While Colorado is taking steps to close the gap between what it has promised public employees in terms of retirement benefits and what it can actually pay, the state needs to do more.
Those were the conclusions of two policy experts in the public employee retirement sphere who were the featured speakers Friday in the Donnell-Kay Foundation’s Hot Lunch series in Denver.
David Draine, lead researcher on public sector retirement systems at the Pew Center on the States, said his mission is to help states both recruit talented employees with a solid compensation package while helping states keep retirement costs under control.
“Colorado faces a fiscal challenge because of unfunded pension promises,” Draine said, pointing out the state has a $23.5 billion shortfall between what should have set aside for promises made to workers and retirees and what the plan actually has on hand.
Draine said it’s hard to predict future plan investment returns, but clearly those returns will have “major implications” on the state’s plan.
A pessimistic analysis foresees the gap could grow to $35 billion, while more upbeat forecasts calling for 9.5 percent annual returns on plan investments mean a $14.5 billion unfunded liability.
“Even with really good investments, that doesn’t make the problem vanish,” Draine said. “No matter what, more money is going to have to go into the system.”
The reason for the gap?
Contributions weren’t made, benefit increases weren’t paid for and investment returns didn’t materialize, he said.
Draine noted that Colorado’s public pension plan – the Public Employees’ Retirement Association or PERA – was fully funded in 2000. But between 2000 and 2011, contributions from state and local governments fell short by $3.5 billion and investments fell short over the same period. Investments in pension plans grew by 4.5 percent when they needed to grow by 8.4 percent, he said.
Meanwhile, in the booming 1990s, unfunded cost-of-living adjustments were granted. When the bill came due, investment returns tanked. In short, the pension plan’s liabilities grew faster than the state’s assets.
What Colorado is doing to fix PERA
The state has put reforms in place to make the system whole by 2042, but more could be done so that this never happens again, Draine said.
For instance, there were no cost-of-living raises in 2010, and future cost-of-living increases were capped at 2 percent vs. 3.5 percent. Employer and employee contributions went up, and the retirement age was raised.
“Colorado still faces years of large and increasing employer contributions taxpayers will be on the hook for,” Draine said.
In 2011, Colorado set aside more than $1 billion to put PERA on a path of financial health, but that contribution fell short by $138 million, he said. Colorado needs to make sure it has a credible plan to fix the system over a reasonable time frame that involves putting more money into the system and sticking to the payment schedule.
Colorado isn’t the only state facing these problems. In fact, nationwide, the unfunded liability in both pensions and retiree healthcare now stands at $1.38 trillion.
Josh McGee, vice president at the Laura and John Arnold Foundation, said states must be concerned about “crowd out.” In other words, the more money states have to sink into depleted retirement programs, the less states have to spend on other key projects and programs. And the cost of labor rises.
Some states, for instance, are hiring more contract or part-time teachers because they can’t afford to add more people to the salaried employee roster. Teacher salaries are also kept lower, which can make it more difficult to recruit the best talent.
“There is substantial evidence people value current wage more than they value deferred compensation,” McGee said. “The state has a limited number of compensation dollars that have to be divided. I would encourage you to think holistically about the compensation dollars being offered.”
Disclosure: The Donnell-Kay Foundation is a funder of Education News Colorado.