Colorado&#39;s PERA &quot;2/2/2&quot; Funding Plan Hopelessly Unsound

Colorado's Public Employees Retirement Association (PERA) is currently only 70% funded. Projections show it will be less than 50% funded by 2012. To get the fund back in shape PERA officials offer plan for sustainability.

PERA officials last week presented their proposal to rescue the ailing retirement fund to the Legislative Audit Committee.

The draft legislation, called 2/2/2 Plus, includes a 2 percent increase in employee contributions, a 2 percent increase in employer contributions, and a 2 percent cap on cost of living increases for retirees.

More than 438,000 people belong to the Public Employees Retirement Association, which faces a multi-billion-dollar deficit over the long-term because of high payouts and stock market instability. PERA includes four independent trusts covering different segments of the labor market: judicial, state, schools and local government workers. In January, Denver Public Schools will be added as a fifth division.

"Change has to occur to ensure the system is sustainable to all of our members," Meredith Williams, PERA's executive director, has said.

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 be reduced to 8 percent, from the current 8.5 percent.

The increase in employer contributions would begin in 2013 and continue through 2017, while the employee increase would begin in 2014 and run through 2017. Cost of living increases (COLA) would be capped at 2 percent and would be dependent on the Consumer Price Index. (The index, CPI-W, is generally used to determine cost of living raises for labor contracts.) Currently, the COLA raise for members is 3.5 percent annually.

Cadillac Of Retirement Funds

The Greeley Tribune discusses the "2/2/2" proposal in PERA plan aims to keep fund solvent.

Rightly so, many consider the Colorado Public Employee Retirement program the Cadillac of retirement funds.

Much like Social Security, PERA can't operate business as usual and continue to be solvent. The four funds PERA manages ? for state, public schools, local government and judicial employees ? all will eventually run out of money in the next 30 years if something doesn't change.

After months of meetings and work sessions, staff members and the board of directors for PERA has announced a plan to make the fund solvent for the foreseeable future.

We recognize this plan isn't perfect. For one, it puts a financial burden on public entities already struggling to balance budgets. Having to find the additional contributions to PERA will make this even more difficult, and certainly could mean other programs and services will suffer. That is a big concern.

Some employees have also balked at having their contributions increase, and for some in the lower income brackets, this may create a bit of a hardship.

Still, overall we believe the PERA plan is prudent. First, it spreads the additional costs around between employees and beneficiaries, including future retirees who will not see the automatic cost of living increases in their benefits that they enjoyed in the past.

Most important, though, the proposal will, under the best financial predictions, keep the fund solvent and insure that future retirees now paying into the system will see their benefits when they decide to stop working. With the current system, that might not happen.

We hope our state legislators will seriously consider these changes to PERA. We believe it will protect public employees in the long run, and still give retirees the Cadillac of retirement programs. Maybe not an Escalade, but still pretty close to a Seville.

The first question to ask is "Why the hell do public employees remotely deserve a Cadillac plan when no one in private industry gets one?"

The "2/2/2" plan forces employers (read taxpayers) to pony up still more so that public workers get Cadillacs while private plans get Pintos if they get anything at all.

Without a doubt, defined benefit pension plans need to be killed before they kill the taxpayers.

Plan Unfair And Financially Unsound

It is galling for anyone, especially the Tribune to think this plan is fair. Moreover, the plan is still financially unsound.

Here are some slides from the November 2009 PERA Legislative Audit Presentation.

click on any chart for sharper image

There are four independent trusts covering different segments of the labor market: judicial, state, schools and local government workers. In January, Denver Public Schools will be added as a fifth division.

Here are what two of the funds look like right now.

At a 7% rate of return the State Division will be completely out of money by 2026. At an 8.5% rate of return the money would run out by 2029.

At a 7% rate of return the School Division will be completely out of money by 2029. At an 8.5% rate of return the money would run out by 2033.

The above charts reflect the current situation.

Based on the proposals and an 8% return here are the new projections.

Even with those proposals, the plans are woefully underfunded all the way until 2036 on the School Division and as far as the eye can see on the State Division.

Unfortunately the new projections do not show what happens at 7% or 6% but it for sure will not look pretty.

Taxpayers of course are on the hook for any decencies.

Unfortunately, an expected rate of return of 8% is not realistic at all, especially for the next decade. Unemployment is going to remain high, the odds of another stock market crash area high, the odds of a double dip recession are high, and boomer demographics ensure that spending and thus tax revenue as well as stock market earnings are not going to return to 2006 levels of growth.

The stock market right now is one of the most overvalued in history. It only looks good in comparison to the 2007 S&P valuation or the 2000 Nasdaq valuation. The S&P has been flat for a decade and it is quite possible if not likely it will be flat at best for another 5-10 years.

Here is another way of looking at it. Ten year treasuries are yielding under 4%. It will take a lot of excess risk to remotely come close to 8% returns.

My Proposal

1) Kill defined benefit plans for all new employees
2) If plan assumptions are not met, the plan participants, not taxpayers take the hit
3) Taxpayers add 0% additional funding. Enough is enough.

Point number two will allow whatever ridiculous assumptions PERA wants to make. However, I would recommend PERA assume something along the lines of 5-6% expected rates of return than 8%.

The "2/2/2" proposal is not remotely a down payment on what needs to happen. This plan should not be approved. It is a joke that addresses no long-term issues.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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