Under-Funded Colorado Retirement System Gets Some New Money

The struggling $44 billion Colorado Public Employees Retirement Association got help Monday as Gov. John Hickenlooper signed a new pension plan that offers it fresh money from the state, the beneficiaries, and their employers.

The state will give $225 million this year, and the same amount annually into the future, toward bolstering the system. Plus, the overhaul plan increases both employer and employee contributions to the system’s funds, which cover teachers, judges, and local government and state workers. Employer contributions are currently between 10% and 13% of an employees’ salary. They will rise by 0.25 percentage point of current pay. Employee contributions will increase to 10% from 8%.

The law will also lower cost-of-living increases to 1.5% from 2%, as well as raise the retirement age for new government workers to 64 from the current 58-60 (which depends on where they work). There will also be a two-year suspension on cost-of-living hikes. Pension disbursements will now be based on an employee’s top five years, rather the current top three.

Under the new law, the retirement system’s board can now make annual changes to the contribution rates. However, it may only increase and decrease the rates up to 0.5% percentage points

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“We understand that these changes will not be easy, but we believe shared impact across the membership and with employers was absolutely necessary,” said Timothy M. O’Brien, the retirement association’s board chairman.

The retirement system is currently facing a $51 billion shortfall. Its average funded ratio across its seven divisions is 53%. Last fall, the S&P credit rating agency threatened to downgrade Colorado if the pension system’s long-term solvency wasn’t addressed, adding that reform could turn the state’s financial situation around.

In a May report, S&P credit analysts said that the state could see a “reduction in reported unfunded liabilities and higher-funded ratios” from this reform.

Tags: Colorado PERA, Gov. John Hickenlooper, Pension, Pension Reform

In the worm-has-turned department, small-capitalization stocks had a great May, outpacing large caps with a total return almost three times as high.

The small-cap S&P 600 turned in a 6.5% performance last month, topping the large-cap S&P 500’s 2.4% showing. Year-to-date, the contrast is even more stark, with the S&P 600 clocking a 7.6% return, versus the S&P 500’s 2%. In 2017, the large-cap index was the clear leader, 21.8% to 13.1%.

Why the difference last month? Healthcare, largely, according to Jodie Gunzberg, head of US equities at S&P Dow Jones Indices. For May, small-cap healthcare was up 9.3%, compared to less than 1% for the large-cap benchmark. She noted strong expectation of acquisitions for small companies broadly, as well as increased innovation among those in the health sector.

The S&P 500 was soaring until late January, when fear of rapidly rising interest rates and a trade war impeded its progress. Small companies have little dealings overseas, so they are less affected by exporting goods abroad.

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Tech, which has been the overall market’s driver for some time, suffered a setback on the large-cap side in March amid the controversy over Facebook’s difficulty keeping user data from the clutches of others, such as Russian mischief-makers. Still, tech had a rebound across the board in May, but small caps had more of a head start. Information technology for small stocks posted a 7.9% gain last month, while large-cap tech came in at 7.1%.

In fact, all 11 S&P 600 sectors were up for May, the first time that has happened since December 2016.

Tags: Equities, Large Cap Stocks, Small Cap Stocks, Standard & Poor’s

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