This week the Colorado Legislature began hearings on Senate Bill 01, a bipartisan measure aimed at restoring long-term solvency to the Public Employees Retirement Association, the public pension plan that covers more than 425,000 active and retired public-sector workers in Colorado.
The measure was crafted in response to the severe decline in PERA’s investment portfolio during 2008, which put the plan’s long-term solvency in jeopardy
The bill is substantially identical to a proposal put forth by PERA late last year, referred to as the “2+2+2” plan, which essentially calls for employer and employee contributions to each increase by 2 percent during a multi-year period, and for cost-of-living increases in retiree pensions to be capped at 2 percent annually.
The bill also includes relatively minor tweaks such as raising the minimum retirement age from 55 to 58 and deferring retiree eligibility for COLA increases for one year.
A pension plan’s “funded ratio” measures the adequacy of the plan’s assets to cover its anticipated future liabilities. Such liabilities consist primarily of payments to present and future retirees.
The complex actuarial calculations that determine future liabilities are based upon not only the assets currently held by the plan, but upon expected future returns on investment, payments into the system by active members, payments to retirees and expected retiree mortality.
As recently as 1999, PERA’s funded ratio was in excess of 100 percent. So confident were legislators and PERA administrators of the system’s long-term solvency that substantial benefit increases were put into place.
But during the early years of this century, PERA’s funded ratio fell to 71 percent, thanks both to a sharp decline in equity markets and badly timed investment decisions by PERA’s professional managers.
During 2005, the legislature sought to address PERA’s problems by doing, on a smaller scale, what is proposed for this session. Minor changes were made in scheduled retiree benefits, and employer contributions were sharply increased.
Thanks to a booming economy, PERA’s funded ratio stabilized and even slightly improved during the next two years. But 2008 brought an unprecedented market meltdown, which saw PERA’s assets shrink by 27.6 percent, and its funded ratio drop below 55 percent.
Unlike California’s public employee pension plan, PERA is not a direct responsibility of the state. Nevertheless, most public schools are required by law to enroll their employees in PERA, and many other public employers (such as the city of Colorado Springs) participate in the system. The PERA board is an independent body largely selected by plan members, but it may not change the plan’s benefit or payment structure without legislative approval.
The 2005 fix put a heavy burden upon public employers. As School District 11’s chief financial officer, Glenn Gustafson said two years ago, as the increases mandated during 2005 began to take effect:
“Our payroll is $120 million annually — so every 1 percent increase means another $1.2 million that we have to pay,” he said. “And this all dates back to around ‘99, when they dramatically enlarged the benefit structure.
“There is no easy solution (for PERA),” he said a year later. “The revenue coming in is insufficient to meet the demands of retirees. There will have to be serious adjustments.”
But, he said, further increases in employer contributions should be off the table.
“PERA is mandated by state law, so withdrawing from the plan is not an option,” Gustafson said. “Employer contribution rates will, under present law, grow to 16.45 percent by 2012. Employees pay 8 percent. It’s scary and concerning for all of us — we don’t know how bad this (economy) is going to get.”
Should SB 01 become law, it would increase employer/employee contributions to PERA to 28.55 percent of salary.
But, given its bipartisan support, the bill seems likely to pass.
That doesn’t sit well with Colorado Springs Republican legislators Keith King and Kent Lambert, who introduced a rival reform bill last week. The bill would change PERA from being a defined benefit plan, which promises a specified monthly benefit at retirement, to a defined contribution plan.
“When we have such a down economy,” Lambert said, “we can’t afford the over-generosity of the plan. We just have to throttle back, and create a still-robust but affordable benefit system.”
Republican Reps. Bob Gardner and Amy Stephens, also from Colorado Springs, are also less than supportive of SB 01.
“As proposed in the Senate, several of us have ongoing concerns (about SB 01),” said Gardner. “It really penalizes current workers for the benefit of retirees. My own thought — we absolutely have to go to a defined contribution plan.”
Stephens took a slightly different tack.
“There are going to be many amendments to the bill, and I won’t settle on a position until I see the completed bill coming to the House,” she said. “However, I am not supportive of the school district increase at the moment — school districts are already making huge cuts in budgets. We also need to raise the retirement age further — the taxpayer doesn’t get to “retire” at 58.”
Even with increased employer/employee contributions, PERA’s plans for returning to long-term solvency depend upon the ability of PERA’s investment managers to maintain an average rate of return of eight percent during the next 30 years.
Kevin Marshall, president of the Colorado Springs Education Association, the professional organization which represents many area schoolteachers, is cautiously optimistic about the projections
“I’m no expert,” he said, “but I’d just look at PERA’s past performance to see whether (8 percent) is realistic.”
Colorado Springs legislator (and retired school teacher) Mike Merrifield, who chairs the House education committee, is generally pleased by the proposed bill.
“There will be a fix,” he said, “and employees will sacrifice more than employers. Retirees such as myself will take a hit, but if we don’t make changes now, there won’t be a PERA. It’s needed, it’s necessary, and I’m surprised and grateful that we’ve got bipartisan support.”
Barry Poulson, a senior fellow at the Independence Institute and a professor of economics at the University of Colorado, says that SB 01 has substantial flaws.
“It doesn’t really deal with the plan’s unfunded liability,” he said, “It just puts everything in the same pot. Other states such as Michigan and Alaska have successfully reformed their pension systems. In Michigan, they established a trust fund, with payments in the fund earmarked for reducing liabilities. And in Alaska, they replaced the whole pension system board, and made it directly accountable to the state treasurer.”
Poulson supports the King-Lambert bill, which he helped draft, but he has few illusions about its prospects.