There was no good news in a 90-minute legislative discussion Thursday afternoon on the financial future of the Public Employees’ Retirement Association.

The PERA board has proposed a sweeping and complex plan designed to bring the recession-battered pension plan to solvency within 30 years. Board members and executives met with members of the Joint Budget Committee to answer questions on the plan.

Summing up the effects of the proposal on civil servants and retirees, PERA Executive Director Meredith Williams said, “So, essentially they’ll work longer, pay more and receive less.”

Public Employees' Retirement Association headquarters in Denver.
Public Employees' Retirement Association headquarters in Denver.

The rescue plan wouldn’t increase employee payroll deductions but would increase employer contributions – including from funds that otherwise would go for salary increases – and, for some workers, would raise the retirement age and reduce the salary base on which a pension is calculated.

The most controversial part of the plan, at least based on the volume of e-mail flowing into legislators’ in-boxes, is a proposal to reduce most retirees’ annual cost-of-living increases from 3.5 percent to 2 percent. It’s estimated that the current COLA would provide a third of the pension benefits over the retirement of a worker who retired in 2008.

The future of PERA – and the cost of fixing it – is of high interest to the Colorado education community. Of PERA’s 190,684 active members, 118,547 are in the school division, which includes all districts in the state except Denver. (DPS employees and retirees will enter the system Jan. 1 as a separate division.) Some 44,806 people receive benefits from the school division. Thousands of higher education employees also belong to PERA, as part of the state division.

Its investments hollowed out by the recession, PERA’s net assets available for benefits dropped from $43.1 billion at the end of 2007 to $30.8 billion at the end of 2008, a loss of more than 25 percent. The system pays about $3.1 billion in benefits a year and receives about $1.7 billion in contributions from covered employees and their employers. PERA overall is about 70 percent funded.

“Certainly these are scary times,” Williams said. “Right now we’re projected to run out of money during the lifetime of most of our members.” Despite the pain imposed by the plan, Wilson said, “It’s cheaper, more cost effective and less painful to act now.”

Some 20 percent of the money needed for the plan would come from employer and employee contributions and the rest from benefit cuts.

Thursday’s discussion was detailed and technical at times; here are some highlights.

They can’t take my COLA!

PERA officials believe retirees’ cost-of-living increases can be reduced because of legal precedent that allows doing so in times of “actuarial necessity” – legalese for the plan will go broke without changes being made.

“We believe the COLA can be modified” based on actuarial necessity, said Greg Smith, PERA chief operating officer and general counsel. “We believe that actuarial necessity exists today. … It is critical that we be able to modify the retiree COLA.” Without doing that, Smith said it would take an “extraordinary amount” of contributions for the plan to achieve solvency.

Many retirees have complained to legislators and others that they were told by human relations staff and in paperwork that the 3.5 percent COLA was guaranteed, so changing it would amount to breaking a contract.

“No matter what an employer hands out, if it doesn’t match the law, it’s not binding,”
Smith said.

Will it all end up in court?

Asked if PERA expects any changes approved by the legislature to end up in court, Smith said, “There is some speculation that it will end up in the courts. … It’s reasonable to expect litigation.”

Whom can we blame?

While neither PERA officials nor current legislators explicitly pointed fingers, there seemed to be general agreement that legislation passed in 2000 helped contribute to the current problem, During the height of the tech boom, 1999 and 2000 were the only two years that PERA has been fully funded in its 78-year history.

In 2000 lawmakers responded by effectively reducing contributions and raising benefits. “That’s kind of where it started,” Williams said.

But when asked if today’s problems could have been avoided if the legislature hadn’t been so generous in 2000, Williams said, “I think not,” saying that the economic crash in 2008 was just too big.

In 2004 and 2006 the legislature did increase contributions and tighten benefits for new employees, but Williams said lawmakers couldn’t go further then because  “We did not have an actuarial necessity. We could not make that legal case. Today we can.”

Don’t wait for the next bull market

Some lawmakers have asked – hopefully – if PERA could rescue itself by more aggressive investment strategies or be rescued by another market boom.

“That would be like going to Black Hawk and doubling down with the rent money,” said Susan Murphy of Denver, one of three PERA trustees who, by law, are neither members of nor beneficiaries of the pension system.

“That was our Plan B,” quipped Rep. Jack Pommer, D-Boulder and JBC chair.

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