Colorado’s public employee pension system generated strong investment returns in 2023 — but its finances still deteriorated for the second time in five years as it struggles to bounce back from a miserable 2022.

The Colorado Public Employees’ Retirement Association’s investments grew by 13.4% in 2023, according to its annual financial report released Friday. That matches its 13.4% loss from a year earlier.

But because the pension has to average 7.25% returns a year to meet its funding targets, the net result was a step backward for the chronically underfunded pension.

PERA’s unfunded debt to members grew by $1.2 billion to $27.5 billion, the report shows. Its funding ratio — the amount of money it has in the bank relative to the benefits it owes current and future retirees — fell slightly to 69.6% from 69.9%. Under state law, its target is to be 100% funded by 2038.

Nonetheless, at the five-year mark of Colorado’s 2018 pension reform law, PERA’s financial position has improved dramatically from when Senate Bill 200 was first passed into law. Back then, PERA was just 60% funded, with a $31 billion unfunded debt.

Those gains, however, have come at a steep cost to retirees, public workers and the agencies that employ them.

Mixed investment returns, pay raises combine to hurt pension

PERA covers more than 220,000 current public employees statewide, most of whom work for the state or school districts. In all, PERA has more than 700,000 members, including 138,000 retirees and more than 300,000 others who have changed jobs but haven’t yet retired.

The financial decline in a good stock market year is due in part to how PERA calculates its balance sheet. PERA smooths its gains and losses across multiple years, to prevent huge swings from a single bad market year.

In 2022, that buoyed the pension’s finances despite the 13% loss, thanks to the lingering impact of huge investment gains in 2020 and 2021.

Last year, the reverse happened, and 2022’s losses offset the investment gains by more than $400 million.

Another problem for the pension: it was a rough year for private equity and real estate, which add up to around 19% of its investment portfolio. PERA earned 24% on its publicly traded stocks, but its private equity holdings only grew 5%. Its real estate investments lost 10% of their value.

Large pay raises for teachers and state workers coming out of the pandemic took an even larger bite out of the pension, adding nearly $800 million to the unfunded debt.

Here’s why: Retirement benefits and contributions to the pension are tied to how much an employee earns. So in theory, the corresponding rise in contributions should generally cover the cost of pay raises. But when older employees nearer to retirement get large raises, it can increase their benefits more than their contributions can make up for in the time they have left in the workforce.

Benefits, contributions to stay steady

The financial report had at least some positive news for PERA members.

The pension’s finances are doing well enough to avoid another round of automatic benefit cuts and contribution hikes.

Since 2018, a safeguard built into the law has been activated twice, causing public workers and their employees to contribute more into the pension than the law initially required.

Annual cost-of-living raises for retirees have fallen to 1% under the provision during a period of high inflation, steadily eroding the value of their pensions.

For context, Social Security benefits increased 3.2% this year and 8.7% last year, and Colorado pension members aren’t eligible for the federal program for years they work under PERA.

Meanwhile, public employees are contributing more than ever. For most members, 11% of each paycheck goes into the pension, while most PERA employers contribute another 21%.