Colorado PERA’s strong 2025 return did not erase its pension shortfall

Colorado PERA earned a 14.1% investment return in 2025 and ended the year with about $75.1 billion in assets, but its funded ratio remained 69.1%. Employee and employer contribution rates and retiree cost-of-living adjustments will remain unchanged in 2026 and 2027.

PERA presented the results Aug. 10 to the Colorado Legislative Audit Committee alongside a clean financial-statement audit. Auditors issued an unmodified opinion and reported no material weaknesses, significant deficiencies, unresolved recommendations, material misstatements or applicable legal noncompliance, according to the committee hearing.

The audit examined PERA’s financial statements, including investment values, actuarially calculated liabilities, compliance with investment policy and the reasonableness of estimates. It did not determine whether the system can pay every promised benefit.

A funded ratio compares the actuarial value of assets with the value of benefits members have earned. At 69.1%, PERA had about 69 cents in actuarial assets for each dollar of accrued liability under its valuation assumptions. The ratio does not mean retirees are receiving only 69.1% of their promised benefits; it is a point-in-time measure that changes with investment results, payroll, demographics and actuarial assumptions.

PERA says Senate Bill 18-200 established a path to full funding by 2048. That date is a modeled objective, not a guarantee. Colorado law also requires review of whether PERA has at least a 67% likelihood of reaching full funding by 2048. PERA told lawmakers that the probability test and the system’s automatic-adjustment provisions can conflict.

What improved — and what did not

PERA reported $5.6 billion in retiree benefit payments in 2025, including about $4.8 billion paid to Colorado residents. The system attributed additional economic activity and tax revenue to those payments, but those estimates were not independently audited.

The 2025 financial statements recorded a new reserve fund for a $500 million direct distribution authorized by legislation enacted June 2, 2025. Auditors reported no concerns with PERA’s accounting for the reserve. The reserve is an accounting record of the distribution, not evidence that PERA eliminated its unfunded liability.

PERA’s 2025 actuarial projections incorporated a later method for allocating an annual $225 million distribution among divisions where it is most needed to prevent an automatic adjustment. Actuaries said the change moved projected contribution relief nearly a decade earlier for all divisions and extended the State Division’s projected funding period by about three years, without substantially delaying its projected full-funding date.

The available records do not isolate how much the $500 million reserve or the allocation method changed the 2048 funding probability, funded ratio or projected funding date compared with a scenario without the distribution.

PERA’s 2025 annual report projects full funding in 2044 for the State Division, 2048 for the School Division, 2030 for Local Government, 2028 for Judicial and 2031 for the Denver Public Schools division. The annual report describes those as open-group actuarial projections based on the Dec. 31, 2025, valuation. They are not guarantees.

The report also modeled the School Division under different long-term investment-return scenarios. At a 4.69% return, its projected funding period was infinite; at 6.36%, it was 37 years; at 7.25%, 18 years; at 8.74%, six years; and at 10.40%, two years. PERA labels the scenarios with confidence levels ranging from the 95th to the 5th percentile. They show the effect of different return outcomes, not the probability that the division will be fully funded by a particular year.

The strong 2025 return removed projected automatic-contribution-increase triggers that had appeared in prior projections for the 2034 and 2039 valuation years, actuaries told the committee. The hearing record described a 5,000-simulation model using investment returns, payroll and demographic experience, but did not provide a new 2025-valuation table with exact probabilities for each division.

The assumptions and risks

Although the portfolio returned 14.1% in 2025, PERA smooths investment gains and losses over four years. The 2025 valuation recognized a 5.9% return, below the system’s 7.25% long-term investment-return assumption.

The actuarial presentation said accrued liability rose from $93.9 billion to $97.3 billion and unfunded liability increased from $28.9 billion to $30.1 billion. Higher-than-expected salary increases added to liabilities but also produced more contributions, the presentation said. PERA made no actuarial-assumption or funding-methodology changes for the year.

PERA’s latest detailed annual report located for this review lists other long-term assumptions, including 2.3% price inflation, 3% wage inflation and 0.7% real wage growth. It says the 7.25% investment assumption is net of investment expenses and serves as the long-term discount rate for valuing future liabilities, the 2023 annual comprehensive financial report says. These are long-term valuation inputs, not predictions of annual investment returns.

PERA planning materials published in 2024 modeled a 51% probability of reaching full funding by 2048 and an 18% probability of being below 50% funded by then. That analysis predates the 2025 return and is not a current forecast.

PERA’s long-term target allocation is 51% global equity, 23% fixed income, 10% private equity, 10% real estate and 6% alternatives, according to its investment stewardship report. The mix is intended to balance growth, liquidity, diversification and risk, but leaves the system exposed to market declines, interest-rate and credit risk, illiquid private assets and real-estate losses.

PERA said more than 62% of its portfolio was managed internally in 2025, mostly in global equities and fixed income. It reported $248.5 million in total investment-management costs and estimated that its internal program cost $23.6 million while saving roughly $100 million compared with external management. The savings figure was PERA’s estimate, not an independent audit finding.

Committee members questioned PERA about private-equity and private-credit exposure to software companies, artificial-intelligence disruption and mobile-home-park investments. PERA did not provide a specific dollar amount or percentage for those exposures or quantify potential losses.

PERA’s chief investment officer said staff were watching AI’s effect on software companies and private credit closely and were “not yet concerned.” She identified AI’s broader effect on global equities and fixed income as potentially the system’s largest current risk. PERA also said it does not invest in the retail-oriented private-credit funds at the center of some liquidity concerns and that its private-credit funds are closed structures expected to mature over roughly a decade.

The 2025 results improved PERA’s asset position and removed near-term projected contribution triggers, but did not eliminate its funding gap. The clean audit means the financial statements passed the auditors’ tests; it does not resolve the system’s exposure to future investment performance, actuarial assumptions or policy decisions about how shortfalls are funded.