PERA reform? House version is a disaster waiting to happen
Author: Joshua Sharf - April 25, 2018 - Updated: April 25, 2018
On April 16, the Colorado House Finance Committee considered Senate Bill18-200, the bipartisan effort to reform and rescue the state’s deeply troubled public pension system (PERA).
Unfortunately, what came in to committee as a bill to modestly move the ball forward on reform and shore up the plan’s finances left committee as a plan to double down on the worst aspects of public pension finance, as though change weren’t coming.
And make no mistake, change is coming. We can either be its victims or its authors. The amended bill ensures that we will be its victims.
Each amendment enmeshes us further in the current broken system. Each amendment makes real reform harder.
First, the committee removed immediate and future increases to the employee contribution, replacing them with an appropriation from the state’s General Fund.
When employers and employees were on the hook for additional ratcheted contributions, the costs of the current system were real and immediate. Burying the contribution increases in the General Fund alleviates political pressure for structural change, making a more stable fix less likely. Moreover, in a plan that was supposed to provide for “shared sacrifice,” the majority Democrats have shifted the entire contribution increase from the employees whose retirements are being funded onto the taxpayers.
Second, it kept teachers locked into an unstable, unsustainable defined-benefit plan. The unions, their leaders, and certain politicians are stoking people’s understandable fear of change in order to limit their freedom and deny them options and opportunities. They falsely claim that those who choose a defined contribution plan will be trading the security of a professionally managed pension for the uncertainty of their own stock-picking skills.
In fact, the current defined-benefit plan is anything but reliable. We are currently in the midst of thefourth PERA funding crisis in the last 15 years, each of which sees a greater draw on public resources and greater revisions of benefits than the last. By contrast, defined contribution plans are always 100 percent funded, and individual investors can have access to the same portfolio diversification and professional investment advice.
Perhaps most unfairly, the committee shifted the bulk of the PERA member sacrifice onto existing retirees and those near retirement. It all but eliminated the increased retirement age for new hires. Court rulings have barred increasing the retirement age for existing employees.
Remember, the committee has also eliminated current future employee contribution increases. Virtually the only place left for benefit changes is the Cost of Living Adjustment (COLA). As a result, the bulk of the PERA member sacrifice falls on existing retirees and those nearing retirement, those least able to shoulder this burden.
…make no mistake, change is coming. We can either be its victims or its authors. The amended bill ensures that we will be its victims.
Worse, the change plays right into one of the primary triggers of the current crisis. PERA’s out-of-date mortality tables had failed to account for the fact that people are living longer than expected. Increasing the retirement age is simply the logical response to that fact.
Even the amendments with smaller reach moved the bill in the wrong direction. Currently, benefits are calculated based on the 3 years of Highest Average Salary (HAS), with contributions based on net pay. The Senate bill would have moved as quickly as possible to gross pay, and changed the calculation to 7 years. Not only would benefits have been calculated on a lower average, but the incentive to game the system by not taking deductions at the end of one’s career. The House bill significantly dilutes the benefits of these changes, changing the HAS calculation to 5 years and taking longer to move from net pay to gross.
Finally, the Democrats worked to make sure that future legislatures will hear only the voice of the PERA Board, which bears a great deal of responsibility for the current state of affairs.
The Senate’s version of the bill would have created a new joint bipartisan committee, with non-voting specialists appointed by the Treasurer. The House committee instead added PERA oversight to the existing Police Officers’ and Firefighters’ Pension Reform Commission. In doing so, it eliminated independent voices representing the taxpayer from the new oversight.
Independence Institute was neutral on the Senate version of the bill, but the current House version would only serve to worsen Colorado’s public pension problems, and we urge its defeat.
And in the wake of that defeat, let’s work to craft a new law that takes us closer to a fairer, more sustainable, more secure retirement system for our state’s government employees and teachers.