First, the return on investment was just 5.7%, which is considerably less than the 7.5% projected. Of course, the S&P 500 saw 13.7% growth in 2014, so the state would have fared better just dumping it’s billion-dollar liability into a generic S&P 500 fund.
The PERA press release then goes on to say that the three-year and five-year annualized rate of return were 11.3% and 9.9%, respectively. But, again, the S&P 500 annualized return for those same periods were 19.7% and 16.5%. Now, a real financial genius would tell you that the S&P 500 comparison doesn’t matter. But, it is illustrative of the challenges that PERA is facing. And, regardless of how well or not well PERA does against the S&P 500, the fact remains that PERA is giant cancer on the state’s balance sheet.
We hate to say we told you so, but we told you so. In November 2012, PERA caused great concern when it implemented an 8% expected rate of return. Here’s what we said then:
“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.”
Even Bloomberg is with us on this one. State Treasurer Walker Stapleton has been about the lone voice of reason on the PERA situation. It’s time to have a serious discussion about the state of PERA’s health.