Colorado’s state employee pension fund traveled a rollicking market in 2018 to a low point in December, finishing the year with a negative 3.5 percent return on its investments woefully short of the 7.25 percent target.
But, believe it or not, there is good news to be found in the depressing annual report the pension released last month: Senate Bill 18-200 is working as intended to soften the blow that $1.8 billion loss would strike to the Public Employee Retirement Association’s actuarial soundness.
“It is working as intended, but it does have some serious ramifications for our membership,” said Ron Baker, executive director of PERA.
The unfunded liability of the pension — the gap between what folks at PERA estimate they’ll owe retirees in the future and the money PERA will have to pay them with — did still grow. It grew despite reforms put in place in 2018 that pledged $225 million payment of taxpayer money every year to the funds and increased employee and employer contributions.
However, the pension funds are still all on track to be fully funded in at least 34 years, thanks to automatic adjustment provisions in SB 200.
In the past when the pension fund suffered a bad year, there was nothing that could be done to immediately respond to the changing financial landscape.
The 2018 bill changed all that, for the better. And not only is it working, but it strikes a good balance, responding to a down year without exacting crushing payments to make up for short-term losses that, in this case, PERA has likely already rebounded from given the market improvements since December 2018. For the record, PERA performed slightly better than its internal benchmarks but worse than the BNY Mellon metric for 97 public pension funds that recorded a return of negative 3 percent.
We had our qualms with Senate Bill 18-200. The Denver Post editorial board advocated for taxpayers to be held harmless (we thought that quarter of a billion dollars would be better spent on education or roads) and instead reduce the annual cost of living increase to existing retirees to zero for many years.
Lawmakers, a truly bipartisan combination of Democrats and Republicans, disagreed.
But we must give credit where credit is due. Lawmakers did include a provision in the bill that required PERA to respond to negative market conditions by increasing employee and employer contributions and reducing the annual cost of living increase for retirees. So, as of July 1, 2020, employees in the state, school and judicial divisions will start paying 10 percent into their retirement pensions, which is 0.5 percent increase over what workers would pay in a good year. Employers in the school division will be paying 0.5 percent more too, bringing their total contribution to 20.9 percent of each employee’s salary. Retirees will see a 0.25 percent cut in their annual cost of living increases, which will bring it to 1.25 percent instead of 1.5 percent.
We know that’s not easy on current employees who already are disproportionately paying for the retirements of their predecessors, and we know retirees were expecting much richer cost of living increases based on what they were promised. Let’s all remember, however, that the end goal is to create a financially sustainable pension that can be here for future employees and retirees. With any luck, we can get there without taxpayers having to spend more on the public employee pension than $225 million a year.
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