intended to show the effect of those cuts on the funding ratio depending on 2020’s return on assets. If the legislature votes to implement all of the JBC staff recommendations, and PERA’s investments return -10% for this year, the School Division will remain less than 60% funded through 2043.
While there remains some expectation among legislators and the governor that the federal government might make up some of the difference, for the moment, the JBC is scrambling to cut enough from both the 2020-21 and 2021-22 fiscal year spending to balance the budget as mandated by the state Constitution.
Sen. Rachel Zenzinger (D-Jefferson County) said that it was possible, but unlikely, that the legislature would seek to implement all of staff recommendations.