A rainbow appears after a brief rain Oct. 18, 2015 at the Colorado State Capitol Building. Rain moved into the Denver metro area around 5pm and it is going to remain cloudy for the rest of Sunday according to the National Weather Service.
Seven years after state lawmakers approved sweeping austerity measures to put the state pension fund on a path to financial stability, the retirement system’s funding levels have deteriorated to the point that the Colorado Public Employees’ Retirement Association is headed back to the state Capitol for another round of difficult reforms.
The stakes are significant.
PERA provides and manages retirement benefits to 566,000 current and former public employees — just over one in every 10 Coloradans. If nothing is done, one bad economic event could be enough to plunge the pension system into insolvency — meaning it would eventually run out of money to pay its retirees, who receive pensions in lieu of Social Security.
If the state legislature passes it into law, the reform package approved in September by the pension fund’s governing board would affect virtually everyone in the state. It seeks significant concessions from retirees, employees and taxpayers alike.
PERA officials next week will begin a three-week tour of the state to explain the board’s endorsement and solicit feedback from members and the general public alike. Times, locations and more can be found at peratour.org.
The subject is complicated, but here is what’s at stake for the $44 billion pension fund and how the proposed changes would affect you.
How is PERA funded?
Here’s how the pension’s funding model works today:
Public employees contribute a portion of each paycheck to PERA — typically 8 percent of their pay.
The government agencies that employ them chip in as well — for the two largest retirement divisions, the rate is 20.15 percent of an employee’s pay. Many employees, though, would argue this is misleading: By law, about a fourth of that employer contribution was supposed to come out of raises that employees would have otherwise received.
Some of that money is paid out each month to retirees as their pension benefit. The rest is invested, not unlike a 401(k) or individual retirement account.
So when the Great Recession wiped out $11 billion, or 26 percent, of the pension’s investments in a single year, PERA’s finances deteriorated to the point that it was on track to run out of money to pay retirees.
In response, lawmakers in 2010 passed Senate Bill 1, a series of austerity measures that gradually cut benefits and ratcheted up employee and taxpayer contributions to shore up the fund — but ultimately fell short of what was needed.
What PERA’s proposal means for retirees:
For retirees hired before 2007, the PERA board last month recommended that their annual cost-of-living adjustment be cut to 1.5 percent from 2 percent starting as soon as the legislation is passed.
That may not sound like much, but the compounding interest adds up. For the typical school district retiree receiving a $37,000-a-year pension, that represents a $151,000 cut to benefits over a 30-year retirement, according to PERA calculations.
Before 2010, pension benefits grew by 3.5 percent annually.
For employees hired after 2007, cost-of-living raises during retirement track inflation, but they would be capped at 1.5 percent.
Retirement benefits and eligibility can vary, depending on an employee’s hire date and how long they worked.
What it means for public employees:
Primarily, less money in each pay check.
Starting in 2020, most public employees would contribute 11 percent of their pretax salary to the pension fund, up from 8 percent under current law.
Workers hired after 2020 would contribute 10 percent, but they wouldn’t be eligible to retire with a full pension until age 65.
All workers will receive less when they retire, though specifics vary depending on when they were hired. The biggest change is the cut to cost-of-living raises for employees hired before 2007.
What it means for taxpayers and government agencies:
The proposal heaps more personnel costs onto cash-strapped government agencies all over the state. The current 20.15 percent most agencies contribute to the pension would rise another 2 percentage points starting in 2020.
That’s $54 million for the state division, which includes most state government employees. It’ll cost even more — $86 million — for school districts, many of whom are already bracing for expected revenue cuts in the coming years.
For taxpayers, that would likely result in at least one of two things: cuts to public services or future tax hikes as rising personnel costs squeeze government budgets.
What it means for PERA
If the reforms are adopted by the state legislature — and if the assumptions hold up, unlike what happened after 2010 — PERA would be on a path to 100 percent funding within 30 years. In other words, it would have enough money in the bank to pay off all current and future retirement benefits.
Today, it would take 78 years to pay off the pension’s $32 billion unfunded liability. Without changes, PERA isn’t projected to run out of money — but it could if the U.S. economy gets hit with another recession.
Why didn’t the 2010 effort fix the funding problem?
In large part, because it was built around faulty assumptions.
At the time, PERA assumed an 8 percent annual return on its investments. But over the years, PERA has steadily reduced its investment assumptions to reflect the modern stock market’s slower growth. Now it sits at 7.25 percent.
That’s more conservative than most public pensions across the country but more aggressive than some critics, such as state Treasurer Walker Stapleton, say is realistic. Over the last decade, PERA has only earned an average of about 5.2 percent a year.
But the bigger shock to the system’s finances, according to PERA officials, was a change in their mortality assumptions. Employees are living longer than was expected when the reforms were passed. And even a few extra years of retirement can cost billions in additional benefit payouts.
What if the assumptions are wrong again?
If the reforms look like they’re going to fall short of the 30-year target, there’s a trigger mechanism that would automatically require more sacrifices from everyone — without PERA needing to go back to the legislature for approval.
Employee and taxpayer contributions alike could increase by as much as 2 percent more. Retiree cost-of-living raises would be cut to as low as 0.5 percent.
But, if the market does better than expected, contributions and benefits would automatically adjust in the opposite direction.