Colorado should not use PERA to invest in non-pension programs 

In 2024, Colorado voters approved Proposition 130, a voter referendum requiring the state to spend $350 million to support law enforcement. The referendum did not include any provisions for how the state was supposed to pay for the requirement. The legislature, specifically the Joint Budget Committee (JBC), has not made any specific recommendations on how to fund the mandate, but is looking at one proposal that would involve the state’s already underfunded pension plan for public workers. Not only is this a bad idea on its own merits, but it could also backfire and fail to satisfy the requirements of Proposition 130. 

In a recent draft bill, the JBC proposes that the state take $500 million from its dedicated emergency reserve fund and invest that money in the Public Employees Retirement Association (PERA) fund portfolio. The state would then look to pay out the $350 million law enforcement supplement over 10 years in equal annual installments. They would rely on PERA to earn at least its 7.25% target return to generate annual payments without, theoretically, reducing the emergency reserve fund. Instead of reimbursing the emergency fund from the assets invested in PERA, the state would replenish the fund by reducing its pension contributions to PERA. This is necessary because, by law, PERA cannot make payouts for any purpose other than pension payments to its members. 

While this proposal gets high marks for creativity, there are several reasons why it should be a non-starter. First, the proposal relies on the primary assumption that PERA will earn at least 7.25% per year over the 10 years of this scheme. With the financial turmoil being experienced in 2025, on top of the existing debt-related stress already on the PERA system, relying on these substantial returns places undue pressure on the plan to do something it has not been able to do historically. According to Reason’s analysis on the system’s investment returns, PERA has only achieved a 6.7% return over the last 23 years. 

A further look at PERA’s financial position clearly shows the risk in this assumption. Through 2024, Colorado PERA (State Division) had a projected funded ratio of just 69.2% and an unfunded actuarial liability of almost $9 billion. The School Division of PERA holds nearly $16 billion in pension debt.  

There also exists a mismatch in investment strategies and the guaranteed nature of lifetime pension promises. PERA is, by definition, a retirement system investing for the long term and paying out lifetime incomes to retired members. The investment pool is designed for this long-term investment horizon. The $350 million payout to supplement law enforcement over 10 years is a liability requiring an investment of a much shorter duration.  Asking PERA to use its fund to meet this obligation is putting it in an untenable position.   

Finally, why is the state even considering using the asset pool of a retirement system to produce a short-term investment return rather than a long-term, retirement-oriented return? If the state’s emergency reserves will be used to fund this mandate, it would seem appropriate for the state treasurer to invest in a liability-appropriate manner to satisfy the need. If the PERA fund does not meet its target return, the scheme falls apart, resulting in a loss to the state’s emergency reserve and leaving the law enforcement mandate short of the required supplement. 

Many state and local government pension funds, including PERA, are in precarious financial positions. Its problems include debilitating unfunded liabilities, questionable investment expectations, and continuing political interference. Adding the responsibility for completely unrelated and short-term investment mandates to these pension systems is simply improper. The idea alone suggests a fundamental lack of understanding of the pension system’s financial position and of investment management generally. The state, through the treasurer, has the mechanism to address situations such as this without involving the retirement funds of public workers. The state should use the proper channels and let PERA concentrate on its own goals and objectives.