If We Hope Hard Enough…
There is an old financial investment saying that “hope is not an investment strategy,” but from what I can tell, that’s about all the current Public Employees’ Retirement Association (PERA) projections are running on. That and crossing some fingers maybe. Financial strategy and investment guru Blaine Rollins hits a home run in this Post guest commentary with an op-ed that would make our own Barry Poulson proud. In the piece, Blaine points out that private firms typically take a conservative approach to calculating their pension liabilities. Usually something around 5% per year is targeted so that if the economy finds itself in the toilet for long stretches, the firm is able to continue making pension payments. States on the other hand, have traditionally picked more aggressive rates of return – like 8% per year. This becomes a problem when their fantasy land projections don’t meet reality. And guess who gets called on to make up the difference?
Taxpayers.
Colorado’s own Public Employees’ Retirement Association went the risky route and chose a whopping 8% rate of return. Such a hopeful outlook has been a point of debate for quite some time now. Barry Poulson discussed PERA’s extremely hopeful rate of return at length in this Independence Institute Issue Paper, PERA Falls Off a Cliff.
In the end, if and when PERA’s hopes don’t materialize and we’re looking at a massive shortfall, there are only two roads to take – and both aren’t pretty.
Betting PERA member retirement plans and Colorado taxpayers’ future on a 30-year, 8 percent return assumption is fiscally irresponsible. With no changes to state or member contributions or benefits, it is easy to see how the PERA assets will fall to zero in the next decade. At that point, Colorado will either need to stop all payment to PERA retirees or raise taxes significantly.
Ouch. Which route do you think will be more politically palatable? The only question is, will they at least have the decency to ask us?
