A little better than nothing

The first bill to be introduced in this year’s legislative session, SB 10-001, sponsored by Senate President Brandon Shaffer and Senate Minority Leader Josh Penry, is intended to fix the acute financial problems of the Colorado Public Employees Retirement Association.

PERA is the long-established defined-benefit retirement plan to which almost all public school, municipal, and state employees belong. Following many years of double-digit investment returns, and increasingly generous payouts to beneficiaries, PERA saw its assets shrink dramatically during 2008, putting the system on the verge of actuarial insolvency.

PERA members do not pay into Social Security, contributing instead to the retirement system. Employees pay 8 percent of their salary, and employers (i.e., taxpayers) pay fourteen percent.

Under the bipartisan legislative fix, PERA’s benefit structure would be slightly tightened, cost-of-living increases for beneficiaries would be limited to 2 percent annually, and both employers and employees would contribute an additional 2 percent of employee salaries in a series of stepped increases.

As Penry pointed out last week, the bill is a compromise.

“I know some of my Republican friends do not like this reform because they don’t care for defined benefit systems, and believe all future retirees should be directed into a 401k style plan,” Penry said, “I’m not unsympathetic to this proposal, but there’s no way to pay for the transition costs to such a program in the short term, and besides, I’m fairly certain such a reform wouldn’t happen this year.”

Penry’s right — but despite its virtues, the bill has many flaws.

It allows PERA to continue its reliance upon actuarial assumptions that are at best, questionable, and imposes an outsized burden upon every public employer in Colorado, especially public schools.

Consider that during 2008 employers paid more than $430 million into the school division trust fund while employees contributed about $304 million. Retired public school employees received about $1.4 billion in benefits. Because of declines in PERA’s investment portfolio, the net assets of the school division trust fund dropped from about $23 billion at the beginning of 2008 to about $16 billion at year’s end.

These shortfalls are to be corrected by increased employer/employee contributions and by projected investment returns of 8 percent annually during the next 30 years.

Just to test the investment assumptions, where would the Dow Jones Industrial Average be had it increased by 8 percent during the last decade? We’d be looking happily at DJIA of 23,000 or so.

During all of the 20th century, the Dow rose by 5.3 percent. If history is any guide, compounded returns of 8 percent are unachievable except during prolonged booms — and subsequent corrections, as we have found, often erase such transient gains.

PERA will continue to burden school districts and other public employers with enormous pension costs, and the system may still continue its slide into insolvency. Regardless of employer/employee labels, the cost of the system is born directly by local taxpayers, few of whom enjoy such generous pension plans.

When all of the scheduled increases are fully phased in, employer/employee contributions to PERA will reach an astronomical 28.55 percent of employee salaries, nearly twice as much as Social Security’s 15 percent. Simply put, that’s a recipe for disaster.

PERA, as we have long argued in these pages, is neither fair nor sustainable. The legislative compromise crafted by Penry and Shaffer may be better than nothing — but not by much.