The Denver Employees Retirement Pension (DERP) has worsened since 2012. The measures taken by Denver budget officials were not enough to slow its decline.[1]
At 60% funded, the Denver pension lags behind Colorado Public Employee Retirement Association (COPERA) which is currently funded at 67.8%, but what is more alarming is the general trend of the Denver pension.
As shown in the chart below, the funded status has consistently declined. This means that while the pension fund is growing overall, it is not growing fast enough to pay for the rising cost of retiree benefits.
Source: DERP Annual Comprehensive Financial Report 2021, Pg. 84 Schedule of Funding Progress
Since 2012, the shortfall has grown every year. Right now, the pension liability is approximately $1.6 billion. For context, the financial report for the city shows total expenses of $3.7 billion. As shown in the chart below, the unfunded pension liability has increased yearly and more than tripled since 2012.
Source: DERP Annual Comprehensive Financial Report 2021, Pg. 84 Schedule of Funding Progress
These problems are for a time when markets have been comparatively tame. None of this information factors in the bear market of early 2022, so things will likely worsen in next year’s report.[2]
How is the Denver pension invested?
Based on the financial report, the pension is invested a bit aggressively, but reasonably. As shown in the chart below, the DERP investments are generally somewhere between Modern and Growth (Aggressive) strategies. There are two exceptions, DERP has less investment in International Equity but a might higher investment in alternatives like commodities, real estate, and hedge funds.[3]
Source: Delagify Analysis of DERP Annual Comprehensive Financial Report 2021 and Morningstar Analysis of VASGX and VSMGX as of 7/29/2022.[4]
How will the Denver pension problems affect workers and retirees?
- DERP will probably not have excess funds to reinstate a Cost-of-Living Adjustment. This means high inflation will hurt retirees.
- Without intervention, Denver may have financial hardship paying its obligations without raising taxes or cutting services.
Read the full report: https://derp.org/wp-content/uploads/2022/06/DERP_AnnualComprehensiveFinancialReport_2021.pdf
This article does not constitute financial advice, it is for educational purposes only. All investments contain risk. All investments can lose value. Any impacts listed in this article are only assumptions based on the current standing of the plan. New legislation, changes to investment performance, or other changes related to plan assumptions could drastically change the conclusions. Consult with a professional before making any major life decisions.
[1] In an attempt to boost the funded status of DERP, Denver took two major actions. First, Denver suspended the cost of living adjustment in 2002. Second, they increased both required employee contributions and budget contributions in 2018.
[2] This statement is based on overall market performance in the first 6 months of 2022. Although unlikely, DERPs performance may vary from broader market performance. To preserve the same funded status, investments must meet their return assumption of 7.25%, all else held equal.
It takes about 6 months to analyze and report on the pension performance. DERP’s 2021 annual report only shows what happened through December of 2021. We will need to wait until the Summer of 2023 to show what happened in 2022.
[3] See details about investment classes below. Note that the valuation methods of each class may vary. The difference in valuation method is negligible for this type of analysis. Investment values are reported in fair value, net asset value, and ammortized value depending on what is most appropriate for the type of investment. For more details, see the full report.
Source: Source: DERP Annual Comprehensive Financial Report 2021
[4] Market data, articles and other references in this presentation are based on published information and are believed to be reliable. Additionally, the content of this report has not been approved or verified by any external sources.