Legislation has been filed to eliminate the cost of living increase for new retirees in the Public Employees Retirement System until they reach age 65, though the legislation is not expected to survive the 2014 session. Pat Robertson, PERS executive director, answered questions from the Daily Journal’s Bobby Harrison about the retirement program for state and local government employees, university and community college faculty and public school teachers.
Q. There have been concerns in recent years about the financial viability of the Public Employees Retirement System. Can you speak to those concerns and give a quick update on the overall program?
A. As of June 30, our funded status remained at 58 percent on an actuarial basis, primarily because we are still recognizing losses from 2009. However, on a market value basis, our funded ratio improved to 61 percent, indicating improvement in the future. Furthermore, we are projected to be more than 90 percent funded in 2042, exceeding the 80 percent goal established by the Board in 2012.
PERS, like the rest of the economy, is recovering from the effects of the “Great Recession” and had an investment return of 13.4 percent for fiscal year 2013. Our assets increased to $21.6 billion in 2013, while we paid more than $1.8 billion in benefits to more than 90,000 individuals.
Finally, the Joint Committee on Performance Evaluation and Expenditure Review (PEER) recently reported on the financial soundness of PERS, stating that with our “continued competent, prudent management…PERS is moving toward reducing both the amortization period for the system and reducing the unfunded accrued liability.”
Q. Can you tell us about the 13th check and give us details of how the cost of living increase works?
A. There is a lot of misunderstanding about the annual Cost-of-Living Adjustment (COLA), primarily due to the fact that many retirees receive it in a lump sum payment in December rather than it being added to their monthly benefit. This causes some people to perceive the COLA as a bonus rather than what it is – a 3 percent annual benefit adjustment designed to protect an individual’s purchasing power from the effects of inflation.
Due to the fact that the COLA is provided by statute as part of the defined benefit, it is included in the overall funding of the plan and, since 1966, has been an important part of the overall benefit. In fact, the cumulative COLA represents 23 percent of the average annual benefit of $21,000.
Q. Some have advocated changing PERS to a defined contribution plan. Would that be a good idea in your opinion?
A. There continue to be debates surrounding the value of defined benefit plans versus defined contribution plans. The question really comes down to what the employer is trying to accomplish. Retirement plans, as with other fringe benefits, are part of the overall compensation package that employers use to recruit and retain employees; therefore, which one works better in the public sector? Generally speaking, public employees have been willing to work for less compensation today with the promise of deferred compensation in the future.