THE PODIUM | Fix PERA now — before its problems gets worse
Author: Jack Tate - April 12, 2018 - Updated: April 12, 2018
By the end of 2017, Coloradans learned that PERA, the state’s public employee retirement plan, had unfunded pension liabilities of approximately $50 billion. Senate Bill 18-200 is a bipartisan response to PERA’s approaching financial crisis which has passed the Senate and now awaits consideration in the House of Representatives.
PERA’s long-term pension obligations are not fully funded. Technically insolvent, PERA has significant pension obligations that are only half matched in actuarial terms by its asset base, projected investment income and future contributions. In essence, to balance that balance sheet, we have to change the course of current contributions and retirement benefits. And the sooner we make those changes, the better — for everyone.
The primary beneficiaries of restoring and protecting the financial health of PERA will be its current and future retirees, because financial solvency is the only sure guarantee that those future benefits will be there. Assuring solvency also helps maintain the state’s good credit rating, which benefits all Coloradans. And yet, no set of financial reforms will be popular with everyone. The changes needed to achieve full funding will require some painful adjustments.
The bipartisan reform package passed by the Colorado Senate on March 27 contains a mix of changes in PERA policies, contributions and benefits. The main features are:
- An increase in the standard retirement age from 58 for school employees and 60 for state employees to 65 for all employees.
- No increase in the current employer (taxpayer) contribution rate of 20.15% for the state government and school districts.
- A phase-in of a 3 percentage point increase in contributions made by all employees, eventually rising to 11%.
- A change in the basis for calculating the retiree’s “highest average salary” from three years to seven years, thereby eliminating unfair “spiking.”
- Beginning in 2021, it lowers the annual cost-of-living adjustment from 2.0% to as low as 1.25%.
- An expansion of the availability of a Defined Contribution Option to all new PERA-eligible employees.
The reform plan does not include an increase in employer contributions — the employers in this case being Colorado taxpayers — because of the serious, potentially devastating impact on municipal and school district budgets. Leaving the employer contribution unchanged gives local government and school districts more flexibility in financing teacher salaries and other public services in local communities.
A recent independent analysis by Colorado’s Common Sense Policy Roundtable noted that between 2000 and 2016, the increases in contributions were not evenly shared between public employers (i.e. taxpayers) and their employees. Over that period, the average employee contribution fell slightly, while employers’ share increased by more than 60%. As passed in the Senate, SB-200 aims to restore some balance to those numbers.
The expansion of the Defined Contribution option — making it available to all new employees — should be an integral part of the long-term solution. Defined contribution plans are increasingly popular among young workers because of transportability. Unlike their grandparents and parents, young workers taking a job in the public sector today do not expect to stay with the same employer — much less in the same job — for 25 years. Typically, they want and need transportability with their retirement savings.
We all know there is no perfect plan that both fixes the problem and meets with universal praise. But unlike the 2010 legislative fix, this plan gets the job done. SB-200 is not proposing another Band-Aid that only postpones the day of reckoning. That’s not fair to either retirees or Colorado taxpayers.
Because SB-200 proposes major changes affecting potentially millions of Coloradans, its provisions will be debated and likely amended in the Democrat-controlled lower chamber. Nonetheless, we believe it is a good starting place and a workable framework for a balanced, bipartisan solution.
The General Assembly must not again kick the can down the road with piecemeal half-measures and false promises that only nibble around the edges of the solvency problem. It’s not being honest with employees or retirees to pretend that we can always count on a taxpayer bailout down the road if Rosy Scenario does not ride to the rescue. Coloradans need and deserve a fiscally sound retirement plan for a 21st century workforce in our dynamic 21st century economy.
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