Colorado’s Pension Review Subcommittee (PRS) held its second, and last meeting of 2021 on Friday, Sept. 10 (you can read about the first meeting here). The PRS was created out of Senate Bill 200, the Public Employee Retirement Association (PERA) reform bill passed by the legislature in 2018. I serve on the PRS as an appointee of the House Republicans.
Towards the end of the meeting, the idea of pension obligation bonds (POBs) seemed to be gaining momentum, either to fund the missed $225 million general fund payment to PERA from 2020, or to put more money into the system to help stabilize it. Surprisingly, Ron Baker, PERA’s executive director, threw cold water on that idea. “I think pension bonds are a terrible way to fund a pension scheme,” said Baker in response to a question about POBs. “Absolutely, it is a siren call that you can borrow low and leverage the investment system to do so. You don’t know if you’re right until 30 years down the road….It never works out well has been my experience, because at the end of the day, if something happens and you need money, you have the pension system impacted by it, and you have to pay the bond holders [It’s] a siren call / fool’s gold that you can borrow low and leverage the pension system.”
This is a 180-degree turn from 2015, when PERA actively supported House Bill 15-1388, a bill to allow the state treasurer to issue upwards of $10 billion of POBs. What happened? First, PERA now thinks that it has a long-term plan towards full funding that it needs to let play out for a few years. An ill-conceived attempt to add leverage to government finance threatens to interfere with that. Moreover, the market performed well in 2019 and 2020. Investing now risks a mean reversion early in the bonds’ lifetimes. If the market were to show a loss in 2022, the bonds could be underwater for a long time.
As important is the advent of a new Chief Investment Officer, Amy McGarrity. Ms. McGarrity was the CIO of Denver Public Schools’ pension fund in 2008-09, and had a front-row seat for the mess that then-Superintendent Michael Bennet and then-Chief Operating Officer Tom Boasberg created with their own pension obligation bond scheme. McGarrity wasn’t responsible for the deal, but as CIO had to deal with the beginning of the fallout when the bottom fell out of the bond markets. Once bitten, twice shy.
The other bad idea that had resurfaced was re-opening SB-200 to greatly increase the annual general fund bailout of $225 million, especially in the name of “generational equity,” whatever that means. Mr. Baker made it clear that while new hires are currently contributing the overwhelming majority of the normal cost of their own benefits, they are not paying down the unfunded liability – that money is coming from the taxpayers via the general fund and the employers.
Instead of dumping upwards of half a billion dollars a year into PERA, the subcommittee settled for making up the missed 2020 payment plus missed interest. As the co-author of an op-ed that argued against suspending that payment at the time, I think this is a reasonable move to make.
On the other side, there were a couple of missed opportunities. This is the second year in a row where it’s been clear that the timing of the various meetings hampers both the subcommittee and the Pension Commission in doing their jobs. The subcommittee’s last meeting, and therefore its last opportunity to make recommendations to the PERA board and the Pension Commission, was the Sept. 10 meeting, the same meeting at which we heard directly from PERA for the first and only time.
The Pension Commission will meet on Tuesday, Sept. 14 and PERA will hold its board meeting on Wednesday through Friday, after the Pension Commission meets, with the Wednesday meeting featuring a detailed technical discussion of the actuarial modeling utilized by PERA.
Clearly, the meeting schedules need to be revised so that PERA doesn’t introduce valuable technical information just days after the legislative committees meet, and the subcommittee should be afforded additional time to use all the relevant information in their recommendations and legislation.
Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver, and serves on the Pension Review Subcommittee.
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