In 2018, the Colorado legislature passed Senate Bill 200, a comprehensive Public Employees Retirement Association (PERA) reform bill that included annual payments of $225 million to the state’s public pension system directly from general tax revenues.
In 2020, having clamped down on the economy during the Covid pandemic, and not yet having received federal bailout money, the legislature decided to skip that year’s payment. Public pensions always come with incentives to kick the can down the road to some future legislature. It’s usually how they end up underfunded in the first place. It usually takes more than two years for it to happen so publicly.
Last Monday, the House Finance Committee voted 10-1 to advance House Bill 22-1029, which would make up that payment. What makes this bill a little unusual, though, is that it includes an estimate of the returns that PERA missed out on by not having that 2020 money to invest. Instead of paying PERA $225 million, the committee voted to send it $304 million instead, using the actual returns from July 1, 2020 to June 30, 2021, and PERA’s expected rate of return of 7.25% for the following year.
Full disclosure is in order. I sit on the Pension Review Commission’s PERA Subcommittee, and voted for this recommendation when it came before the subcommittee for consideration. I did so for a number of reasons, but the main one is that promises already made must be kept. The courts won’t let us adjust down core benefits even for those still working, so we’re stuck with those promises. The cost of keeping them should be open and obvious to everyone – the legislature, PERA, and most importantly, the public at large.
That said, I remain pessimistic that PERA as a defined benefit plan can every truly be made reliably stable. In the short run, it will likely get a somewhat morbid boost from increased Covid mortality over the last couple of years. For obvious reasons, that’s neither sustainable nor desirable. However, we have already put the brakes on Cost-of-Living Adjustments (COLAs), even as inflation spirals upward. We can count on political pressure from retirees to revisit those strictures.
The long-term threats to any defined benefit retirement plan remain the same as they have always been – volatility in returns, increases in lifespan, inflation or deflation. PERA points out that new employees are currently paying nearly all of the normal cost of their own benefits. But PERA’s ability to meet those benefits is still dependent on those and other factors that are beyond the fund’s control. If it were truly confident that it could cover the promised benefits, then a transition to a defined contribution plan, even for employees hired in the last few years, should be relatively painless.
Rather than continue to accumulate promises, the state should move those employees either to a defined contribution plan with some matching contributions from the state, or to a plan that promises a particular cash balance at retirement, based on salary, years of service, and age at retirement. Then we could all sleep easier and not continue revisiting this problem every few years.
Joshua Sharf is senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.
