Major ramifications for $32 billion overhaul of public pension

The newly passed rescue package for Colorado’s public pension program will have major ramifications for publicsector workers, retirees and taxpayers across the state for decades to come.

The legislation aims to pay off the Public Employees’ Retirement Association’s $32 billion funding shortfall within 30 years, and it calls for steep financial sacrifices from public sector retirees, workers and taxpayer-funded government agencies to do so.

Gov. John Hickenlooper on Friday called the passage “an amazing accomplishment.”

“I think when you compare it to what other states have done, it will be one of the most significant balancing acts of any state pension in the country,” Hickenlooper added in a recent interview.

Here’s what you need to know about the final legislation, which on Friday afternoon still had not been published on the legislature’s website for public inspection.

Why was it needed?

More than 566,000 current and former public employees are members of the pension system. That’s roughly one in 10 Coloradans.

In 2010, the legislature approved what was billed as a long-term fix to the pension,

which was projected to run out of money after the financial crash of 2008.

Since then, the state pension board has steadily adopted more conservative financial assumptions. Retirees are living longer than previously expected. And because the last round of reforms were phased in slowly, government agencies continued to contribute less than is needed to pay for the benefits being promised to retired workers.

As a result, the pension’s financial situation is among the worst in the country. The fund at the end of 2016 had just 58 percent of the money needed to pay off benefits.

It has a $32 billion unfunded debt by one accounting measure, $50 billion by another. And rating agency Standard and Poor’s warned the state of a possible credit downgrade if the issue was not addressed this year.

What do changes mean public employees? for

Most public sector workers enrolled in the pension plan will contribute an extra 2 percent of their pay, phased in over the next few years, raising their contribution from 8 percent to 10 percent of pay.

Future employees will have to work longer, and their pensions won’t be worth as much as prior generations because of changes to benefit formulas. Currently, state workers can retire at 60, and teachers at 58. The bill raises the retirement age to 64 for both.

The legislation allows more public sector workers to opt out of the pension and join a defined contribution plan, similar to a private sector 401(k). School district employees are still barred from doing so.

What do the changes mean for retirees?

The bill eliminates annual costof-living raises for two years, and then reduces them to 1.5 percent annually, down from 2 percent today.

Because pension recipients in Colorado don’t pay into or receive Social Security, retiree pensions are likely to lose value over time to inflation, which has averaged close to 2 percent over the last decade.

For the average school retiree receiving a $37,000-a-year pension, the change equates to a $151,000 cut to benefits over a 30year retirement, according to the pension system’s analysis.

Before 2010, retirees received 3.5 percent raises each year.

What will the rescue plan cost taxpayers?

The bill doesn’t call for any tax increases. But it will require the government to spend more on the pension, leaving less money for public services.

How do these reforms differ from 2010?

Benefit cuts and contribution hikes will kick in automatically if the pension’s finances veer off course. The bill also creates a legislative oversight commission to monitor the pension’s finances more closely.