Critics question PERA’s economic impact

Colorado’s Public Employees’ Retirement Association released a study Monday saying the $3.5 billion in annual PERA retirement distributions impact the state economy to the tune of a whopping $5.2 billion.

This is due to the “multiplier effect” — the spending of retirees’ dollars in their local economy, according to the study.

Critics say the study is flawed because it presents a one-sided financial picture and doesn’t accurately portray the state’s rising public pension costs, which could put at risk both funding for public services and workers’ retirement security.

Boulder-based Pacey Economics was commissioned by PERA to do the study — a follow-up to its 2009 and 2011 assessments.

The report estimates for every dollar paid to retirees, about $1.70 is put back into the economy. And, it says, 29,350 jobs are sustained statewide due to the more than 90,000 retirees who spend the more than $3.5 billion paid annually in PERA distributions.

For example, when a retiree buys groceries, that provides wages for a store employee to purchase goods, and so on, said Pacey managing director Mark McNulty.

“When you have dollars flowing into a community due to PERA or due to new industry starting up, the economic impact is larger than the dollars flowing in,” McNulty said.

The report also says that regular payments to retirees created stability during the Great Recession because those dollars were used to support local economies.

But this “multiplier effect” doesn’t take into account the costs of the plan itself, which, when included, tell a very different story, said Andrew Biggs, resident scholar with nonprofit think tank American Enterprise Institute in Washington, D.C.

“Sure, every dollar worth of benefits can be spent and therefore stimulates the economy, but every dollar we have to pay to finance those benefits is a dollar we can’t spend to stimulate the economy,” he said. ” … If those contributions could have been invested somewhere else, that investment would have produced earnings.”

McNulty said that Pacey did not consider initial employee contributions in its calculations but that it’s not an equal comparison with growth after investment.

“It is true that those dollars were contributed into PERA from tax dollars, from employees payroll and from their salaries. So there is, of course, an income lowering initially when they first take dollars out,” he said. “But they are ultimately invested in PERA and grow over time with interest and then they’re spent.”

Budget deficit

PERA is funded at about 64 percent and is facing a $26 billion funding gap — about the same as Gov. John Hickenlooper’s proposed budget for the entire state.

A measure that would allow the state to issue risky pension-obligation bonds would have taken funding levels closer to 70 percent or 80 percent, PERA says. That measure died on the Senate floor in May. Legislation passed in 2010 puts PERA on track to close the gap within 30 years, said agency spokeswoman Leslie Oliver.

“It takes time, but it’s on a trajectory to be fully funded, and it’s sustainable,” she said. “We’ve got the income stream coming in now in terms of contributions that allows us to pay benefits that we owe now and into the future.”

Cost uncertainty

However, that might not be enough, said Josh McGee, vice president with the Laura and John Arnold Foundation in Houston, which on Monday issued an independent report on the state’s rising public pension costs.

McGee and his co-author Michelle Welch take both PERA and the state to task for the funding gap. They say in their report that 81 percent of PERA’s debt increase “is due to the state’s failure to make sufficient pension payments on a regular basis” and assert this threatens retirement security and funding for public services.

The Arnold report also says the 2010 legislation “failed to provide relief in the near-term” and cautions that PERA is vulnerable to downturns because of a risky investment strategy that includes “volatile assets such as equities, real estate, and alternatives.”

“It’s a disservice to the state of Colorado to simply say ‘everything is good’ and not have a conversation about future cost uncertainty and the impact of that cost uncertainty,” McGee said.

That conversation might be coming. As part of the 2010 legislation, PERA is required to issue a progress report on the reforms to the General Assembly before the end the year.

Additionally, the state commissioned the auditor’s office to determine how well the fund is doing. The first of two planned reports from the auditor’s office is expected to be released in July, Oliver said.

However, Biggs reiterated, if those reports don’t look at all of the pertinent data, they are basically worthless.

“You have to count both sides of the equation,” he said.

Laura Keeney: 303-954-1337, lkeeney@denverpost.com or twitter.com/LauraKeeney