GREAT EXPECTATIONS: PERA Board Retains Ridiculous 8% Return Assumption

Colorado’s Public Employees’ Retirement Association (PERA), already under scrutiny for its high expected rates of return, sent eyebrows skyward yesterday when it voted to continue its portfolio’s eight percent expected rate of return.  With the market still wobbly from the election and from the “Great Recession”, analysts have been calling an 8% return a pipe dream for some time.

Currently, PERA has a $26 billion gap between the expected rate of return and the actual rate of return – a number that grows each year the portfolio misses the 8% mark.  PERA averages the return over a 30-year period.  Oddly, even PERA’s own financial advisor, Hewitt Ennis Knupp has recommended the lower 7.6% rate of return, which PERA has ignored.

Even New York City Mayor Michael Bloomberg recently stated that an 8 percent return was “absolutely hysterical” and even a 7 percent return is “indefensible,” during similar discussions about the New York City pension plan.

To put it in context, the fund returned a measly 1.9% last year.

Despite the mess this unrealistic expectation is causing in our state’s budget, some see the 8-7 vote as a small victory for Colorado Treasurer Walker Stapleton, who has been sounding alarms about the rate of return since he took office in 2011.  Here is what Stapleton said about the vote:

“While the 8-7 vote to uphold the 8 percent return is not the outcome I would have liked, it does mark significant progress.  Last year we had a 10-5 vote.  I am optimistic that board members are starting to look at current market realities. Now is the time to lower the rate of return, look at the real unfunded liability we are facing and figure out a solution to save the retirements of nearly 300,000 current and future retirees.”

Despite the minor victory for Stapleton, the 8-7 vote (and continued unrealistic expectations) is no winner for public employees, whose retirements may be at jeopardy due to this growing unfunded mandate.

 
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