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Colorado pension system faces risky future despite past fixes

By   /   June 15, 2017  /   News  /   No Comments

Incremental fixes, tinkering and benefit adjustments over the past decade have failed to keep Colorado’s public-employee pension system within a reasonable fiscal comfort zone, say critics of the system.

The state’s Public Employee Retirement Association (PERA) completed a month-long “listening tour” of the state last week, giving PERA officials a chance to hear from stakeholders about proposals to reduce the financial risks the pension system faces in the future.

“At this point we are engaging a range of stakeholders in a conversation [about] PERA’s risk profile, which is presently too high,” the association said in a statement emailed to Watchdog.org.

The PERA governing board late last year decided its expected rate of return on investments was too high and lowered it from 7.5 percent to 7.25 percent. In addition, the board updated mortality tables to make its financial projections more realistic, since people are living longer.

In getting input from people throughout Colorado, PERA aims to develop principles and priorities that will guide the board in making future changes to its pension plan, PERA said.

“These principles and priorities will be used by the PERA board as a set of criteria against which they will be able to evaluate proposed changes to the plan, which may include modifications to the contributions, the benefits and the benefit calculations,” the PERA statement said.

But the association seemed to oppose any systemic changes.

“The PERA board is committed to the preservation of the defined benefit plan,” the association said in its emailed statement to Watchdog.org.

Critics such as Joshua Sharf, who heads the PERA Project at the Denver-based Independence Institute, point out that the state legislature approved benefit reductions and higher taxpayer contributions to the pension system after it verged toward bankruptcy in the wake of the 2008 recession. But even with those changes, the system had a funding ratio of just over 60 percent as of last year.

And the period of time projected to pay off current liabilities in the system’s school fund has grown to 75 years, while the amortization period for the state fund now stands at 55 years, Sharf said. Those represent PERA’s two largest funds, he said.

“What ends up happening is that defined benefit plans are unsustainable,” he told Watchdog.org. Such systems place the bulk of the investment risk on taxpayers, and those in the pension system can face uncertainties when markets tank and the responsibilities for fixes fall to politicians, he said.

Nudging the system toward portable, 401(K)-type defined contribution accounts for younger people entering the system can help to put the system on a more sound footing, Sharf said, though it does not get rid of the current unfunded liabilities.

“No one wants a system where a retiree’s earned benefits are at risk,” he said.

Sharf does not expect any major changes from PERA in response to the listening tour. The board might come out in favor of increasing employee contributions from 8 percent to 10 percent and possibly adjusting the way the average of a retiree’s highest salaries is calculated to determine retirement benefits, he said. But the board can be expected to reject any suggestion of raising the retirement age, according to Sharf.

“There will be a certain amount of knob turning and dial shifting …” he said. “They took big changes off the table and limited discussion to small changes.”

But the board is doing better at facing some of the longer-term financial realities that underlie the system, Sharf said, adding that PERA is not simply reacting to a single bad investment year.

“Some of it was the result of more realistic assumptions they have adopted,” he said. “It’s good they’re being more realistic.”

Sen. Kevin Lundberg, R-Berthoud, has also expressed concerns about the pension system and the way its governing board is set up.

“The board has too many PERA recipients and far too few financial experts,” Lundberg told Watchdog.org.

And PERA has been too generous in the way it has handed out benefits and too optimistic about the performance of its investments, he said. In private systems, employers and employees typically each contribute 50 percent of the retirement fund contributions, but in Colorado the state or school districts kick in twice as much as employees, Lundberg said.

Asked if Colorado’s public-employee pension system should move toward defined contributions, he said, “Overall, yes, we ought to.”

But Lundberg said drawing up legislation to create such an option – while maintaining the current defined benefits system so it can fulfill current employee commitments – likely wouldn’t happen soon.

“In looking at voting patterns and partisan situations, I don’t think we can move very far …” he said. “We have not been able to make good progress in actually curing the problem – just a few Band-Aids here and there.”

Likewise, Sharf stressed that people would be kidding themselves if they thought that the current system would support sustainable retirement benefits while protecting taxpayer risks.

“A fairer system is to make each person responsible for their own financial wellbeing,” he said.

 

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