The Dallas Police and Fire Pension System Fund is tiny compared to the Colorado Public Employees Retirement Association, but its present dilemma may be instructive to the state’s often-beleaguered pension fund.
Simply stated, the Dallas fund is nearly insolvent — so much so that it may drag the Texas city into bankruptcy.
A recent editorial in the Dallas Morning News got right to the point:
“Over the years, the fund has amassed $2 billion to $5 billion in unfunded liabilities, the result of bad real estate investments and blatant self-enrichment from prior management. … City officials are openly uttering the word bankruptcy, not just of the pension fund but the city itself.”
Like PERA’s Board, the Dallas fund’s trustees lowered their target investment return from 8.5 percent to 7.25 percent between 2013 and 2015 — but that’s where the similarities end.
In the early 2000s, the fund sharply reduced its position in equities and put big bucks into real estate. When real estate prices collapsed, fund managers continued to value their holdings at purchase price, concealing the fund’s actual performance. Newspaper reports unmasked the scam, and pensioners grew increasingly alarmed as trustees discussed reducing benefits and ending withdrawals from the Deferred Retirement Option Program, available to police and firefighters who choose to work past retirement age.
Result: An old-fashioned bank run as pensioners sought to get money out of the fund. The fund may need a $1.1 billion cash infusion to avoid insolvency.
That’s more than Dallas’ annual budget. It’s hard to argue with the newspaper’s conclusion: “The city and the pension fund share a rowboat. It doesn’t matter whose end is leaking; the boat is still taking on water.”
On Nov. 18, the Board of Trustees of the Colorado Public Employees Retirement Association completed its annual review of the pension fund’s actuarial assumptions. The board decided to modify long-term inflation expectations to 2.4 percent from 2.8 percent and reduce the long-term investment return assumption to 7.25 percent from 7.5 percent.
The board also revisited the demographic assumptions used to determine PERA’s funded status.
“In light of new information,” according to a PERA press release, “the board made several adjustments to the demographic assumptions including new mortality tables to reflect the actual experience of the PERA membership. … Projections indicate funds will be available for payment of benefits throughout the period.”
State Treasurer Walker Stapleton, a longtime critic of PERA, says the changes will increase the system’s unfunded liability by approximately $3 billion. That will lower PERA’s funded ratio — currently estimated at 62.1 percent. At the end of 2015, the PERA’s assets were $44 billion, against total liabilities of $70.9 billion.
Because promised benefits outweigh current assets, there exists an unfunded liability of $26.8 billion.
“This is a small step in the right direction, but it does not go nearly far enough,” said Stapleton. “We pushed hard to lower the return to a maximum of 6.5 percent. PERA’s own experts from Byron Wein to Goldman Sachs advised the board that 5 percent is a more realistic rate of return. It is unfortunate PERA’s board thinks 7.25 percent is a responsible assumption.”
So who’s right? Clearly, it’s imperative that PERA’s funding be sufficient to pay present and future pensions, particularly since most beneficiaries did not pay into Social Security when contributing to PERA.
It’s also clear that reducing the rate to 6.5 percent or below would sharply increase PERA’s unfunded liability. The state might then be faced with options such as reducing retiree benefits, increasing contributions or figuring out a way to recapitalize the fund.
Could such a reduction also trigger the kind of “bank run” that took down the Dallas fund? That’s not a possibility.
According to PERA public information officer Katie Kaufmanis, legislative measures in 2003 and 2005 sharply limited the number of years that could be bought by early retirement, and priced them at full actuarial value.
PERA’s long-term investment return of 9.5 percent in the 35 years between 1980 and 2015 looks pretty good — especially compared to the S&P’s 8.1 percent annualized return. The total S&P 500 return during that period, including reinvested dividends, was 10.9 percent.
Many investment advisers and portfolio managers believe that our era of low investment returns will continue indefinitely, but Seattle investment advisor Alexander Adams isn’t among them.
“The average annual return of the S&P 500 from August 1982 to March 2000 was 12.2 percent,” he said. “From March 2000 to July 2016 the return has been less than 3 percent.”
Alexander believes that the nation is in the early stages of a bull market, one that will accelerate faster and yield higher returns than most of its predecessors.
Let’s hope that he’s right. A roaring bull market would be perfect for PERA.