Alternative PERA plan dies in legislative committee

By Marianne Goodland
THE COLORADO STATESMAN

An alternative plan to shore up the Public Employees’ Retirement Association failed to gain enough support to get it out of the House State, Veterans and Military Affairs Committee this week.

House Bill 1207 was sponsored by Rep. Kent Lambert, R-Colorado Springs and member of the Joint Budget Committee. He told The Statesman when the bill was introduced that he had little hopes for its passage but wanted to put an alternative idea for fixing PERA on the table.

HB 1207 intended to end all new enrollments in PERA’s defined benefit plan and initiate a new defined contribution plan. Under HB 1207, all members in PERA’s current defined contribution plan would become members of the new plan, and any employee hired on or after Jan. 1, 2011 would become a member of the defined contribution plan and would not have the option of becoming a member of the defined benefit plan. PERA retirees who come back to work for a PERA employer also would have to become members of the defined contribution plan.

The fiscal note for HB 1207 stated that switching PERA to a defined contribution plan would save the state hundreds of millions of dollars, even in the short term. In 2010-11, the savings would start at almost $31 million, and increase to $117 million annually by 2014-15. However, the fiscal note could not estimate how long it would take to pay off PERA’s unfunded liability if HB 1207 were adopted. The unfunded liability, a reflection of the shortage in assets PERA has to pay its benefits, was just under $22 billion at the end of 2009.

Lambert acknowledged during testimony on Wednesday the recent signing of SB 1 and noted the lawsuit that has already been filed against that law. Lambert said he agreed with some of the changes in SB 1 but said the bill did not go far enough.

The defined benefit plan in PERA is “simply too expensive to maintain over the long run,” Lambert said. Contribution rates will very soon be unsustainable.

The only witness to testify in support of HB 1207 was Barry Poulson, a professor of economics at CU-Boulder and a fellow at the Independence Institute.

Poulson said he had recently conducted a study, published by the conservative American Legislative Exchange Council (ALEC), which said the unfunded liabilities in state pension plans are much worse than previously reported. Poulson pointed to a recent study published by The Pew Charitable Trusts’ Center on the States that said public pension plans have to cover about $2.7 trillion in pension, health care and other retirement benefits in the next 30 years, and have about 85 percent of the assets in which to do so. Poulson said the Pew study used outdated data from 2006, well before the financial collapse of 2008. He estimated the true shortfall in pension assets at closer to $2 trillion.

When he looked at the unfunded liabilities of a dozen states, including Colorado, Poulson said that of those dozen states, the largest funding crisis was for Colorado PERA.

Poulson estimated the cost of shoring up PERA is $3,600 for every person in the state, or about 9 percent of the per capita income of the state. It would be substantially cheaper for the state to go to a defined contribution plan, Poulson explained, and that kind of change has been successful in other states such as Michigan and Alaska. Reforms in those states have made it easier for them to pay off their unfunded liabilities, he said.

The bill was vigorously opposed by PERA officials and PERA members, many of whom had testified either in support or opposition to SB 1.

Stephen Smith, a former assistant attorney general for the state, told the committee that HB 1207 would change the pension plan to one akin to a private sector plan, and that could hurt the state’s ability to retain experienced employees. If the state is going to act like a private employer regarding its pension plan, “you’re going to have to start paying [salaries] like one,” Smith said. He noted that private law firms hire young attorneys in the $125,000 to $140,000 range, and Smith said he never even made $100,000 per year as a long-term employee in the state attorney general’s office. There are tradeoffs when you work for the state as an attorney, Smith said — getting to work on interesting cases, for example. But one of those tradeoffs also is making less money than in the private sector and the tradeoff is getting the pension at retirement. Switching to a defined contribution plan like the one established in HB 1207 will make it harder for the state to recruit and retain attorneys and other professionals, Smith warned.

Tom Cavanaugh of Cavanaugh MacDonald Consulting, an actuarial firm, said changes conceived in HB 1207 would result in substantial long-term cost to the state. Yes, HB 1207 would save money in the early years, he said, but once the funds in the defined benefit plans run out of money the state would have to go to a “pay as you go” system, paying benefits owed to those still in the defined benefit plan. That could run as much as $2 billion per year for the state division starting in 2030, and would continue so long as the state has recipients in the defined benefit plan. The costs would be even higher for the school division, probably $3 billion per year. And the health care trust fund would go bankrupt.

The bill was postponed indefinitely on a 7-4 party-line vote.

The last bill dealing with PERA for the 2010 session is one that requires PERA employees in the state and judicial divisions to cover 2.5 percent of the state employer contributions in those divisions for 2010-11. SB 146 passed the Senate on Feb. 24 and is awaiting action from the House Appropriations Committee.

Marianne@coloradostatesman.com