With the legislative session winding down, lawmakers in Denver are moving quicker than ever to squeeze in critical votes before the session comes to a close.
Yet, with only a few short days left, you’d expect the biggest and most controversial pieces of legislation to be long behind us. This year, however, that’s far from the case.
Treasurer Walker Stapleton, with the help of legislators, is moving quickly on a complex bill that would allegedly help shore up an astounding $23 billion hole in the state’s public pension budget. While getting the state’s fiscal house in order should always be a priority for lawmakers, make no mistake: lawmakers should swiftly to put an end to this risky proposal.
Conversations are underway on a plan that would authorize the state borrow as much as $12 billion in pension-obligation bonds, which, as the proposal has it, would be invested – and the assumed profits used to help close Colorado Public Employee’ Retirement Association’s (PERA’s) gaping budget shortfall.
Basically, Stapleton’s plan is to borrow money to invest it in the stock market. He is assuming that we would be able to pocket the difference between the interest on the debt and the return on investment. The hole in the state public pension fund – that is, the difference between the fund’s value and how much the fund is already committed to pay out to retirees – would, in theory, then shrink over time.
Well, at least in theory that is.
It’s a risky plan that puts not only PERA, but the entire state’s finances in jeopardy, and lawmakers would be foolish to consider it.
Currently, the cost of borrowing money is about 4% – and it’s true, PERA has, over the years, averaged about a 7.5% return.
That’s the important part.
Sometimes returns are higher, sometimes they’re lower. But certainly no amount is ever guaranteed.
All it takes is a hiccup in the economy, much like the one in 2008 that brought global financial markets crumbling to their knees, for returns to come plummeting and, with borrowed principal, have the state quickly be thrown upside down on its investment.
It’s one thing to make a risky bet with your own money, but quite another to make a risky move with somebody else’s money — much less with someone else’s retirement money that they’ve worked their entire lives for.
To some, the numbers seem to make sense on paper, but as anyone can tell you, sometimes even the surest of bets have tendency to run astray.
At the end of the day, allowing the state to borrow money to make bets with far-from-guaranteed returns is simply bad business.
If this plan sounds all-too-familiar. That’s because it is. The plan harkens back to plan that Democratic Senator Michael Bennet proposed in 2008 as superintendent of the Denver Public School System.
In 2008, Bennet had a $400 million shortfall in the Denver Public School System’s Pension Fund. Bennet, at the behest of the high-flying bankers at JP Morgan, concocted a complicated plan that would refinance $300 million of existing debt and take on an additional $450 million in the form of pension certificates (basically bonds with variable interest rates).
The plan went over about as well as you’d expect.
The Denver Public School System’s pension fund was thrown into disarray when the markets took a crash. As the New York Times reported, “The money the city raised to shore up its pension fund has turned out to be inadequate…losing almost twice the $400 million borrowed by the school district.”
The state of Colorado can’t afford to take this same risk.
Instead of talking about real reforms to make PERA solvent in the long-run, legislators are looking at cheap, easy credit as a “quick fix” to its budgetary woes. But as my grandpa always used to say, “You can’t borrow yourself out of a hole.”
Treasurer Stapleton is moving forward on these risky pension bonds, but if he wants to know where it’s headed, he need only to ask Sen. Bennet how his version worked out.
We just can’t afford to take that gamble.
Michael Fields is the Colorado Deputy Director for Americans for Prosperity.