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.