PERA takes solvency plan to its members
By Charles Ashby 
| August 13, 2009 | 7:01 AM
Like just about everything else in the nation, government workers’ pensions haven’t fared too well during the Great Recession. But unlike private plans, members of the Colorado Public Employees Retirement Association do have some places to turn to address their long-term solvency issues.
That’s just what PERA’s 15-member Board of Trustees is hoping to do.
This summer, the state auditor’s office released a report on PERA’s financial condition, showing that it has only about $31 billion to pay pensions. That’s down more than $11 billion — or a quarter of its assets — from before the recession hit, leaving two of its biggest funds virtually insolvent. Without changes to how PERA operates, those funds — specifically for state and school workers — could run out in less than 30 years, the minimum time required for the association to be considered financially sound.
As a result, the board is considering asking the Colorado legislature to change the way its pension funds operate. The 434,000-member association looks at it as a simple algebraic formula: C+I=B+E (contributions plus investments equals benefits plus expenses). To get that formula to balance, however, isn’t so simple.
“To make up for a negative 26 percent (market value loss), you’d have to make 60 percent in investment returns the next year,” PERA spokeswoman Katie Kaufmanis said. “We just can’t invest our way out of this. We’ve been judged to be one of the lowest cost benefit providers in the world, so expenses isn’t where it’s at. That leaves benefits and contributions. That’s what it comes down to.”
The association needs to find a way to increase contributions and lower benefits, but that is easier said than done. Not only does the state not have the money to increase contributions given the billion-dollar cuts it’s already made and another billion to come, but there are legal restrictions to reducing the benefits PERA pays out.
PERA operates four divisions: state, schools, local governments and the judicial branch. Assuming PERA can maintain its normal rate of return on investments at 8.5 percent, something it’s averaged for many years, the judicial and local government divisions are projected to be solvent for more than 40 years. The state and school divisions, however, are solvent only for 29 and 33 years, respectively, making them the weakest because they also are the largest.
PERA’s descent into the financial doldrums has been years in the making. Much of its problems started in the late 1990s, when the legislature approved sweetheart benefit enhancements for government workers. These included a mandatory 3.5 percent increase in annual cost-of-living payments to retirees; allowing existing state workers to “buy” additional years of service — which allowed many to retire early and receive payments longer — and allowing workers to retire but still keep their jobs as contract employees, thus earning PERA benefits and getting regular paychecks.
Those enhancements proved to be unsustainable, forcing PERA and the legislature to try to roll back benefits. They couldn’t because the law forbids earned benefits from being taken away. As a result, PERA and the legislature approved a “Tier II” benefits package in 2006. That meant, from the moment the new package became law, existing and new state workers would have to contribute more to their pensions and get back less when they retire. Those who were already government employees will still get credit for the years they have been in the plan and will receive the enhanced benefits when they retire.
“We thought we had fixed this, but in 2006 we couldn’t anticipate what happened in 2008,” Kaufmanis said. “Now, we want to fix this once and for all. Those benefit enhancements and the increase of COLA (cost of living adjustments) of 3 1/2 percent forever are expensive.”
As a result, PERA’s board is considering a new “Tier III” benefits package. That could include such things as raising the retirement age and lowering annual cost-of-living increases. The board also is looking at similar changes to existing retiree packages and reducing benefits to current state workers.
Starting this week, PERA is taking its ideas directly to state and school workers. It’s already met with people in Denver and Colorado Springs, and will travel to Pueblo, Grand Junction, Fort Collins, Fort Morgan and Durango in the next two weeks. The board will decide Nov. 1 what it will present to the legislature.
The plan also is expected to include increasing mandatory contributions from employees and employers. While that would mean workers would have to put more money into their own pension accounts, something many may be hard-pressed to do given the current state of the economy, it is unlikely to happen — at least for the foreseeable future — from the state, said Rep. Mark Ferrandino, D-Denver and member of the legislature’s Joint Budget Committee.
Ferrrandino said that given the $385 million the state needs to trim from the current fiscal year’s budget, which began July 1, it expects to have to cut another $400 million from next year’s spending plan when the legislature meets again in January.
Still, he said the state’s financial woes won’t be around forever. So while it’s impossible now, it could be possible later.
“They’re looking at a 30-year horizon when they’re talking about being actuarially sound, so its unfeasible to think there’ll be an employer contribution increase in the next several years, but maybe it can in the long term,” he said. “But you have to look at the benefits, investment strategies and the costs of running the (pension) program, too.”
Ferrandino attended PERA’s first hearing on the matter last Tuesday. There, he heard members make what he thought were reasonable suggestions.
“Some said that if there’s going to be a cut in benefits, it should be shared between current retirees, people who are close to retirement, people just entering the system and future state employees,” he said. “How that is spread out between everyone, that’s the conversation we need to have.”
colorado, economy, pension, pera, politics, public employees retirement association
