Exclusives, Gold Dome, Joshua Sharf, PERA, Uncategorized

Sharf: Proposed bill ladles gravy on public pension retirees

Inflation is hitting all Coloradans hard, but at least one class of citizens has the state legislature looking out for them – retirees with public pensions, both state and local.

Bill numbers haven’t been assigned yet, so the prospective legislation is known only as Bill A, but the details have been released.  At an estimated cost of $220 million per year to Colorado taxpayers, all retired members of state and local public pensions that file Colorado tax return will get a $700 tax credit in both fiscal years 2023 and 2024.  The original bill would have increased the tax deduction to create a similar benefit, but the authors ended up opting for a tax credit to get the checks out immediately.

I serve as an appointee on the legislative oversight subcommittee for Colorado’s public pension system, or PERA, which in turn reports to the Pension Review Commission.  At a recent subcommittee meeting, some sort of tax break for PERA retirees was mentioned as a possibility, but there was no concrete shape to the plan, and no formal proposal.  There was some skepticism of the idea of a special tax break for government retirees even among Democrat committee appointees.

Unfortunately, since the bill was moved directly to the Pension Review Commission, the subcommittee – whose entire purpose is to provide outside expert oversight of PERA and input into the legislative process affecting it – never got to review, or even discuss the question.

This is, in a word, ludicrous.

So since the subcommittee won’t be discussing this bill, we should do so here.

The impulse for the bill doesn’t come out of the blue.  Inflation over the last year has been brutal, especially in the areas of rent, food, and energy.  While Denver’s rents have increased slightly less than nationally on a percentage basis, they started out much higher to begin with.

Court rulings have limited the benefits that can be reduced for existing pension plan members, but cost of living adjustments (COLAs) are not considered core benefits, and are open to adjustment.  In 2018, Senate Bill 200 not only imposed a brief moratorium on COLAs for PERA recipients, but also subjected them to a downward ratchet depending on the plan’s progress toward full funding.

With no COLAs in 2018 and 2019, and only limited ones in 2020 and 2021, and with PERA acting as a Social Security replacement plan, there is some feeling that the COLA limits are hitting current retirees harder than was intended by SB-200.  Since retirees are at the end of their careers, they’ve already made their financial decisions.  The refundable tax credit is an attempt to ameliorate that.

However, it is a singularly blunt instrument, that indiscriminately benefits people who at this point hardly need it, along with those who do.

For example, PERA members who retired in 2010 received COLAs that actually outpaced inflation through 2017, 14.9% cumulatively over that period, compared with 11.0% inflation.  Only in 2018, with the COLA moratorium, did that begin to reverse, and by 2019 they were 1.3% behind over the 10-year period.  The bill makes no distinction between those who retired ten or twelve years ago, receiving the benefit of inflation-beating COLAs, and those who retired last year and who have fallen behind almost immediately.

Furthermore, the bill would apply not only to PERA members, but to retirees of any “public pension plan administered by a local government of the state of Colorado.”  Colorado has dozens of such plans, most of which are not Social Security replacement, but co-exist alongside Social Security for their members.  Social Security does have COLAs, and recipients will receive an 8.7% increase in benefits this year.

The average PERA benefit is around $38,000 per year.  For Weld County, that number is around $26,000 per year, but Weld County’s plan is not a Social Security replacement.  With a personal deduction of $20,000 for those over 55, and $24,000 for those over 65, it is likely that most PERA recipients – and most retired public pensioners – saw a net benefit from the redistributionist Taxpayer’s Bill of Rights (TABOR) refund formula this past year.  They would now see an additional $700, almost certainly taken from the TABOR refund for 2023 and 2024, which are a result of tax overpayment by the general population.

We can estimate the total benefit from the fiscal note on the original bill, which would have increased the allowable deduction for public pension retirees.  It claims that approximately 315,000 retirees would have been affected.  Since the eligibility criteria are the same, we can take that number, multiply it by $700, and it comes out to just under $220 million per year.  By comparison, the total TABOR refund for 2022 was $3.9 billion.

We should also note, in passing, that a retiree need only be 55 years old to qualify.  Fifty-five may be old enough to retire, but for most people, it’s hardly beyond the point where they have the ability to improve their financial situations.  Taxpayers who are helping to fund these pensions in the first place are, by and large, still working at that age.

The bill is also a perversion of the idea of a tax credit.  Colorado has a fair number of income tax credits, designed to reward particular behavior, not particular classes of individuals. This particular credit is simply a wealth transfer to a politically connected group.  There’s no prospective behavior being encouraged here, unless it’s to retire in the next couple of years.

The bill was structured this way – through the tax code – in order not to affect PERA’s bottom line, it’s funded level, or the automatic adjustments designed to put the system on a path to full funding by 2047.  That’s all well and good, but by putting their hands in the pockets of the taxpayers to fund it, the measure’s supporters a mockery of the idea of “shared sacrifice” behind the bill in the first place.

Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.

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