COLORADO SPRINGS — The governing board that manages the public pensions of 566,000 Coloradans on Friday endorsed a sweeping package of financial reforms that would cut retirement benefits and require public employees and taxpayers to contribute significantly more in the coming decades to bring the plan’s finances back from the brink.
The effort — which requires the state legislature’s approval — represents the second major reform attempt in the last decade for the Colorado Public Employees’ Retirement Association, or PERA, after a wave of austerity measures following the Great Recession fell short.
But it won’t be easy — in large part because of the huge financial hole that has been dug since the last reforms were adopted seven years ago.
Today, the pension is just 58.1 percent funded, down from 64.7 percent in 2010. At current projections, it would take 78 years to pay off the pension’s $32.2 billion unfunded liability.
The board’s recommendation sets the stage for what’s sure to be a bitter fight at the politically divided state legislature in 2018 — an election year, to boot.
Conservatives for years have said taxpayers contribute enough to the pension fund already, while on the left, public sector unions are likely to fight another round of cuts that PERA officials say would immediately eliminate $4.5 billion in benefits owed.
“Everybody’s going to hate this — let’s face it,” said Carolyn Jonas-Morrison, a board member.
The proposal
Specifics vary slightly among PERA’s retirement divisions, but the pain would be widespread, hitting retirees, workers and taxpayers alike.
Beginning in 2020, most current employees would have to contribute 11 percent of their salaries to the pension, a 3-percentage-point increase — or 37.5 percent more than today. Employees hired after 2020 would contribute 10 percent but wouldn’t be able to draw full retirement benefits until age 65, a 5-year increase in the retirement age.
For retirees, the annual cost-of-living adjustment, or COLA, would be capped at 1.5 percent, down from 2 percent today.
Taxpayers would contribute 22.15 percent, an increase of 2 percentage points. That would mean an extra $86 million a year paid by school districts, whose fund is the largest and most imperiled. For state government, the second-largest division, it would add up to $54 million in additional pension costs.
In many ways, the proposal mirrors that of Senate Bill 1 in 2010, when lawmakers voted to cut benefits and boost contributions over a period of years. Like that older measure, the new one targets full funding within 30 years.
But in some respects, the latest plan goes even further, asking the legislature to give up some of its authority in adjusting contributions and benefits. A central piece of the proposal would set up a trigger mechanism that automatically increases contributions by as much as 2 additional percentage points, and cut cost-of-living raises to as low as 0.5 percent if the pension’s fiscal situation deteriorated.
“The longer you wait, the more pain there is”
Friday’s board vote came at the tail-end of a three-day planning retreat at the Garden of the Gods Resort, a private country club overlooking the picturesque park in Colorado Springs.
And while several board members called it a difficult decision, they voted 14-1 in favor of the plan, which they said represented the best chance to save the public pension system from potential disaster. The system is currently on track to pay benefits in perpetuity if the pensions’ targeted investment returns are met. But financial analysts with Cavanaugh Macdonald this summer put the risk of insolvency at as high as 44 percent for the teacher pension fund, which is in the worst shape of any PERA division.
“I’d be reluctant to vote for it if this thing got watered down at all — just as I didn’t vote for it last time because it got watered down, and it resulted in us being right back at it again,” said board member Lynn Turner, a former chief accountant for the U.S. Securities and Exchange Commission.
The only no vote came from a stand-in for State Treasurer Walker Stapleton, who was absent from the meeting. (Board policy has long allowed state treasurers to vote by proxy because of the demands of the office.)
In an interview afterward, Stapleton maintained that the proposed reforms are built on the same sort of outlandish assumptions that doomed the last attempt.
“It’s still an unrealistic return expectation, and it’ll only lead us back to this place,” said Stapleton, a Republican who is expected to run for governor. “We’ll be here again as soon as there’s a hiccup in a market.
“I feel like it’s putting a Band-Aid on a patient who is hemorrhaging,” Stapleton added.
In a separate interview, PERA executive director Greg Smith countered that changes were robust enough to withstand lower-than-expected investment returns — though not a seismic market crash like the country experienced in 2008.
The fund today assumes a 7.25 percent return on its investments, reduced from the 8 percent targets used in 2010. In reality, the fund has earned 5.2 percent over the last decade, and 9.8 percent over the last 35 years.
When asked about the political challenges of proposing such major reforms in an election cycle, Smith said he was more afraid of waiting another year.
“The longer you wait, the more pain there is,” Smith said. “Every year makes a difference.”
This represents a stark change of tone for PERA, whose officials for years had urged patience to allow prior reforms time to work.
As recently as December 2015, PERA wrote in a progress report to the General Assembly: “As a result of the innovated shared sacrifices and reforms made to PERA by (Senate Bill 1), PERA is once again sustainable for the long term.”
Months later, the dam burst. A summer 2016 financial report revealed that PERA’s investments had generated just 1.5 percent the year before. And the board adopted new funding projections to reflect that employees were living longer, a change that sent the pension’s liabilities skyrocketing.
Without changes, both the school and state divisions are expected to dip below 20 percent funded within 30 years. That would represent the worst funding ratio of any state pension in the U.S.
Correction: An earlier version of this story incorrectly reported when the proposed contribution increases would take effect. The board discussed phasing them in over a period of time, but instead endorsed a plan that would increase contributions all at once, effective Jan. 1, 2020.
