In common with public employee pension plans in almost every state, the Colorado Public Employees’ Retirement Association is less than fully funded. In other words, its assets are less than its liabilities.
As of PERA’s comprehensive annual financial report of Dec. 31, 2016, the fund held assets valued at $43.15 billion, against liabilities estimated at just short of $77 billion. If the plan’s investment portfolio generates returns of 7.25 percent annually for the next 80 years, PERA will be fully funded.
PERA critics believe that such long-term returns are unachievable, that PERA’s benefit structure is too generous and that a more realistic assessment of the fund’s fiscal and actuarial situation would show that PERA is hovering on the verge of insolvency. If the assumed rate of return is reduced from 7.25 to 5.5 percent, the unfunded liability would be more than $50 billion.
The bipartisan sponsors of Senate Bill 200 hope their bill will put PERA on a credible path to full funding. To do so, it’ll have to pass muster with both the Republican Senate and the Democratic House. The numbers seem to indicate that the problem is real and imminent, but the fraught politics surrounding the issue may make it difficult for legislators to find common ground.
Here are the bill’s main provisions, as written:
• It raises the retirement age to 65 for many current and all future employees.
• It increases employee contributions to between 11 and 13 percent of their annual pay, depending on the funded status of their division.
• It increases employer contributions (i.e., from public-funded institutions such as school districts) by 2 percent. Under this formula, Colorado Springs School District 11 would pay 22 percent of employee annual pay into PERA.
• The annual cost of living adjustment for beneficiaries would drop from 2 percent to 1.25 percent, with no cost-of-living adjustments for 2018 and 2019.
• All future hires would be able to opt for a defined-contribution plan with some of the characteristics of a 401k plan.
More than half a million Colorado residents are members of PERA. For public employees such as teachers, law enforcement personnel, state workers and city workers, PERA substitutes for Social Security. Employers and employees alike pay more for PERA than they would for Social Security and receive better benefits. While Social Security is a safety net, a means of protecting elderly Americans from abject poverty, PERA is a defined-benefit pension plan. Some PERA members believe that they made a deal with the state, accepting lower compensation during their working lives in exchange for a state-guaranteed pension.
“As an educator for 40 years I had no choice but to join PERA,” said retired teacher George Gertz, “and was promised a retiree package if I fulfilled my obligation. After years of substandard pay I looked forward to a modest pension only to find that this promise was hollow.”
While PERA’s board has not taken a position on SB 18-200, recommending a less stringent plan, they noted that both plans achieve the goals of 100-percent funding within 30 years; shared responsibility among employers, employees and retirees; and preservation of the PERA defined-benefit plan.
This isn’t the first time that the legislature has tried to fix PERA.
The plan’s problems can be traced back to the turn of the century, when the legislature agreed to sweeten the package for PERA recipients and contributors, increasing benefits and reducing contributions. At the time, the plan was more than 100-percent funded and PERA’s investment managers had racked up double-digit rates of return for more than a decade.
So began the steady deterioration of the plan’s funded status, despite multiple legislative attempts to reverse the trend. The post-Sept. 11, 2001, recession reduced the value of PERA’s investment portfolio, which had just begun to recover when the Great Recession dealt it another blow. In 2008 alone, the portfolio lost 26 percent.
PERA also took an actuarial hit in 2016, when it revised beneficiary mortality tables upward, jettisoning the standard RP-2000 tables that the fund had used for 15 years. Beneficiaries were living longer and PERA’s liabilities had to be adjusted to allow for the added cost of benefits.
As Senate President Kevin Grantham, R-Cañon City, predicted, not everyone is pleased with SB 18-200, despite its bipartisan origins.
“AARP believes Americans are faced with a crisis in achieving adequate and secure retirement income, and [SB 18-200], as written, is not the answer for the Public Employees’ Retirement Association,” said the senior advocacy organization in a press release, citing concerns about the cumulative effects of reduced cost-of-living adjustments and the availability of a defined-contribution plan upon present and future beneficiaries.
State Treasurer Walker Stapleton, who’s seeking the Republican nomination for Colorado governor, said SB 18-200 needs to be even tougher.
“As Treasurer, I have led the charge in reforming PERA which has surpassed $30 billion in unfunded liabilities,” Stapleton wrote on his campaign website. “Years of unrealistic investment return projections, and a board filled with 11 of 15 members economically incentivized to uphold the status quo, have caused this liability to grow extensively year-over-year.”
Stapleton wants to end COLAs until the plan is fully funded and make employers pay more and supports the defined-contribution option.
Irene Martinez Jordan, a retired principal of West High School in Denver, is an AARP volunteer who attended SB 18-200 hearings before the Senate Finance Committee last week.
“It’ll go before [the Appropriations Committee] this week as amended, and then to the Senate floor,” she said March 19. “It’s not a simple bill — it’s very complex, almost 40 pages long.”
Jordan is particularly concerned by the defined-contribution option.
“If that’s included, PERA won’t get the funding it needs to solve the problem,” she said.
As amended, the bill no longer requires additional funding from employers and establishes a “legislative oversight committee” to monitor the pension fund.
If it passes the Senate, it will go to the House but the bill has just begun the long legislative process. If it passes Appropriations, it will go to the Senate floor.
If still alive after a third reading, the bill will head to the House, where the process will be repeated. If the House and Senate versions differ, a joint conference committee will attempt to craft a compromise bill, and send it to both chambers for a final vote. If approved, it’ll go to the governor’s desk. The governor can sign the bill, let it become law without his signature or veto it. If vetoed, it returns to the legislature where legislators can attempt to override the governor’s veto.