Memorial: Better off out of PERA?

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Memorial Health System employees, worried that a sale of the network will eliminate their state-run pensions, could be better off under a different retirement plan.

That’s the assessment of a growing chorus of think tanks and experts in the field who point to the troubles of public pensions nationwide.

More than 4,000 of Memorial’s employees are members of the Colorado Public Employees Retirement Association, which, like so many other state pension funds, has seen its share of troubles.

For the second time in five years, the state legislature in this year’s session tried to fix the pension plan, capping cost-of-living adjustments and gradually raising employer and employee contributions.

A group of retirees responded by suing the state because they won’t get an increase in benefits this year. The lawsuit charges that the freeze — and a cap on COLA of 2 percent in future years — violates promises made to them.

Legislative fixes notwithstanding, think tanks like the Heartland Institute and the Independence Institute say PERA’s woes aren’t going away. The Heartland Institute gives Colorado’s pension an F.

Memorial pays 12.8 percent of an employee’s salary into the pension plan — last year, that obligation amounted to $26.2 million — while employees pay 8 percent. Under this year’s legislation, Memorial’s share will rise by slightly less than 1 percent for three years.

So why would Memorial employees want to remain in a pension plan whose performance appears so shaky?

“Most people view PERA as more viable, with a higher potential for return,” said Guy Theriot, an information systems specialist at the hospital. “There’s a perception that PERA will pay more over the number of years invested.”

But that perception could be far from accurate.

PERA’s generous benefits are one reason analysts have said they believe the state’s pension plan borders on insolvency. A decade ago, PERA was fully able to cover its future obligations. Today, its assets are enough to cover only 52 percent of those obligations, which is what forced the legislature to act this year.

Barry Poulson, economics professor at the University of Colorado at Boulder, believes PERA will eventually become a liability to taxpayers. “Taxpayers are already on the hook for $24 billion in unfunded (PERA) liabilities,” he said. “They will have to pay any future unfunded liabilities incurred in the system.”

Theriot has worked at Memorial for more than eight years. He said the generous retirement plan is one reason people choose to work at Memorial.

“The pay isn’t extraordinary,” he said, “but to have a guaranteed retirement plan like PERA is a major benefit. It’s one most of us don’t want to lose.”

There may be no choice.

If Memorial is sold to a for-profit system, then employees will no longer be eligible for PERA benefits.

The buyer is most likely to offer a new, private retirement plan for employees, along the lines of a 401(k).

If Memorial is sold to a nonprofit, current employees could stay in PERA, but anyone new would be enrolled in a new pension plan.

Memorial is working to answer the PERA question, as is the Memorial Commission, the citizens’ group formed to make recommendations about the hospital’s future.

“It’s very complicated,” said Carm Moceri, chief strategy officer for the system, “and it’s one of the employees’ biggest concerns. Any change will affect them in many ways, but retirement worries are probably the biggest.”

What are the other options? The one private companies have been switching to in droves: defined contribution plans such as a 401(k) vs. defined benefit plans such as PERA’s. About 38,000 companies still offer PERA-style plans nationwide, compared with 114,000 in 1983.

“Over the past several decades, the private sector has rapidly shifted away from defined-benefit plans and toward defined-contribution plans for good reason — traditional plans are expensive, unpredictable and unsustainable in the long run, a recent Reason Foundation report said.

The Heartland Institute agrees, saying that defined contribution plans can “significantly reduce unfunded liabilities.”

“Once the state gets the current pension debt levels under control, a defined contribution plan should be strongly considered in the near-term for newly hired employees and current employees who voluntarily opt out of defined benefit programs,” it said.

But that’s easier said than done. Because PERA is a state plan, it is subject to the whims of the legislature, which would likely come under intense pressure to keep things as they are from retirees and current members in the plan.

Theriot said employees worry that they will lose money in any change, especially if the pension is switched to a private plan. They also worry about vesting schedules.

“You have to be here five years before you are vested 100 percent (in PERA),” he said. “Less than that, and you won’t receive the full match from the hospital.”

With a new pension plan, “there’s also some concern that starting over might mean waiting another five years to be vested, to get the full match,” he said. “That seems unfair to a lot of people.”

PERA’s potential insolvency, on the other hand, is sure to seem even less fair.

One Response to Memorial: Better off out of PERA?

  1. THE DROP IN PERA’S FUNDED RATIO IS THE RESULT OF MISMANAGEMENT. WE SHOULD HAVE ENACTED LEGAL REFORMS AND SKIPPED THE LAWSUIT.

    Hi Amy, the retirees didn’t sue because the state violated promises to them. The retirees sued because the state violated contracts to which the retirees are a party. If your mortgage company unilaterally increased your mortgage interest rate to 10 percent, you would sue, you have a contract.

    More info: PERA employer contributions dropped by 2.5 percent this year under Senate Bill 146. Check it out.

    PERA’s financial problems stem from the state skipping its actuarially required contribution (totalling $6 billion) over the last decade. Also, financial difficulties arose from the Owens adminstration’s increase of PERA benefits in 2000 (supported by both parties) and the PERA Board.

    The 52 percent figure you cite is the market value of assets. This figure is not used to measure pension performance in the industry. The statistic that is used in the industry is the actuarial funded ratio. The most recent AFR for PERA is 68.5 percent. A new AFR will be released by PERA soon in its 2009 financial report. This report should also show that PERA’s assets grew last year by about 20 percent. Last year the S&P was up 22 percent.

    This year’s PERA reform bill sponsors runshed the bill through so that the 2009 figures could not be taken into consideration. Penry called it a “window” in which they had to enact SB1. The reform bill was justified based on 2008 numbers.

    PERA’s average funded ratio for the last 40 years has been 77 percent. It has fluctuated between 55 percent and 102 percent. In the past when PERA’s funded ratio was in the 50s range there was no call to breach contracts. PERA invests over a 30 year time frame. Just like your mortgage, PERA’s liabilities do not have to be paid off tomorrow. (If you have paid off half of your mortgage you currently have a 50 percent market based funded ratio on your mortgage, are you losing sleep over that? No, you have many years left to pay it off.)

    Poulson should wait for the new PERA financial report for 2009 to come out to see the latest unfunded liability. By definition, defined benefit plans (like your mortgage) will have unfunded liabilities most of the time. In the industry 80 percent is considered to be well-funded. You can see that PERA over-reached by trying to structure their reform bill to bring PERA up to a 100 percent funded level. They could have acheived a realistic goal of 80 percent funding by enacting legal reforms, in that case the lawsuit would have been unnecessary.

    Here’s a good paper discussing legal pension reforms for you to check out:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1573864

    Read this paper, by Amy Monahan at the University of Minnesota School of Law, and you will know more about the legalities of public pension reform than any member of the Colorado Legislature.

    Many members of the Legislature pointed out that SB1 would breach contracts during debate on the bill. Even PERA’s General Counsel, Greg Smith, was quoted in a 2008 Denver Post article saying that taking retiree’s COLAs appeared to be illegal (Google it for the full quote.)

    Also, I remember seeing a statistic that about 20 percent of private sector employees are still covered by defined benefit pension plans. They really are better than 401Ks, but the sponsor has to make the actuarially required contributions, unlike the state. When managed properly they provide a great incentive to work for an employer, allow an employer to attract the best employees whether in the private sector or the public sector. We need more DB plans in the private sector, however they must be managed properly. Many large US private sector employers have these plans.

    A switch to a defined contribution plan (401K) does not affect the current defeined benefit liabilities of the DB plan sponsor. I think a better way to go is to try to alter the rate at which future pension benefits accrue in the DB plan. This change would be prospective, rather than retroactive and illegal, and would have a much better chance of passing constitutional muster. It would have represented a reasonable pension reform, whereas SB1 is prima facie unconstitutional.

    Thanks for covering this very complex subject, it will be interesting to follow this lawsuit.

    Algernon Moncrief
    July 10, 2010 at 10:35 am