May 26, 2012 11:32 PM UTC

Musings on the Colorado PERA Answer Brief: "Funding Ratios," by A. Moncrief

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• by: PolDancer

As we have seen, PERA’s Answer Brief attempts to deceive the court by intentionally avoiding the use of the basic descriptors of defined benefit pension structure, “automatic COLA” and “ad hoc COLA.”  Is it their hope that the court has no knowledge of pension structure?

Well, the deception continues when PERA’s Answer Brief turns to the matter of pension “funding ratios,” aka, “funded ratios.”

Right away you should know that there are two basic funding ratios used to gauge the soundness of public pension plans, “actuarial funding ratios” and to a lesser extent “market-based funding ratios.”

“Actuarial funding ratios” are commonly used in defined benefit pension administration because they are mandated by financial regulatory agencies.

Here’s an excerpt from a state actuary’s website:

“In financial reporting of public pension plans, funded status is reported using consistent measures by all governmental entities.  According to the Government Accounting Standards Board (GASB), the funded ratio equals the actuarial value of assets divided by the actuarial accrued liability calculated under the allowable actuarial methods.”

http://osa.leg.wa.gov/About_Pe…

Here is a description from the website of the National Association of State Retirement Administrators:

“The most recognized measure of a public retirement plan’s ability to meet current and future obligations is its actuarial funding ratio, derived by dividing the actuarial value of a plan’s assets by the value of its liabilities.”

The use of “actuarial funding ratios” is the standard practice in public defined benefit plan administration (and this includes Colorado PERA historically.)

A “market-based funding ratio” is calculated using the market value of pension assets rather than the actuarial value of assets.  PERA uses the market-based funding ratio throughout its Answer Brief in an attempt to exaggerate the decline in the funded status of PERA’s trust funds.

PERA is mixing up apples and oranges, and hoping that the court fails to note the different types of fruit.

One would think that such a calculating stratagem would irritate the court . . . it confuses the legal investigation unnecessarily.

PERA cites the “52% funding ratio” three times in the Answer Brief.  This “52% funding ratio” cited by PERA is a “market-based funding ratio.”  The three citations are: “a 52% funded level at the end of 2008,” “a funding ratio of 52%,” and “to fall to 52% funded at the end of 2008.”

Throughout PERA’s history is has used “actuarial funding ratios” to measure of the fiscal soundness of the PERA trust funds.  It is only since the inception of PERA’s campaign to take fully-vested PERA retiree benefits that PERA began employing “market-based funding ratios.”

A review of PERA’s publications over the last decade reveals that PERA has rarely employed “market-based funding ratios.”  Such an examination of PERA’s communications to members and their publications over the last decade reveals that “actuarial funding ratios” are almost always used as indicators of the financial soundness of the PERA trust funds.

The very bill that Colorado PERA is attempting to defend, SB 10-001, uses “actuarial funding ratios” as a measure of the PERA trust fund’s solvency.  The “100% funded ratio” in the title of SB 10-001 is an “actuarial funded-ratio.”  The triggers in SB 10-001 are linked to “actuarial funding ratios.”

In their Answer Brief, PERA would like us to believe the fiction that the PERA trust funds had a combined funding ratio of 52% at the end of 2008.

In reality, at the end of 2008, the combined PERA (actuarial) funding ratio stood at 69.8%, according to Colorado PERA’s own reported statistics.  (Not quite as scary as the 52% figure PERA would have us believe.)

It is critical that the court see the PERA trust fund’s combined actuarial funding ratio of 69.8% at the end of 2008 in an historical perspective.  Below, I provide that historical perspective.

During the 40-year period, 1970 to 2009, the PERA “actuarial funding ratio” ranged from a low of 54.5 percent in 1973 to a high of 105.2 percent in 2000.  The average actuarial funding ratio over this 40-year period is 78 percent.  At the end of 2008, the PERA actuarial funding ratio of 69.8% was mere 8.2% lower than the average PERA actuarial funding ratio over the 40 year period.  At the end of 2008, PERA’s actuarial funding ratio of 69.8 percent was 10.2 percent below an 80 percent funded ratio, considered “well-funded” by Fitch Ratings.  During an eleven year span, from 1970 to 1981, PERA’s actuarial funding ratio was actually lower than it was at the end of 2008, and yet there was no PERA campaign during those eleven years to take fully-vested, earned, accrued, contracted PERA retiree pension benefits.

If the PERA trust funds cannot be “sustained” with an “actuarial funding ratio” of 69 percent in 2008, how were the trust funds “sustained” in the past when the actuarial funding ratio approached 50 percent?  Obviously, PERA’s trust funds can be “sustained” when their funding ratio is in the 50-60 percent range, since the funding ratio has been there in the past and the pension trust funds still exist . . . the trust funds were “sustained.”

Relevant to this discussion is the fact that Colorado’s aggregate public pension debt is in the middle of the pack among the states.  Colorado’s total public pension debt level is typical of state public pension debt in the United States . . . 8 percent of gross state product versus a national average of 7.3 percent.  Should all legislatures in states with pension debt levels above a certain threshold be permitted to breach their contractual public pension obligations?  What is the threshold level where state contracts become meaningless?

I realize that there are many well-meaning (but temporarily misguided) people on the other side of this issue.  If the defendant’s prevail in this lawsuit, these honest people will want their victory to have been achieved in a forthright manner.  I would think that such people (including PERA’s professional staff) would find this type of conduct, intentional deception, disturbing.  Perhaps, this is just standard operating procedure . . . anything goes in litigation and I’m just being naïve.

Let’s take a look at some of the instances in which Colorado PERA has cited an “actuarial funding ratio” over the years:

Colorado PERA Update – (Spring 2006 – page 4):  “See that PERA’s (actuarial) funded status was lower (61.5 percent) 30 years ago than what it is now.  You may recall that there was no perceived “crisis” in PERA’s funded status in 1975.”

Colorado PERA News Archive for 2004 (9-16-2004):  “PERA’S funded level was below 60 percent in 1970, and there was not a perceived crisis in PERA’s financial health.”

So, in 2004 the position of Colorado PERA was that an actuarial funding ratio under 60 percent did not constitute a “crisis.”  If an actuarial funding ratio below 60 percent in 1970 was not a “crisis” in 2004, then how is it that an actuarial funding ratio of 69.8 percent in 2008 is a “crisis” or an “actuarial emergency”?  It just doesn’t add up, does it?

While we’re on the subject of funding ratios, the PERA Answer Brief cites a provision of SB 10-001, allowing the COLA to increase in the future “when PERA returns to financial soundness and its funding ratio reaches 103%.”  As we have seen in recent months, Fitch Ratings, one of the three most prominent ratings firms in the United States deems a public pension plan “well-funded” at an 80 percent funding ratio.  The PERA trust funds are financially sound at an 80 percent actuarial funding ratio.

A legislative attempt to breach the pension contracts of ACTIVE, WORKING PERA members who have PARTIALLY-vested pension rights in order to unnecessarily reach a 100 percent actuarial funding ratio would constitute a ridiculous overreach.

A legislative attempt to violate the FULLY-vested, contracted, earned, accrued pension rights of CURRENT, RETIRED PERA members to unnecessarily reach a 100 percent actuarial funding ratio truly shocks the conscience.

The drafter of SB 10-001 made it no further than the title of the bill before stumbling into folly.  Can you blame him?  He put provisions into the draft bill at the direction of the bill’s prime sponsors.  These members of the General Assembly were getting their marching orders from PERA lobbyists.  These legislators did not bother conducting their own legal research into the contractual nature of pension rights, they held no interim investigations of the matter, and they did not conduct due diligence.  As Senator Lundberg said on the Senate floor during the SB 10-001 debate: “This bill is a deal that was cut before this body met.”

Clearly, reaching a 100 percent pension actuarial funding ratio is not a “legitimate” governmental interest.  Public pension plans and their governmental sponsors exist in perpetuity.  They need not entirely “pay off” their unfunded liabilities . . . ever.  If it happens that public pensions reach 100 percent actuarial funding levels, that is all well and good.  However, these pensions are “well-funded” at an 80 percent funding level.  I have excerpted a few passages from the website of the National Association of State Retirement Administrators that are instructive:

“Although a pension plan that is fully funded is preferable to one that is underfunded, other factors held equal, a plan’s funded status is simply a snapshot in a long-term, continuous financial and actuarial process.  A plan’s funding level is akin to a single frame of a movie that spans decades.”

“The fact that a plan is underfunded is not necessarily a sign of fiscal or actuarial distress; many pension plans remain underfunded for decades without causing fiscal stress for the plan sponsor or reducing benefits to current beneficiaries.”

“Because the sponsors of public pensions (i.e., states, cities, etc.) are “going concerns,” operating essentially as perpetual entities, there is nothing particularly important about a public pension plan being fully funded at any particular point.  Likewise, the fact that a plan is underfunded does not necessarily present a fiscal or actuarial challenge to the plan sponsor.”

“Attaining full funding of a pension plan has been likened to a mortgage: at the end of the process, when fully paid, the mortgage would be considered fully funded. Although at any point during the 30-year mortgage, part of the outstanding obligation may be considered an unfunded liability, more relevant considerations are a) whether the mortgage holder has the resources to continue making payments until the obligation is resolved; and b) whether the obligation is indeed being amortized.”

Colorado PERA has more to say on this matter of funding ratios, (note that these past communications to PERA members exclusively cite “actuarial funding ratios.”)

From: Shareholders Meeting Fall 2006 document:

http://www.copera.org/pdf/Shar…

“Note that PERA was over 100% funded in only two years of our 75 year history.”

From, Meredith Wiliams, CAFR Summary to Members, 2002, December   5/21 (REV 6/03)

http://www.copera.org/pdf/5/5-…

“PERA directs its efforts at keeping the funding ratio, (the ratio of assets to accrued liabilities) for the three divisional retirement funds at a minimum of 80 percent.  A funding ratio over 80 percent is considered good.”

Well, Colorado PERA, then why try to take fully-vested retiree benefits until the trust funds reach a 100 percent actuarial funding ratio?  Why has the goal post been moved?

From, PERA’s Funding Status, 2002 document:

http://www.copera.org/pera/abo…

“Those members who are planning on retiring should not be alarmed by the underfunded status of PERA.  Retirement benefits will be calculated and paid, in the same manner, regardless of PERA’s funded status.”

From, PERA Shareholders Meeting Presentation, Fall, 2005 document:

“Note that PERA’s funded status was lower 30 years ago than it is now.  You may recall that there was no perceived “crisis” in PERA’s funded status in 1975.”

“What the PERA Board and staff would like is for the funded status curve to be flat or stable at around 80 percent.  Why?  Because not all benefits are due and payable today or tomorrow . . . PERA can weather the ups and downs in the markets.”

http://www.copera.org/pdf/Shar…

The National Association of State Retirement Administrators has published research that helps to place Colorado PERA’s taking of fully-vested pension benefits in perspective.

According to the NASRA, at the end of 2009, the average actuarial funding ratio of major US public funds was 80 percent.  “The second sharp decline in the value of equities this decade caused public pension funding levels to also go down, to 80 percent in FY 09 from 85 percent in FY 08.”

“An April 2010 issue brief authored by the Center for Retirement Research at Boston College found that for the public pension community as a group, receiving the full ARC (annual required contribution) would require additional pension contributions of two percent of payroll, an amount that varies by plan.”

Here are the PDFs:

http://www.publicfundsurvey.or…

http://www.publicfundsurvey.or…

At the end of 2009, the median “actuarial funding ratio” among public pension funds in the NASRA survey was 76.4 percent.  At the time of the taking of the PERA retiree’s contracted COLA benefit, the actuarial funding ratio of the PERA trust funds stood at 68.9 percent, a difference of 7.9 percent.  (Remember that this 7.9 percent difference was the result of the Colorado General Assembly skipping out on $3.5 billion of its PERA actuary identified annual required contributions during the prior 8 years.)  (Also, recall that fully-vested members of public pension plans bear no “market risk.”)

In light of the taking of the contracted COLA benefit, I find the Colorado PERA Board’s inflation assumption of 3.75 percent damning.  Recognizing this 3.75 percent board inflation assumption, the Colorado PERA Board essentially wants to inflate away retiree contracted benefits as de facto board policy.  To ensure that the State of Colorado continues to have the lowest per capita state tax receipts in the nation, and retains the option to grant further discretionary tax relief (for example, last month), the fully-vested, contracted retirement benefits of PERA retirees should be inflated away with a COLA of 0 percent to 2 percent.

Colorado PERA wants to do this to retired public employees who, as a condition of employment, were prohibited from participating in one of the “three stool legs” of retirement security, the federal Social Security system.

Colorado PERA’s Executive Director has comforted us during past market volatility:

From, Meredith Wiliams, CAFR Summary to Members, 2002, December   5/21 (REV 6/03)

http://www.copera.org/pdf/5/5-…

“While the investment markets will always have ups and downs, PERA is a long-term investor and we can ride out the bad times the market experiences. ”

Meredith Wiliams, CAFR Summary to Members, 2001, December 31, 2001

http://www.copera.org/pdf/5/5-…

“Be assured that your PERA account is safe, and that the benefit you receive when you retire is not affected by PERA’s short-term return on investments.”

Meredith, PERA retirees are not feeling all that “safe” these days.

(I tell you, it’s quite burdensome being a guardian of the truth.)