PERA reform bill gets bipartisan blessing

By Marianne Goodland
THE COLORADO STATESMAN

With a March 1 deadline fast approaching, the House Finance Committee Wednesday night gave its blessing to Senate Bill 1, the bill to bring the pension plan of the Public Employees’ Retirement Association (PERA) to full funded status. The 8-3 vote had the support of the committee’s six Democrats as well as Rep. Ellen Roberts, R-Durango, and Rep. Ken Summers, R-Lakewood.

SB 1 would set up a plan for paying for PERA’s unfunded liability in 30 years or less. After the 2008 market collapse, PERA’s ratio of assets to liabilities dropped to about 51 percent, with $29.3 billion in assets to pay $57 billion in liabilities. The 2009 market was much kinder, with the investments earning an estimated 15 percent, which increased assets to $33 billion. However, PERA officials warn that without a major fix, the pension plan would be bankrupt in as little as 26 years, and could be in a “death spiral,” where assets would have to start to be sold to pay benefits, in about four years.

Under SB 1, retirees would give up their annual 3.5 percent cost of living adjustment (COLA) in 2010. The COLA would drop to the lower of 2 percent beginning in 2011 or indexed based on the Consumer Price Index for Urban Wage Earners (CPI-W). The COLA also could drop to zero if PERA experiences a negative investment return year. PERA makes its annual COLA adjustment in March, so in order for the COLA to be eliminated for 2010, the bill needs to be signed by Gov. Bill Ritter by March 1.

The bill also requires PERA employers in all divisions except the school division to increase contributions by 2 percent of payroll beginning in 2013. The current contribution by PERA employees also would increase by 2 percent. School division employers would contribute 1.5 percent beginning in 2013; school division employees would contribute 2.5 percent in order to gain an earlier retirement at age 58.

The plan also makes changes in the employee’s required age at retirement. Most current public employees would have to wait until age 55 to retire, with at least 30 years of service. Public employees hired after Jan. 1, 2011, would have to reach age 58 with 30 years of service before being eligible for benefits. After Jan. 1, 2017, that age requirement would increase to 60 years.

The vote to send SB 1 to the House Appropriations Committee came after more than seven hours of testimony, much of it from PERA retirees and others who opposed SB 1.

Bill sponsor and Assistant House Majority Leader Andy Kerr, D-Lakewood, said a strong pension plan is an important tool for school districts to recruit top teachers. Kerr, a schoolteacher himself, said school districts look to national markets for top-flight teachers. Without a stable pension plan, top teachers “will go elsewhere,” he said.

Rep. Daniel Kagan, D-Englewood, said his constituents who oppose the COLA changes raise concerns about high inflation, and the burden that would be especially hard for low-income retirees. Kerr responded that PERA is willing to look at language dealing with a “means-tested” COLA, an idea also supported by Colorado WINS.

The positive investment returns in 2009 led to changes in SB 1, according to PERA Executive Director Meredith Williams. That included a 2 percent COLA in 2011, allowing for a lower retirement age for school employees and reducing the “corridor” — the point at which PERA could start to reduce employer or employee contributions. Under the Senate amendments, PERA could start reducing those contributions when the plan reaches 103 percent of assets to liabilities. In the bill’s original version PERA would have to reach 110 percent, which has never happened in the plan’s 75-year history.

Williams explained that the plan would still meet the 30-year timeline for full funding because of the 2009 investment returns. “But if we have another 2008 we are in a very dangerous place,” Williams told the committee.

Responding to the many retirees who have testified against the COLA change, PERA General Counsel Greg Smith said putting the burden entirely on employers and current or future employees would not solve the unfunded liability. In order to begin addressing the problem in the near term, PERA would need some of the millions that annually cover inflation adjustments. “The only solution that works involves impacting the COLA,” he said.

Rep. Spencer Swalm, R-Centennial, raised the possibility that other states with defined benefit plans that go bankrupt could be bailed out by the federal government. “We’d look like suckers,” he said. “I’m not willing to bet on the federal government riding to the rescue,” Williams responded. But if the federal government did get involved, Williams said he would work to ensure any bailout applied equally to every state, and then PERA could reduce its contribution rates.

Rep. Cheri Gerou, R-Evergreen, questioned why Williams and Smith still have their jobs, suggesting that if they worked in the private sector they might have been fired. “A lot of people would like to see you lose your jobs over this,” she told them.

Williams pointed out that many leaders in private sector investment funds that got into trouble instead got millions in bonuses. But the reaction of Gerou’s constituents is a natural one, he said. PERA held town meetings all over the state that drew more than 4,200 comments. Of those comments, 40 percent said to fix the problem but leave the benefits of the commenter alone. Another 40 percent said fix the problem and the commenter would be willing to share in the sacrifice. The last 20 percent said, “Fire Meredith,” Williams said. “This job used to have pleasures associated with it,” he said. “Now, not so much.”

Williams took the opportunity to apologize for PERA’s woes and to tell retirees how badly he feels about their situation. “I’m really sorry we had the year we had [in 2008],” he said. Listening to the testimony of retirees who worry about the future, both last month and Wednesday night, was painful, he said.

Former state Senator Norma Anderson, R-Lakewood, defended the work of PERA’s leaders. “Meredith has done a good job, and there’s no one better than Greg Smith in his knowledge of pension funds,” she said.

Several who opposed the COLA changes in SB 1 asked that an interim committee be formed to study the issue for another year. Gary Justus of SavePERACOLA.com said it was too early to make a $50 billion decision and that a year of study, similar to what was done for Pinnacol Assurance, was necessary.

Another suggestion was that PERA’s defined benefit plan be done away with entirely. That came from Barry Poulson, a CU-Boulder economics professor who also is a senior fellow with the Independence Institute. Poulson said the situation with PERA is much worse than legislators are being led to believe. He said he compared PERA to other state pension plans and found that its unfunded liability is much larger than other state plans. “This is a failed system,” he said, and laid the blame on PERA’s expected investment return of 8.5 percent, which he said leads to riskier investing. (PERA’s board lowered that expected estimate to 8 percent in October.) “If you pass SB 1 PERA will still make risky investments,” Poulson warned the committee.

Poulson pointed to what happened in Alaska, where he said the state restructured its pension plan, replaced its defined benefit plan with a defined contribution plan for new hires and put the plan’s oversight into the hands of its governor. The result, according to Poulson, was an improvement in its funded status. Poulson noted that this idea is embedded in HB 1207, sponsored by Rep. Kent Lambert, R-Colorado Springs, and Sen. Keith King, R-Colorado Springs. “This is what you need to do instead of a Band-aid,” Poulson said.

Rep. John Kefalas, D-Fort Collins, asked what happened to the value of defined contribution plans in 2008. “My 401(k) took a big hit,” he said. Poulson said that his retirement plan, which is in TIAA-CREF, is valued at $1.5 million after 45 years of membership, but dodged repeated questions from Kefalas on what had happened to other defined contribution plans.

Thomas Thielemier of Pueblo, a PERA retiree, who also backed the proposal to study PERA for a year, laid part of the blame on the recent merger between PERA and the Denver Public Schools Retirement System plan. Thielemier said that DPS is putting $74 million per year into paying off certificates ofparticipation that made the DPS plan fully funded, when that money should be going into the employer contribution to PERA to help pay down its unfunded liability.

Former Assistant Attorney General Stephen Smith said he believed everything in SB 1 is legal except for the COLA change. “They’re setting themselves and you up for failure,” he told the committee.

Responding to the issues raised during the hearing, Greg Smith said that speculation that the merger with DPS drove PERA to its current situation is unfounded. Dollars that go into one division of PERA, such as DPS, cannot flow into another. The DPS portion of PERA is an entirely different division, he said, and does not affect the other divisions of PERA, nor their funded status.

As to the specter of lawsuits that may be filed against the pension plan, Smith said the law is uncertain and “we will be making law in this process…the appropriate response is to pass SB 1 and resolve it in court.” That didn’t sit well with Gerou, who said she did not like passing laws that would get the state sued.

Gerou also asked about the costs to covert PERA to a defined contribution plan for new hires — and that drew an admission from Williams that it would be cheaper. The unfunded liability doesn’t go away and still has to be covered, he said. Under a defined contribution plan, employees’ contributions cover their own benefits; the employer contributions would eventually pay off the unfunded liability. In order for this to work the state could go with a “low-ball” defined contribution plan, Williams said. “But a well-run, defined benefit plan is still a low cost producer of benefits for retirees,” he said. “We’re still the best thing going.”

The committee turned down eight amendments offered by Republican members, including turning PERA into a defined contribution plan, or taking legislators out of the plan for conflict of interest reasons.

Gerou, in explaining her “no” vote, said that the hours of testimony from retirees showed that the bill did not have “buy-in. If you don’t get people to understand what needs to be done, you’ve failed,” she said. “People who have already retired deserve better than this.”

But Kagan said that taking action now requires courage, foresight and wisdom. “The easiest thing to do is to ignore the problem for another five years,” he said. “Future retirees will look back at 2010 and be glad” for the action taken by the Legislature.

Rep. Andy Kerr had the last word. “We need to fix this and fix it soon,” regardless of the potential for litigation. PERA might get sued if SB 1 passes, but it might get sued if nothing is done. “What happens to a deer in the headlights if it doesn’t move?” Kerr said.

Greg Smith told The Statesman after the hearing that it was important for people to address the issue with accurate information and facts, alluding to several witnesses who had made inaccurate assumptions. “We’re working to get accurate information out and will continue to do so.”

Marianne@coloradostatesman.com