Opinion

LOMAX | Price of PERA bailout gouges Colorado taxpayers

Author: Simon Lomax - May 14, 2018 - Updated: May 14, 2018

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Simon Lomax

What is the purpose of state government: To provide basic services to the public, or ever-increasing amounts of money to pension funds?

That’s the question Colorado taxpayers will be asking today, tomorrow and long into the future after the passage of SB-200, a reform-and-bailout bill for the state’s public pension system. Passed just minutes before the end of this year’s legislative session, the bill aims to fix a $32 billion unfunded liability at the Public Employees’ Retirement Association (PERA), the state’s pension fund manager.

To be sure, the bill included some very good reforms: The retirement age was raised to 64 for new PERA members; public employees will pay more towards their own retirement like their private-sector counterparts; the formula for calculating base benefits won’t be quite so generous for future workers; and, for those already in retirement, automatic annual increases in base benefits will be more tightly controlled.

But in a plot twist few saw coming, the final bill included a huge taxpayer bailout for PERA – a permanent transfer of $225 million per year from the state’s general fund, along with a further increase in pension contributions from school districts and other taxpayer-funded entities worth an estimated $25 million per year.

That’s right: The PERA reform bill will cost taxpayers something like $250 million per year, and the cost could be even higher depending on the bill’s fine print, which observers were still trying to obtain and decipher late last week, days after it passed the legislature.

It was an astonishing outcome, because in a state with strict budget controls, where every dollar spent on one thing takes a dollar from something else, the public had been assured PERA could be fixed without a taxpayer bailout.

Early in the debate, the state’s Democratic governor, John Hickenlooper, said taxpayers should not – and need not – pay even more into PERA to eliminate the unfunded liability. Later, the Republican-controlled state Senate passed a bill that drew the same line: No new money from taxpayers.

The reason for shielding taxpayers and focusing on the cost of benefits was explained in the governor’s budget submittal letter in November: “[P]ublic employer contributions have grown substantially in recent years and would remain at 20.15 percent of payroll for most covered employees.”

In fact, the PERA taxpayer contribution rate has actually doubled since the mid-2000s, from roughly 10 percent to more than 20 percent this year. The rate increases were approved by the state legislature in 2004, 2006 and 2010 in the belief that more taxpayer funding would bring PERA back into balance. But instead, the unfunded liability grew worse.

The impact of doubling the taxpayer contribution rate for school districts, local governments and state agencies has been serious and largely overlooked. Earlier this year, I worked with a coalition of Colorado business groups called the REMI Partnership on a report into this issue, and it showed hundreds of millions of dollars every year have been diverted from school construction, teacher pay, roads and other pressing budget demands and paid into PERA instead.

During the debate over SB-200, Denver Public Schools Superintendent Tom Boasberg cited rising PERA costs as a major factor in “why you are seeing half the school districts in the state go to four-day work weeks” and other K-12 education challenges like “very large class sizes.” Hiking contribution rates from school districts even more – as PERA was requesting – would result in “reduced salaries or cuts and reductions in positions,” he said.

It was an astonishing outcome, because in a state with strict budget controls, where every dollar spent on one thing takes a dollar from something else, the public had been assured PERA could be fixed without a taxpayer bailout.

When the Senate bill went over to the House, however, the debate took a “wrong turn,” according to the Denver Post editorial board. The House bill rolled back most of the reforms passed by the Senate and created a regular transfer of cash –$225 million a year – from the state’s general fund to PERA.

This year’s budget may cover the cost, however “good times don’t roll forever and Colorado’s transportation, infrastructure, and education backlog is only growing longer,” the Post warned. “It is simply not responsible to commit taxpayers to paying all of the additional revenue over the decades-long reach of the latest PERA reform.”

There was a standoff between the House and Senate until the final day of the session, when not only was the $225 million bailout approved, but so was an increase in taxpayer contribution rates. The Twitter feed of Brian Eason, a reporter who closely covered the PERA debate for the Post and then the Associated Press, recorded the unexpected turn of events in real time.

Three minutes before midnight, Eason posted the Gov. Hickenlooper’s reaction: “If you told me at the beginning of the session that we’d be able to put $225 million a year into the pension forever, I would’ve told you it was impossible.”

Then just after 1 a.m., Eason himself observed: “This is frankly stunning after steadfast Republican opposition to higher taxpayer contributions in recent years. This calls for $225M a year in state money, forever, and a .25% employer rate hike.”

Stunning indeed. Yes, there are good reforms in the final version of SB-200, but the price for taxpayers was simply too high. The sticker shock may not be felt immediately, but it will be felt, as the crowding out of other essential budget priorities in favor of public pensions grows even worse.

In the state of Illinois, general fund bailouts of the public pension system have become routine. They now consume one quarter of the Illinois state budget and leaders of both parties have spent years trying to end the practice.

Will the same thing happen in Colorado? I certainly hope not. But on the issue of public pensions, we have just taken a significant step in the direction of Illinois, and that should make all Colorado taxpayers nervous.

Simon Lomax

Simon Lomax

Simon Lomax is a research fellow with Vital for Colorado, a coalition of state business leaders, public officials and citizens focused on energy policy, and an adviser to pro-business groups. Before going into advocacy, he was a reporter for Bloomberg News and a congressional fellow with the American Political Science Association. The views expressed are his own. Find him on Twitter at @simonrlomax.