Despite critics’ claims, PERA is secure investment

Bernard Anderson

Current propaganda regarding the Colorado Public Employees’ Retirement Association’s so-called too-high earnings rate is wrong. In spite of what some Colorado office holders say Colorado’s defined benefit plan is sustainable and is not bleeding red ink as was stated by a recent visit by Colorado State Treasurer Walker Stapleton.

These half-truths serve the conservative ideas of Republicans and the Independence Institute, a right-wing organization in Denver.

In my opinion, those who spread this kind of “information” are not financial experts but are propaganda bedfellows of the right. I have been a forensic economist for the last 47 years as well as a professor of economics for 49 years. As an expert witness, I have to support my results before juries. Forensic economists rely on long run economic projections. PERA’s returns must be measured by long run analysis, not today’s data.

Critics of PERA argue that the 8 percent future rate of return on PERA assets is too high. PERA is using that rate because history supports its use. I wish I could predict the future perfectly, but no one can. President Harry S. Truman said it wisely when he stated he wanted projections from economists who had one arm – no more – “on the other hand” statements. But, professionals must “guess” using their knowledge of the past to predict the future. PERA’s fiscal future is dependent on payments into the system by employees as well as outflows to retirees. Of paramount importance are the earnings on PERA’s investments as well as any changes in asset values. The 2007 recession destroyed values for everyone – homes, stocks, 401(k)s. It wiped out savings for retirement and caused pension fund values to plummet.

But it looks as if it’s over. Free enterprise has its ups and downs. Annual average changes in large-cap stock values have been as follows: five years: 1.3 percent; 10 years: 2 percent; 20 years: 7.9 percent; 30 years: 10.5 percent; 40 years: 9.8 percent; 50 years: 9.2 percent. The two bubbles (dot-com and real estate) of the last 14 years did their damage to averages. However, for 2012, PERA is estimating an about 12 percent return. PERA’s assumption of an 8 percent return is right in line with the conclusions of a March 2013 report by the National Association of State Retirement Administrators. (The actual average is 8.9 percent.)

Critics show their ignorance of finance when they refer to the 8 percent rate of return as being impossible. They say that the assumption of an 8 percent return on PERA’s assets is too high. One representative of this group stated that Mayor Michael Bloomberg of New York City said “an 8 percent rate of return is laughable, a 7.5 percent rate of return is unachievable and a 7 percent rate of return if somebody offers it to you, you should take it and hope their last name isn’t Madoff.”

Bloomberg’s famous investment company (yes, the same Bloomberg) then states, “It’s been a frustrating stretch for prudent bond investors girding for a rise in interest rates. The average one-year return for Morningstar’s long-term government bond fund category is 32.7 percent.” Yep, 32.7 percent. Holy bond portfolio! A 32.7 percent increase in one year? Why? Critics forgot existing bond values rise as interest rates fall thereby really boosting the worth of PERA’s long-term bond holdings. Of course, interest rates may rise from their current low levels and if one continued to hold on to those bonds, they would lose big time. Good portfolio management requires an expert team of professionals. PERA has that team.

Portfolio values depend on increases in the prices of assets as well as dividends and interest. Critics conveniently ignore this fact.

Bill Gates of Microsoft, one of the richest men in the world, didn’t become a billionaire by holding his stock in anticipation of dividends. Microsoft stock increased in value and split many times. It’s the value that’s important for growth, not just interest or dividends.

Critics also ignore the fiscally important funding changes that the Colorado Legislature made to PERA just two short years ago. PERA is not the same as it was when PERA was rated as one of the pension plans in dire need of fixing. State employees now contribute more earnings. Their future contributions are slated to increase.

Cost-of-living increases have been forgone. Future adjustments are now dependent on the health of the system. Early retirement options have been scrapped. A defined contribution plan is in place.

The public’s investment in PERA is secure.

For those who might have additional interest in public pensions plans, please visit: http://siepr.stanford.edu/system/files/shared/Nation%20Statewide%20Report%20v081.pdf. This thoughtful and unbiased study was completed by Dr. Joe Nation, Stanford Institute for Economic Policy Research, Dec. 13, 2011.

Bernard Anderson is a forensic economist and former professor of economics at Fort Lewis College. Reach him at andersonpb@mac.com.

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