Colorado lawmakers approve a “painful solution” to unfunded public employee pension plan

“No one is happy,” House Majority Leader KC Becker said as the 2018 session came to a close.

Colorado lawmakers approve a “painful solution” to unfunded public employee pension plan

When Colorado teachers rallied outside the state Capitol in April, they were asking lawmakers to ensure they have a stable retirement pension, among other demands.

And in the last hours of the session, the state legislature approved a plan aimed at doing just that — but teachers may not like it. It makes cuts to retirement benefits and requires workers to hand over a larger share of their paychecks. The hope is the extra cash will help shore up an unfunded public employee retirement pension.

“No one is happy,” House Majority Leader KC Becker told a Democratic caucus ahead of a House floor vote on the proposed legislation. “I still think it is the right thing to do. At the end of the day, we have to think long-term.”

The changes aim to help buoy the state’s unfunded pension plan that about 185,000 state workers, teachers and other public employees rely on for their retirement benefits. The plan is managed by the Public Employees’ Retirement Association, or PERA, and currently has an unfunded debt to retirees that is expected to only grow without legislative intervention, putting at risk the pension these workers rely on in lieu of Social Security.

Many Democrats voted against the reform package despite encouragement from the majority leader and Gov. John Hickenlooper. Several said they were upset they only had two hours to digest the changes before voting. The Colorado Education Association, the state’s largest teacher union that organized rallies at the state Capitol, opposed the reforms.

“We are very disappointed in our elected officials who did not support educators and retirees, and even chose to take money out of their pockets,” said CEA President Kerrie Dallman.

The pension plan has a $32 billion to $50 billion unfunded liability, which means PERA currently does not have enough money to pay out current and future benefits to all its members. And in the event of another economic downturn, PERA could be unable to pay benefits to retirees. The reason for this dilemma, PERA says, is that members are living longer than anticipated and the expected rate of return on pension investments was recently adjusted down, resulting in less money for the fund.

Lawmakers want to have enough money in the pension to cover the cost of benefits in 30 years.

“When you’re trying to address a $50 billion liability, it’s a painful solution,” said Sen. Jack Tate, a Republican from Centennial who helped craft the deal.

The plan relies on $225 million from taxpayers, an extra two percent pay from workers, and cuts to retirement benefits. It reduces the cost of living adjustment, or COLA, on retirees’ benefits from the current 2 percent to zero for the next two years. In 2020, it would then go up to 1.5 percent, but could ratchet up or down depending on the financial health of the pension. The retirement age will also increase for new employees from 58 to 64.

The proposed law includes a so-called fail-safe measure that allows contributions and benefits to be adjusted up or down as the financial conditions of the fund change without legislative approval.

Republicans have long sought to allow workers to opt into a 401(k)-style defined-contribution plan. This option is now available to all employees except teachers and some state workers.

Gov. Hickenlooper, in a rare appearance at a Democratic caucus late Wednesday night, backed the proposed changes.

“This is nobody’s idea of a perfect solution,” Hickenlooper said. “In the end, you have to look at the long-term.”

A teacher rally at the state Capitol on April 26. Photo by John Herrick

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About the Author

John Herrick

John is covering the 2018 legislative session. Follow him on Twitter @herrickjohnny and email him at John@coloradoindependent.com.

5 Comments

  1. john in denver on said:

    How much money will come from the 2% increase on current workers? How much money will a freeze in COLA “save” PERA on a yearly basis?

    Not knowing those amounts, but knowing the legislators think this will address a $30-50 billion shortfall, it seems to me
    * the existing retirees are hit with an on-going “loss” in benefits (2% this year, 2% next, and who knows how much more in the formula),
    * the current workers pay an additional 2% and have retirement age eligibility increased, meaning they will pay more and get 5 years less, and
    * the employers (taxpayers) are hit with a one-time charge of $225 million,

    If the resulting changes actually reduce the deficit adequately, the taxpayers getting off with paying LESS than 1% of the “correction.”

    Whoever voted for this has a strange sense of “fair.” Future legislatures should revisit this and balance the costs of PERA’s correction in a more balanced manner.

  2. FIN Dnver/JeffCo on said:

    Time for transparency. Does the legislator have to contribute more to His/Her PERA, too?

  3. Brian on said:

    I believe the $225 million in additional contributions from the general fund is intended to be an annual amount. If so, it actually could be well-balanced.

    Some rough estimates based on experience with similar plans and some data from the published actuarial valuations…
    From the active employees: the active employee payroll is in the neighborhood of $8 Billion, so 2% of that is about $160 million per year, plus changes to retirement eligibility ages. The additional pay contribution is worth about $4.4 billion on a present value basis if the payroll grows at 3.5% and you use a discount rate of 7.25%, and the increased contribution rate never sunsets.

    From the retirees: two year suspension of COLA, and a reduction of COLA from 2% to 1.5% after that. A crude rule of thumb would be that a one-time 2% COLA would be worth about 1% of the liability, so the suspension is worth around $1.5B over the two years, and the reduction from 2% to 1.5% after that would be worth around $1.8B. That’s $3.3B in total.

    If the $225 additional contribution from the general fund is indeed an ongoing annual contribution, the present value at 7.25% would be around $3.3B.

    It’s not shared identically (and it may well not be fair to make each group bear an equal share), but each group makes significant contributions towards a solution.

  4. john in denver on said:

    Brian — thanks for the calculations.

    Reading an article on Chalkbeat, the $225 million is expected to be annual. There is also a 0.25% increase in rates from school districts — the article focuses on education impacts, so it isn’t clear if other agencies will be adding funds or not.

    Using your figures, I understand:
    * contributing employees add $4.4B PLUS lose an amount unpaid for 4 or 6 years due to the rise in age of retirement.
    * retired employees lose $3.3B in benefits.
    * state government (employer) pays $3.3B plus whatever the 0.25% would add.

    Equity among stakeholders aside, do these figures really add up in a way to “fix” a gap in PERA I’ve seen described as $30B to $50B?

  5. Brian on said:

    There is currently a gap between what the system thinks they would need to have on hand today to ultimately make all the promised benefit payments (the liability) and the assets they actually have on hand. As you said, that gap has been estimated at $30B to $50B – the estimate is very sensitive to what you assume your investments are going to earn in the future, so if you assume relatively higher returns you may say the gap is $30B, and if you assume relatively lower returns you may say it is $50B.

    Prior to these recent changes, it looks like the total annual contributions going into the system were slightly higher than the cost of new benefits granted each year (if all results match assumptions). That meant that the gap between assets and liabilities eventually would start to narrow, though very gradually. In the case of Colorado PERA, that narrowing was projected to be very slow, and it would take many decades to completely close the gap.

    The recent changes do two things – first, they immediately shrink the size of the gap, but do not eliminate it, by lowering the current liability (through the COLA changes and the eligibility age changes for active employees). Second, they speed up the rate at which the gap closes by increasing the amounts contributed to the system. However, it is still expected to take thirty years to eliminate the gap.

    All of this will be very dependent on future investment earnings, and, to a lesser extent, other assumptions about mortality, age at retirement, withdrawal from service, etc. From the descriptions of the changes that I have read, it seems like they have tried to build in some safeguards so that if experience is significantly better or worse than expected, there are automatic changes to benefits and contributions. Notably, this includes changes in either direction – the COLA, for example, is adjusted down if things go badly, but could potentially be adjusted up if results are better than anticipated.

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