PERA investments rebound in 2023, but Colorado pension plan finances weaken

Colorado’s public employee pension system generated strong investment returns in 2023 — but its finances still worsened for the second time in five years as it struggles to bounce back from a dismal 2022.

Public Employees Retirement Association of Colorado investments grew 13.4% in 2023, according to its annual financial report released Friday. This matches its loss of 13.4% from a year ago.

But because the pension must average 7.25% of annual returns to meet its funding targets, the net result was a step backwards for the chronically underfunded pension.

PERA’s unfunded debt to members increased by $1.2 billion to $27.5 billion, the report shows. Its funding ratio – the amount of money it has in the bank relative to the benefits owed to current and future retirees – fell slightly to 69.6% from 69.9%. According to state law, its goal is to be 100% funded by 2038.

However, at the five-year mark of the 2018 Colorado Pension Reform Act, PERA’s financial position has improved dramatically from when Senate Bill 200 was first passed into law. At the time, PERA was only 60% funded, with an unfunded debt of $31 billion.

These benefits, however, have come at a great cost to retirees, public employees and the agencies that employ them.

Mixed investment returns, rising wages combine to hurt pensions

PERA covers more than 220,000 current public employees nationwide, most of whom work for the state or school districts. In total, PERA has more than 700,000 members, including 138,000 retirees and more than 300,000 others who have changed jobs but have not yet retired.

The financial decline in a good stock market year is partly due to the way PERA calculates its balance sheet. PERA smooths its gains and losses over multiple years to prevent large swings from a single bad market year.

In 2022, this boosted pension finance despite a 13% loss, thanks to the continued impact of large investment gains in 2020 and 2021.

Last year, the opposite happened, and 2022 losses offset investment gains by more than $400 million.

Another problem for the pensioner: It was a tough year for private equity and real estate, which make up about 19% of his investment portfolio. PERA gained 24% in its publicly traded shares, but its private equity holdings rose only 5%. Her real estate investments lost 10% of their value.

Big pay raises for teachers and state workers that came out of the pandemic took an even bigger bite out of pensions, adding nearly $800 million to the unfunded debt.

Here’s why: Retirement benefits and retirement contributions are tied to how much an employee earns. So in theory, the corresponding increase in contributions should generally cover the cost of the wage increase. But when older workers closer to retirement get big raises, it can increase their benefits more than they can offset their contributions in the time they have left in the workforce.

Benefits, contributions to stay sustainable

The financial report had at least some positive news for PERA members.

Pension finances are doing well enough to avoid another round of automatic benefit cuts and contribution increases.

Since 2018, a safeguard built into the law has been activated twice, causing public employees and their employees to contribute more to pensions than the law originally required.

Annual cost of living increases for pensioners have fallen to 1% under provision during a period of high inflation, steadily eroding the value of their pensions.

For context, Social Security benefits grew 3.2% this year and 8.7% last year, and Colorado retirees are not eligible for the federal program for years they work under PERA.

Meanwhile, public employees are contributing more than ever. For most members, 11% of each pay goes into retirement, while most PERA employers contribute 21%.