PERA Actuarial Report Summary

June 21, 2010

Hello Ambassadors,

On June 18 the PERA Board of Trustees held its scheduled meeting, and the meeting included reports from the actuaries about the condition of the trust funds measured as of December 31, 2009. The reports include the effect of the changes made by Senate Bill 10-001 that apply to current members and benefit recipients. Following is a summary of highlights of the reports.

While the annual actuarial valuations are valuable measurements of PERA's current funding status, it's important to remember that they do not include projections of PERA's future funding ratio. Those projections are being prepared by the actuaries and will be ready in July, in time for PERA's regular meeting with the Legislative Audit Committee scheduled for August 16, and in time for the three meetings for Ambassadors to be held beginning on July 27.

• The overall funded ratio of the PERA pension trust funds (not counting the newly-established DPS Division) declined from 69.8 percent at the end of 2008 to 68.9 percent as of December 31, 2009, using the actuarial value of assets (AVA). The AVA is calculated using a smoothing method which recognizes a portion of investment gains and losses in each year; the gain or loss in any particular year is fully recognized over a four-year period.

• PERA's investment return for 2009 was 17.4 percent, well above the assumed rate of return of 8 percent. However, only one-fourth of this gain is recognized for the 2009 valuation, and it was overshadowed by the continuing recognition of the negative 26 percent return for 2008. AVA fell from $38.8 billion in 2008 to $37.6 billion at the end of 2009.

• Actuarial accrued liabilities (AAL) for the four pension trust funds (State, School, Local Government, and Judicial) fell from $55.6 billion at the end of 2008 to $54.5 billion at the end of 2009. The assumed investment return was reduced from 8.5 percent to 8.0 percent, you'll recall, which had the effect of increasing liabilities. However, it was overshadowed by the changes in SB 10-001, which decreased actuarial liabilities. The net decrease in AAL was $1.1 billion.

• The unfunded liability of these pension trust funds increased by $0.1 billion to $16.9 billion as of December 31, 2009.

• Using market value of assets (MVA) instead of AVA, the overall funded ratio of these pension funds increased from 52.7 percent in 2008 to 59.9 percent at the end of 2009. MVA increased from $29.3 billion to $32.7 billion during 2009.

• The unfunded liability amortization periods dropped significantly in most divisions, primarily because of the changes in benefit provisions and future increases in AED and SAED incorporated in SB 10-001. The amortization periods for each division as of December 31, 2009 are:

  	State	School	Local Gov't	Judicial
  With Contributions At Current Level	43 years	44 years	16 years	65 years
  With Future Increases In AED/SAED Included	24 years	23 years	16 years	65 years

• These calculations are "snapshots" and do not include the effect that new hires will have on the system and some other factors. When completed in July, the projections of PERA's funded ratio may project full funding will take less than or more than 30 years for the State and School Divisions. Nevertheless, these results from the actuary show that SB 10-001 makes a significant improvement in PERA's funding picture and will help return PERA to the path of long-term sustainability. than 30 years for the State and School Divisions. Nevertheless, these results from the actuary show that SB 10-001 makes a significant improvement in PERA's funding picture and will help return PERA to the path of long-term sustainability.

• The PERA Health Care Trust Fund (HCTF) includes assets for the purpose of paying premium subsidies on behalf of benefit recipients of the State, School, Local Government, and Judicial Division who enroll in PERACare. The funded ratio of the HCTF decreased from 18.7 percent at the end of 2008 to 14.8 percent as of December 31, 2009. Changes to actuarial assumptions, including the decrease in assumed investment return, increased liabilities of the HCTF. The period for amortizing unfunded liabilities increased from 39 years to 53 years. However, if RDS (Retiree Drug Subsidy) payments from the federal government continue as provided in law, the amortization period drops to 41 years.

• The Denver Public Schools (DPS) Division results were measured by the actuaries employed by the Denver Public Schools Retirement System prior to the merger. As you remember, the merger legislation provided for a separate division within PERA for the assets and liabilities of DPS members and benefit recipients. The actuaries' report showed that AVA for the DPS Division decreased from $2.944 billion at the end of 2008 to $2.918 billion at the end of 2009. Liabilities (AAL) decreased from $3.493 billion $3.305 billion at the end of 2009, as a result of changes to assumptions and benefits due to the merger and SB 10-001. So the funded ratio in the DPS Division increased from 84.3 percent to 88.3 percent as of December 31, 2009. On a market value of assets basis, the funded ratio was 83.1 percent at the end of 2009.

• The amortization period for the DPS Division is "infinite." The actuaries noted that in 2010, DPS as an employer is projected to contribute 1.39 percent of payroll to the DPS Division fund. This low contribution rate is allowed under the merger legislation passed in 2009, and involves credits DPS has as a result of its Pension Certificates of Participation borrowings. If DPS contribution rates do not increase, the actuaries cautioned, the funded status of the division will deteriorate. This was a concern of the PERA Board in 2009, which it voiced to the Legislature when the merger legislation was being debated. However, DPS is scheduled to pay the same AED and SAED payments as PERA School Division employers, and pursuant to SB 10-001 these rates will increase in the next few years. Also, under the merger legislation, the DPS employer contribution will be adjusted in a few years to try to match the projected future funded ratio of the School Division.

• Measurement of DPS Division results is complicated by the fact that over 4,100 hourly and part-time employees became members as of January 1, 2010, and data on them is not as accurate now as it will be with a few years of experience. The actuaries also said that the funded status of the DPS Division may tend to fluctuate more than other divisions because a higher proportion of its total liabilities is for current retirees' benefits. The DPS Division had 8,003 full-time active members at the end of 2009, compared to 6,218 retirees and beneficiaries.

• There is a separate Health Care Trust Fund for DPS, just as there is a separate pension fund. DPS benefit recipients enrolled in PERACare have different premium subsidies in some cases than PERA benefit recipients. The funded ratio of the DPS-HCTF as of December 31, 2009, was 17.7 percent. The allocation to the DPS-HCTF is 1.02 percent of salary, the same as for the PERA HCTF. With this contribution, the amortization period for the DPS-HCTF is 23 years.

Primarily because of the DPS merger and also because of SB 10-001, the PERA Comprehensive Annual Financial Report (CAFR) will take longer to prepare this year than it normally does. This CAFR is expected to be printed by late July. As in other years, a Summary of the CAFR also will be prepared and will be distributed to all PERA members, inactive members and benefit recipients.

Feel free to contact us if you have any questions.

Sincerely,

Rob Gray

PERA Ambassador Program Coordinator

(303) 837-6230

DPSRS/PERA Merger Bill Signed into Law

Following many years of legislation and many failed attempts at drafting merger agreements, the merger of the Denver Public Schools Retirement System (DPSRS) into the Colorado Public Employees Retirement Association (PERA) will become effective on January 1, 2010. On Thursday, May 21, 2009, Colorado Governor Bill Ritter signed SB 09-282 into law. This legislation directs that the 14,500 DPSRS members will join with the other 430,000 members of PERA in a separate DPS division. The law provides future portability of accrued service throughout all 178 school districts in Colorado, expanded health care options for DPS retirees, and greater long-term stability of retirement benefits.

Unlike previous merger legislation in 2003 and 2005, SB 09-282 was heavily debated in both the Colorado Senate and House. Legislators from outlying districts were concerned that teachers could more easily move from smaller districts to higher paying districts like Denver. Other concerns centered around the state taking on the liability of being the guarantor for retirement benefits of DPS employees. Senator Paula Sandoval of Denver argued that Colorado’s children and taxpayers would benefit from the removal of a major barrier to teacher mobility and the greater stability and security of retirement benefits. Senator Nancy Spence and Representative Andy Kerr maintained that DPS had been isolated from the free exchange of teachers and administrators for far too long. With bi-partisan support, SB 09-282 passed the Senate 24-9 and the House 51-14.

The work to complete the merger by January 1, 2010, will be intense. Staff members from DPSRS and PERA have been working for some time to establish the guidelines for the integration of benefits and transfer of assets, data, and equipment. The staff at DPSRS has developed an extensive communications plan to keep members informed on merger related issues. Details on specific provisions of the merger legislation will be forthcoming on the Merger Information page on the DPSRS web site at www.dpsrs.org. Updates via email will be provided to everyone who registers online with DPSRS. Meetings for specific member groups (active, retired, etc.) will be scheduled during the summer and fall. The dates for those meetings will be published in the next issue of the Pension Perspective.

Effective January 1, 2010, health, vision and dental insurance for DPSRS retirees will be provided through PERACare, the health benefits program for PERA retirees and benefit recipients. PERA is in the process of developing a communication plan to introduce DPSRS retired members to PERACare. Currently requests for bids from prospective 2010 insurance providers have been issued by PERACare. 2010 provider selection should be completed by late summer. Open enrollment for PERACare is generally scheduled from October 1 through November 15 of each year. All current DPS retirees and benefit recipients can expect to receive open enrollment information in September.

Both DPSRS and PERA incurred significant losses of assets in 2008. SB 09-282 requires PERA to report to the General Assembly by November 1, 2009 with recommendations for future reforms to put all PERA divisions on a path toward full funding of their accrued liabilities. These recommendations will be addressed in the 2010 legislative session and could involve benefit reductions, contribution increases and other changes. PERA has been working intensively to put the necessary pieces in place to ensure that PERA’s 2010 legislative recommendations address the situation in a comprehensive and effective manner. Since DPSRS members will become PERA members on January 1, 2010, these recommendations will likely have some effect on current DPSRS members. Until the PERA meetings over the summer and fall are completed, the information analyzed and the legislative recommendations formulated further discussion is of little value. Speculation about the many possibilities serves no purpose at this time. PERA will be conducting a statewide Listening Tour in August and Shareholder meetings in October which will provide additional information regarding the 2010 legislative recommendations. Specific dates and locations will be included in the next email update.