DENVER — The Regional Transportation District (RTD) is still trying to fully fund an archaic and costly retirement system for some of its employees, costing taxpayers inside the eight-county RTD taxing district millions of dollars.
Perhaps the bigger problem, for at least one RTD Board of Directors member is that RTD also continues to remain the sole source of contributions into all non-union employee pension plans.
The plans combined amount to more than $11 million per year in contributions, funded with taxpayer money.
“I have done extensive outreach look for a comparable guide for the average contribution by public employers,” said District M representative Natalie Menten. “I got frustrated because there is little to be found. But there was still no evidence of a public agency where employee contribution was zero.”
RTD has split representation of its employees. Train operators and bus drivers are paid under union contracts with their retirement accounts similar to the Public Employee Retirement Association (PERA) where the employee pays a portion of his or her retirement contribution and RTD pays an additional portion.
However, salaried employees are non-union, and their retirement accounts are paid entirely by RTD. The employee is not responsible for any portion of it, and that practice does not appear to be changing anytime soon.
For salaried employees, there are two plans, a defined benefit plan and a defined contribution plan. The defined benefit plan is an idea that is becoming obsolete in most government sectors because of the high cost of payout. RTD stopped offering the defined benefit program more than a decade ago. However, it must continue to pay benefits for those who were originally part of the previous plan.
PERA, which covers most teachers in Colorado is the most recognized of defined benefits plans that are struggling to operate because payouts are “defined” and in many cases are transferred to surviving family members once the covered employee dies. RTD’s plan also offered survivor benefits.
The funds in many government-operated defined benefit plans are underfunded because contributions to the plans were too low and the expected return rate of return on that money was too high to satisfy the commitments.
By contrast under a defined contribution system, employers define how much they will put into the employee’s retirement account, such as a 401K. At retirement, the employee has a specified total amount of money to collect.
Currently, RTD defined contribution members get an amount equal to 9 percent of their income added yearly, for 2020, it is predicted that cost will amount to $4.7 million.
For defined benefit employees, RTD contributes a flat rate yearly that staff has determined will “catch up” the fund by a specified date, so that all benefits will be paid as planned.
For 2020, there were two options. An actuary recommended $8.1 million per year until “catch up,” which would be 2031, while RTD’s Chief Financial Officer recommended $6.1 million to assume a “catch up” date of 2040, all things remaining equal. The $6.1 million recommendation assumes an annual return rate of 7 percent.
Predicting a return rate is a problem no matter what the amount, said Joshua Sharf, senior fellow in fiscal policy, who headed up the PERA Project at the Independence Institute*, a free-market think tank in Denver.
“We have been in a declining interest rate for so long we don’t know what the other looks like,” Sharf said. “It’s almost impossible to know what the rate of return should be.”
Sharf said the problem with assuming that the rate of return for RTD is twofold. First, the 7 percent return rate is higher than the rate used by investment genius Warren Buffett. But also, using a higher rate of return makes the liability look small.
“It goes back to how you measure tomorrow’s promises in today’s dollars,” Sharf said. “Public pension plans use a higher rate to make that promise look smaller.”
Sharf added that taking a higher rate of return introduces volatility.
“If you’re underfunded, the volatility is your enemy,” Sharf said. “One bad year is worse than several good ones.”
At RTD’s most recent meeting, Menton proposed reducing the current defined contribution rate of 9 percent to 7 percent, which would have saved taxpayers about $1 million in 2020. The proposal failed, 12-3. According to Menten, few are willing to look at the issue seriously, and she does not see anything changing anytime soon. RTD taxpayers will continue to be the sole source for funding retirement benefits, she said.
“We postponed this vote for two months as people pretended they might be willing to make a change,” Menton said. “Each year it comes to the board, and they’ve just rubber-stamped it. We’ll make our final vote next week, but I don’t think much of anything will change.”
Menten said the only argument RTD administrative staff has given for why the amount donated should not be decreased or split among RTD and the employee is that it will reduce moral. But that recommendation itself is an even bigger problem.
“The ones who are benefiting from these pension plans are the ones writing it,” she said.
*Editor’s note: Complete Colorado is a project of the Independence Institute.