Colo. lawmakers face their most costly issue in years

State lawmakers Tuesday will begin the delicate process of overhauling a state pension fund that 1 in 10 Coloradans expect to rely on in their retirement.

The path ahead won’t be easy. And the initial bipartisan proposal, sponsored by Republican Sen. Jack Tate, among others, is best viewed as the opening bid in what’s sure to be a lengthy negotiation.

The bill, which has its first hearing Tuesday afternoon in the Senate Finance Committee, asks both conservatives and liberals to support ideas they have described as nonstarters. And, like the last pension reform effort in 2010, it calls for difficult financial sacrifices from public-sector retirees, workers and the taxpayer-funded government agencies that employ them.

Lawmakers have a steep hill to climb. After years of warning signs and underfunding went ignored by policymakers, the Public Employees’ Retirement Association now owes anywhere from $32 billion to

$50 billion in unfunded benefits depending on how the fund calculates its liabilities, according to its financial reports

“Something as large as $10,000 per man, woman and child in Colorado requires financial help from all sources,” Tate told reporters in a recent briefing. “I’m working hard to let my colleagues in the Senate know that the circumstance may be more dire (than they realize), and it can’t be just handled merely with some nominal benefit cuts.”

Here is a primer on the key issues that lawmakers will debate in the coming weeks.

ISSUE: INCREASING TAXPAYER CONTRIBUTIONS

Senate Bill 200, sponsored by Tate and House Majority Leader KC Becker, D-Boulder, would increase taxpayer contributions into the fund by 2 percentage points. That’s on top of the 20.15 percent of an employee’s salary that school districts and the state contribute today.

The increase would cost school districts $86 million annually, and the state government, $54 million — big numbers to swallow on top of the existing contributions. But there are a few factors to keep in mind. PERA employers don’t pay Social Security payroll taxes, because the pension is a replacement for the federal retirement program. And by law, at least 5 percentage points of the existing taxpayer contribution was supposed to come out of annual raises that the employees would have otherwise received.

Further, the bulk of the 20.15 percent contribution isn’t even paying for that employee’s pension. Instead, it goes to paying down the debt the government owes to retirees after years of promising benefits to employees that it wasn’t fully funding.

The case for it: PERA isn’t insolvent today, but it has a deep hole to dig out of. Even the more optimistic scenario estimates that the debt is larger than this year’s entire $26.8 billion state budget. Colorado government agencies have spent nearly two decades promising benefits to employees that weren’t being paid for. As a result, courts may frown upon attempts to balance the pension’s debt on the backs of employees and retirees alone, when they were promised these benefits as a condition of employment.

The case against it: Many taxpayers feel they’ve already contributed more than their share, and the proposed 22.15 percent would be more than double what the government contributed in the early 2000s, when the pension was completely funded. The state of Colorado is already struggling to fund basic public services, from transportation to education. And rural school districts, in particular, have a hard enough time affording teachers as it is.

ISSUE: INCREASING EMPLOYEE CONTRIBUTIONS

The bill would phase in a 3-percentage-point hike in contributions from current and future employees starting July 1. Unlike the PERA board’s proposal, which suggested that future employees should pay a little less, that means all employees would eventually contribute 11 percent of their pay.

The case for it: All sides agree the pension needs more money coming in, and the political math simply doesn’t work if public workers don’t have some skin in the game. A taxpayer bailout isn’t in the political cards, and it’s too late to turn back the clock and get more money out of former workers who are now drawing benefits.

The case against it: Because the bill also raises the retirement age to 65 (up from 58 or 60, for school and state workers, respectively) and makes other changes to benefit calculations for future employees, they’ll get worse benefits than their predecessors, so the PERA board has argued they should get some relief from the contribution hikes. Higher contributions means less take-home pay, which will make it that much harder for the public sector to compete for a quality workforce.

ISSUE: CUTTING COST-OFLIVING RAISES FOR RETIREES

The bill would suspend cost-ofliving raises for two years, and reduce them thereafter to 1.25 percent annually from the 2 percent bump retirees receive today.

The case for it: Many current retirees were able to retire with full benefits as young as age 50 — a retirement age virtually unheard of in the private sector, with people living longer. Many of them also benefited from questionable decision-making in the early 2000s, when Gov. Bill Owens, the state legislature and the PERA board all endorsed a plan to let workers buy years of service, essentially giving them a better benefit package for less than it was worth.

The case against it: Public-sector retirees were promised good benefits in exchange for lower pay than they could earn in the private sector. And older retirees may not be in a position to go back to work and make up for the unexpected drop in income. If the cost-of-living adjustment drops to 1.25 percent, retiree pension checks would no longer keep up with the cost of living, which has averaged around 2 percent nationally since 2000 — and they don’t have Social Security to fall back on.

ISSUE: EXTENDING A “DEFINED CONTRIBUTION” OPTION TO ALL FUTURE EMPLOYEES

The bill would offer all PERAeligible employees hired after 2020 the choice of opting out of the pension and joining a defined contribution plan, similar to a private-sector 401(k). Today, only some state government workers have this option. The bill would require public agencies to make additional contributions to pay down the existing unfunded liability for each worker that chooses this option.

The case for it: Like most private-sector retirement accounts, defined contribution plans are self-directed and portable, meaning workers can leave their government job and take their savings with them. It also transfers the investment risk from taxpayers, who are on the hook for PERA’s promised benefits even if the stock market underperforms, to workers, who would no longer be guaranteed certain benefits until they die. Many younger workers like having the choice — around 1 in 10 eligible workers opt for PERA’s defined contribution plan over the pension. The case against it: Publicsector unions view a defined contribution option as an attack on the pension, which has offered guaranteed retirement security since 1931. Plus, it’s expensive. The bill would require government agencies to make additional contributions to pay down the pension’s debt for each employee that opts out, to make up for lost contributions that would have otherwise gone toward the unfunded liability.

ISSUE: PAYING OFF THE DEBT SOONER

PERA’s projections show the bill would pay off the unfunded liability within 25 years, rather than the 30-year target established under current state law.

The case for it: By trying to pay off the debt faster, PERA will be more likely to hit its 30-year target, because it would have a bigger cushion against a financial downturn. It also safeguards against investments growing by less than PERA’s 7.25 percent assumed rate of return.

Look no further than the last reform effort in 2010 for a case study. That was supposed to pay off the debt within 30 years, but PERA changed its financial assumptions to reflect longer employee lifespans and the more conservative long-term market expectations that now prevail on Wall Street. CalPERS, the largest public pension in the country, in February adopted a 20-year funding target for the California retirement system.

The case against it: There’s a danger to overcorrecting. Paying off the debt more aggressively means more costly sacrifices from public employees and taxpayers that may not be necessary. And it heightens the risk of a lawsuit. Courts have said PERA has to show “actuarial necessity” before reducing benefits, or it could violate the government’s contract with its workers.