A four step plan to save PERA

By Brett Barkey
October 23, 2017

Colorado’s Public Employees’ Retirement Association system is going broke. Colorado’s teachers, firefighters, and state troopers are among PERA’s 560,000 members who are expecting retirement benefits in 20 or 30 years, but who, under the current system, may not be able to actually receive them. Ensuring retirees will receive their benefits, while also protecting taxpayers, should be the top priority for Colorado’s next state treasurer and for Colorado’s legislature.

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Exactly how big is this problem? PERA’s 2016 annual report indicated that the retirement system had a $32.2 billion unfunded liability. Even more concerning was a note in the back of this report: a different valuation method calculated the unfunded liability at nearly $50 billion. (For context, Colorado’s entire annual budget is about $29 billion.) PERA is therefore Colorado’s biggest — by far — single liability. Because it is a statutory entitlement, it is a burden that will ultimately fall squarely on the shoulders of all taxpayers should PERA go bankrupt. Bold and immediate steps are needed now to avoid this outcome.

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I propose four steps to solve this problem in a way that (1) ensures present retirees retain their benefits, (2) brings the fund to solvency, and (3) ensures taxpayers won’t foot a $50 billion bankruptcy bill. Each of the following four steps applies to a different category of PERA members: (1) those presently drawing retirement benefits; (2) those newly joining PERA; (3) those members over 50 years of age not yet drawing benefits; and (4) those members under 50.

First, retirees now receiving benefits would not be affected. This is a commitment we must honor to those who would be most vulnerable, and least able to adjust, to changes in benefits.

Second, those who are newly hired and just entering the system would participate in a defined contribution plan, such as a 401(k) plan. Employees could elect from a variety of investment alternatives without a commitment of a guaranteed return. The vast majority of industries in America use this type of retirement plan. This is the retirement system that Colorado taxpayers can afford now and into the future.

Third, PERA members over 50 years of age, but not yet drawing benefits, would receive a defined benefit in retirement. However, that defined benefit would be changed to reflect an employee’s average salary over a career, and not the average of the highest five years of salaries, as it is now. This step would eliminate the reported gamesmanship that sometimes artificially elevates an employee’s salary just before retirement. PERA members over 50 would also increase their contribution from 8 percent to 11 percent, and employers’ contributions would increase from 20 percent to 22 percent.

Fourth, PERA members under 50 years of age would be moved to a hybrid “cash account” plan. This plan would require employee and employer contributions of 8 percent each (instead of the 11 percent and 22.15 percent contributions respectfully recently proposed by the PERA board) with a guaranteed return of 4 percent. Upon retirement, the balance in the employee’s account would be transferred into an annuity, provided by a private vendor, paying out the benefit for the remainder of the retiree’s life. Because a private firm would manage the annuity, the state of Colorado would not be financially liable should the retiree live longer, as it is now. Instead, the private vendor would bear that risk.

These four simple but effective changes will protect Colorado’s taxpayers. Right now, the required employer contributions are putting increasing pressure on state and local budgets. The PERA board recently announced that they want to increase the employer contribution yet another 2 percent, even further compounding the stresses on local and state budgets. My proposal would significantly reduce these pressures and free up funding for other priorities, while ensuring the solvency of the fund.

Further, under the present structure, Colorado’s taxpayers bear the risk if PERA’s assumed 7.25 percent rate return on investment does not pan out. It has failed to meet PERA’s previously assumed 8 percent rate of return, which has contributed to the ballooning liability. The “cash account” plan I propose is based on an assumed 4 percent return. This is a more conservative and realistic rate of return in the present economy. This conservatism will better protect taxpayers from economic downturns, which are an inevitable part of economic cycles.

The four steps I propose above will prevent PERA’s collapse into insolvency — an outcome that would be catastrophic for both retirees and Colorado taxpayers. We must be ready to admit that we can no longer afford the present system and take the bold steps necessary to fix it.

It is time for the PERA board and state Legislature, with the help of the state treasurer, to act boldly to prevent PERA’s collapse and to move to a public retirement system Colorado can afford.

 

Brett Barkey is a Republican candidate for state treasurer. He spent eight years in the U.S. Treasury Department. He is the elected district attorney in northwest Colorado. He also served 25 years in the active and reserve Marine Corps, including three tours in Iraq. He retired as a colonel in 2015.

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