PERA rescue plan moves forward at Capitol

After negotiation, bill kept alive by Senate Finance Committee's 5-2 vote

Legislation intended to stabilize the Public Employee's Retirement Association pension fund passed the Senate Finance Committee by a 5-2 vote Tuesday night after more than five hours of testimony and debate.

Senate Bill 1 would increase contributions by employers and employees, place a cap on cost-of-living adjustments for retirees, modify benefit calculations and age eligibility for full retirement, and create new guidelines for working retirees. The bill next goes to the Senate Appropriations Committee.

"This is the single largest liability facing Colorado," said Josh Penry, bill co-sponsor and Senate minority leader. "We are fast approaching unfunded liability."

Projections show that on its current path, the state division of PERA could run out of money in as little as 16 years.

Senate President Brandon Shaffer, D-Longmont, and Penry, R-Grand Junction, have been brokering the deal for nearly six months. Negotiations on amendments to the initial bill continued through Monday evening.

Meredith Williams, PERA's executive director, said the negotiated fix preserves the plan while spreading the sacrifices among all of the retirement fund members.

As amended, SB1 calls for a gradual increase to employer contributions of 1.5 percent by 2017 and an increase in employee contributions of 2.5 percent by 2017.

Currently, the University of Colorado contributes 10.15 percent of its payroll to the fund and employees contribute 8 percent.

The bill also changes the age of retirement for full benefit eligibility. Currently, employees must have 30 years of service and reach age 50 or 55, depending on when the employee joined PERA, to receive full benefits. The age requirement changes to 58 for those employed by K-12 schools; for other PERA members, it would rise to age 60 beginning in 2017.

Colorado Education Association lobbyist Karen Wick said a higher retirement age would have negative consequences for school districts because salaries are back-loaded. Districts, she said, are continually replacing older, more costly teachers in order to stay within budget. Some districts currently are offering early retirements to avoid the cash crunch they face.

The most contentious portion of the bill concerns the annual cost-of-living adjustments (COLAs) for retirees. Currently, the plan pays a yearly increase of 3.5 percent to retired members. Under the legislation, COLAs would be capped at 2 percent unless PERA experiences a negative investment return. In that case, the retirement association would use an inflation calculation to determine any COLA increases. The bill also calls for a one-year COLA holiday in 2010 to help the fund recover.

About 40 people signed up to testify before the Senate panel. Proponents of the bill — and opponents — expressed reservations about the COLA cuts.

Many said the decrease would hurt lower-wage retirees, especially as costs for other necessities, including health care, rise sharply. Others, including a former assistant attorney general, said the 3.5 percent annual increase in benefits was a contractual right, and that changing it would be illegal.

"It is unconstitutional to cut COLA payments," said Gary Justus, a retired teacher. He and others cited an opinion by former Colorado Attorney General Ken Salazar that said benefits could not be legally reduced for vested employees who had begun collecting retirement benefits.

Many witnesses asked the senators to seek legal counsel before final passage of the bill rather than face a court battle afterward.

Sen. Penry and Sen. Shaffer, the bill's sponsors, are requesting that some sections of the bill, including the COLA decrease, become effective immediately upon the governor's signature. Shaffer says the bill must be signed in late February in order to render void the COLA increase that would normally occur in March.

Without the specified decreases in COLA benefits, PERA officials said, the retirement plan could not remain solvent. The plan now is funded at about 70 percent, but PERA and the legislators want the plan to have a 100 percent funded rate.

The bill makes certain allowances if the plan's assets increase. For instance, if PERA is only 90 percent funded, contributions would rise, but if the plan becomes 103 percent funded, contributions would decrease.

PERA has said large payouts and stock market volatility have contributed to the fund's dire condition. The plan pays nearly $3 million each month to retirees, and the market crash in 2008 led to a nearly $30 billion decline in assets.

The retirement plan, a substitute for Social Security, covers about 450,000 employees in five divisions: Denver Public Schools (added this year), local government, judiciary, state (including CU and other higher-education institutions) and school.

According to the plan, solvency would be reached in 30 years. Previously, the association operated on a 60-year amortization plan. To reach that goal, return on investments would change to 8 percent from 8.5 percent.

Also included in the plan:

  • A provision that would change the way benefits are calculated using the highest average salary (HAS) model. The HAS would be measured over three years with an 8 percent cap on salary changes from year to year. Currently, that cap is at 15 percent.
  • A five-year vesting period for eligibility to receive a 50 percent match upon refund of benefits.
  • A change in working retiree contributions. Currently, retirees who return to work for a PERA employer without suspending retirement are not required to pay member contributions. SB1 specifies that a retiree contribution would be imposed, equal to a member contribution, but the money would not be deposited in the member's contribution account.

Sen. Keith King, R-Colorado Springs, said he was skeptical of the rescue plan. Initially, SB1 called for no COLA increase for two years. King questioned how a one-year timeout, worth about $50 million, still would allow the plan to reach amortization in the scheduled 30 years.

He offered amendments that would allow employees to opt into a defined contribution plan similar to one the state division has in place. He also called for an independent audit of the plan by the state treasurer. The committee defeated both amendments.

King and Sen. Mark Scheffel, R-Parker, voted against SB1. Those voting for the measure were Democrats Paula Sandoval, Michael Johnston and Pat Steadman, all of Denver, Evie Hudak of Westminster and Republican Greg Brophy of Wray.