How to reform PERA? Start with its board
Author: Bernard Douthit - January 12, 2018 - Updated: January 12, 2018
As a candidate for state treasurer I often get asked how I would fix the Public Employees Retirement system, known as PERA, that currently has an unfunded liability of $32 billion. The state treasurer sits on the 16-member PERA board, so it is a relevant question.
I have three close family members who are PERA members, including my mom. One of my key goals as treasurer will be to protect it and keep it intact as a defined benefit program. To this end, I believe that having a more balanced board that includes more nonmembers and more members with expertise in finance and accounting will protect both its members and taxpayers. It should also serve to calm the fears of those who say it is poorly managed.
We seem to have a crisis with PERA every few years and have heard the same refrain about “shared sacrifice” dating back to at least 2010.
PERA was fully funded as recently as 2000. Going from $0 to a $32-billion deficit in 17 years was not the result of one bad decision but many bad decisions by many different people. There’s plenty of blame to go around to former board members, legislators and governors.
One key reason I believe PERA is underfunded is that we have underpaid teachers for years: Instead of giving them raises, we have been promising them benefits down the road instead. Wyoming’s starting salary for teachers is $11,000 higher than here in Colorado. We should be able to pay our teachers as much as Wyoming does, and we also should not burden them and other PERA members with large increases in contributions as the governor has proposed.
…(H)aving a more balanced board that includes more nonmembers and more members with expertise in finance and accounting will protect both its members and taxpayers.
While other state pension programs have also struggled, nearly a dozen state pensions are funded at 80 percent or higher. These are in states as diverse as Tennessee, Oregon, New York and South Dakota.
I started to wonder what these states were doing differently? What can we learn from them?
One key fact I have learned is that PERA’s board is composed of 75 percent plan members, i.e., 12 of the 16 board seats are PERA members. If we include nonvoting members, (PERA has one from DPS), this percentage is still quite high at 73.3 percent.
Because such a large percentage of board seats are held by PERA members without expertise in accounting or economics, it is not surprising that poor decisions have been made. A majority of plan members on the board also appears to be a conflict of interest. It may not be, but board members who are plan members can vote in ways that benefit them directly. Members of the state legislature are also PERA members so this also represents a conflict of interest.
State pension systems that perform the best, i.e., are fully funded or close to fully funded typically have a lower percentage of plan members on their boards. The average percentage of member board seats of the top 10 performing pension programs is 36.5 percent, or roughly 4 out of 10, a minority of seats.
For the bottom 10 performers, i.e., those with the lowest funding ratio, the percentage of member board seats is 53.7 percent, just over half. For the five lowest performers, the percentage of member-held board seats is even higher at 58.3 percent or about six out of 10.
South Dakota is worth mentioning as it does have a pension board with a majority of plan members, 14 out of 18, and it is also fully funded at 100 percent.
However, for South Dakota, six of the 14 board members who are also plan members work in finance- or auditing-specific roles, represent school boards, or are also elected officials. Thus, these members are directly accountable to nonmember voters or they provide critical finance and accounting expertise.
To move to a truly long term solution, I would strongly recommend that we emulate the example of other states with better performing state pensions and change the PERA Board to include more non-members with finance and economics expertise. This makes sense and the facts strongly support it.