PERA Reform

THE CHALLENGE

Colorado’s Public Employees’ Retirement Association (PERA) 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.

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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STEAK AND LOBSTER

An easy way to understand this is with food. I love steak and lobster! I would eat it every day…until the bill comes. What I can afford everyday is a ham and cheese sandwich. Present PERA retirees receive an exceptional benefit that they have earned, and as I describe below, that I would not change. It is steak and lobster. It is a legacy retirement system built for a 20th century workforce at a time when that was the common benefit in many American industries.

But Colorado cannot afford that system anymore. Nor is it the industry standard necessary to attract good workers. Most Coloradans, and most industries, have a “ham and cheese sandwich” retirement system. We cannot ask Coloradan’s to pay for "steak and lobster" for the public employees in PERA (there are many public employees who are not in PERA), when their own retirement benefits, if they have any at all, look more like ham and cheese

21st CENTURY RETIREMENT

We need to build a public employee retirement system for the 21st Century. I propose four steps to do that, while also ensuring:

  • Present PERA retirees retain their benefits,

  • The fund comes to solvency , and

  • Taxpayers won’t foot a $50 billion bankruptcy bill.

THE HAM & CHEESE SANDWICH

Each of the following four steps applies to a different category of PERA members each representing a different part of the ham and cheese sandwich:

  1. The top slice of bread would be those presently drawing retirement benefits;

  2. The bottom slice of bread would be those newly joining PERA;

  3. The piece of cheese would be those members over 50 years of age not yet drawing benefits; and

  4. The main part of the sandwich, the ham, would be those members under 50.

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First, retirees now receiving benefits - that top slice of bread - 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, that bottom slice of bread represents those who are newly hired and just entering the system, and they 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, are the slice of cheese. They 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 three 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% to 11%, and employers’ contributions would increase from 20% to 22%.

Fourth, the ham: 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% each (instead of the 11% and 22.15% contributions respectfully recently proposed by the PERA Board) with a guaranteed return of 4%. 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%, 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% rate return on investment does not pan out. It has failed to meet PERA’s previously assumed 8% rate of return, which has contributed to the ballooning liability. The “cash account” plan I propose is based on an assumed 4% 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.

OTHER NECESSARY STEPS: TRANSPARENCY AND GOVERNANCE

Full PERA requires some additional steps to promote transparency and better governance. PERA’s financial status has been opaque. Efforts to require the board to share financial data with its board members, including the State Treasurer, have been blocked. The Colorado legislature needs to reverse this to require full financial disclosure to the PERA board and appropriate committees of the legislature.

PERA has a sixteen member Board of Trustees, fifteen of whom vote. Nine are elected from entities that participate in PERA such as public schools, local government, state government and the judiciary. Two more members of the PERA Board are PERA retirees. The Governor appoints three more members. Denver Public Schools, a division of PERA, elect a non-voting member of the Board. The State Treasurer is the sixteenth board member.

The PERA Board needs to be balanced with more members representing the taxpayers. This could be done by allowing the President of the Colorado Senate and the Speaker of the State House of Representatives to appoint three members each. The Governor’s number of appointees should be increased to five. This 23 voting member board would then have 12 members representing the broader interests of taxpayers and 11 representing PERA participants. Another option, though likely to be opposed, would be to reduce the size of the PERA board by reducing the number of PERA participants in a way that gives the voting majority to those representing Colorado’s taxpayers.

Further, the board members should be required demonstrate an aptitude for financial management. In other words - and with apologies in advance - my third grade English teacher, although a gifted instructor, would not have been the best candidate to shape the decisions of a retirement system. A school system’s chief financial officer would be a better fit. The proof of this need is in the $32.2 to $50 billion unfunded status of Colorado’s public pension system.

 

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CONCLUSION: HAM & CHEESE

The four steps I propose above, as well as improvements in transparency and governance, 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 “steak and lobster” 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 “ham and cheese” public retirement system Colorado can actually afford.

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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. More information can be found at brettbarkey.com.

 

 

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