Colorado PERA’s Board of Trustees met on January 17, considering presentations on PERA investments, a briefing on legislative issues, an update to PERA’s Signal Light Reporting, and more.
2018 was a difficult year for global public asset classes. The preliminary results for 2019 are more positive, although the returns have yet to be finalized and audited.
Amy C. McGarrity, PERA’s Chief Investment Officer, recapped 2019 achievements and listed projects her division will undertake in 2020:
- PERA’s Board sets asset allocation guidelines for PERA’s investment division. A new asset allocation was approved at the November 2019 Board meeting, and McGarrity presented the resulting 2020 policy benchmark weights.
- In 2020, PERA’s Board will evaluate their existing Proxy Voting Policy and consider whether to implement enhancements beginning in 2021.
- In late 2019, PERA’s Board selected Callan as the investment consultant for PERA’s Defined Contribution Plan. With their assistance, PERA will undergo an evaluation of current and proposed options in this plan.
- In January 2020, PERA liquidated its BlackRock Fixed Income passive account and brought management of those assets in-house, a move expected to result in improved performance at a lower cost.
Expecting a relatively quiet year at the Capitol
Colorado’s Legislative Session began January 8. Lawmakers are already considering a few bills that affect PERA. As currently written, these bills are narrow in scope, affecting only a small number of PERA members in specific positions. Bills introduced so far include:
- SB 20-057, which would make firefighters who work in the Department of Public Safety in the Division of Fire Prevention and Control eligible for the same PERA benefits as Safety Officers.
- HB 20-1127, which would modify working-after-retirement rules for retirees who work in specific, hard-to-fill positions for boards of cooperative services (BOCES) that serve rural areas of the state.
You can track developments on these bills, and all PERA-related legislation, here.
A new rubric to gauge PERA’s funded status
PERA’s funded status is a closely watched metric. Calculating this number is a complex process that requires projecting investment returns, demographic information, changes in employment and salary information, and other factors decades into the future. Interpreting these calculations can also be a challenge. Even with careful consideration and planning, a single outcome is not guaranteed. Instead, these models show a range of possible outcomes.
In 2014, the Legislative Audit Committee directed the Office of the State Auditor to develop a way to make PERA’s financial status easier to understand. The result of this directive was Signal Light Reporting, which translates risk into green, yellow, and red levels.
During the Board meeting, Segal Consulting previewed an enhanced version of this tool, called Signal Light 2.0.
Signal Light 2.0 measures plan risk in a more robust way, and it is intended to more effectively communicate funding probabilities, incorporating a variety of assumptions used in calculating PERA’s funding status.
One significant improvement in Signal Light 2.0 is the use of stochastic modeling. The first version of Signal Light Reporting modeled possible outcomes if PERA’s investment returns achieved its assumed rate of return (7.25 percent) year after year. The assumed rate of return is the target over time, but stochastic modeling recognizes that one year might significantly underperform that rate while other years might significantly outperform. The sequence of these over- or underperforming returns can affect account balances over time—even if the average investment return is the same.
Signal Light 2.0 calculates 5,000 different possible scenarios, considering PERA’s asset allocation, expected returns, risk levels, and more. The analysis shows how many of these 5,000 different scenarios meet specified outcomes, such as reaching fully funded status in 30, 40, and 50 years. In the end, this analysis is distilled into a signal light color.
The next iteration of Signal Light 2.0 may look at additional assumptions, such as demographic assumptions, or payroll growth. Varying these assumptions using stochastic modeling should result in a more complete picture of the probabilities associated with PERA’s funding.
This calculation is, by definition, an ongoing process. Each signal light report is a snapshot of the outlook on a specific day in time. It helps tell a story about funding risk, but that story changes every day. PERA will continue to use this methodology to help capture the overall outlook amid constantly changing circumstances.