State pension bailout only postpones the reckoning

(Centennial Fellow) Rescuing the Public Employees Retirement Association (PERA) is nothing new for state lawmakers. Twice in the last decade, legislators have thrown PERA a lifeline, forcing the state, school districts, local governments and finally even workers to chip in hundreds of millions of dollars to keep the plan afloat.

As recently as four years ago, PERA and many employee groups refused to acknowledge the plan’s peril, despite assets falling from 105 percent of the amount needed to pay benefits to just 70 percent from 2000 to 2004.

In 2008, PERA’s funding ratio tumbled to below 52 cents for every dollar of promised benefits – a $30 billion deficit. After almost a year of cautioning lawmakers against acting hastily, even PERA’s directors finally asked for help – a third rescue plan in just seven years.

PERA had little choice. Its $30 billion unfunded liability is enormous. For comparison, state government is expected to collect about $27 billion in taxes and “fees” over the next three years. Shutting down state government for three years in order to bail out PERA isn’t exactly a viable option.

PERA’s fix asks for more money from employers (taxpayers) and asks current employees to forego up to 5 percent of future wage increases.

More significantly, PERA abandoned its long-held legal argument that benefits once promised to its members can never be scaled back, no matter how unaffordable they become. PERA proposes an immediate reduction of cost-of-living adjustments from the current 3.5 percent per year to no more than 2 percent.

The current plan, Senate Bill 1, is criticized from the right for not doing enough to control the costs of PERA’s generous benefit structure and from the left because – at long last – it requires PERA beneficiaries to shoulder a significant portion of the bailout’s cost.

However, the cost of PERA will soon become too large to ignore, even for those hoping to retire on PERA. If this year’s “fix” is approved -the alternatives aren’t any easier – then the total cost of employing a PERA member will be more than 28 percent of that employee’s wages:

** 8 percent deducted directly from an employee’s paycheck,

** 15.15 percent contributed by employers, including a 5-percent bailout payment,

** And a 5-percent bailout payment from employees, which is, at least in theory, subtracted from wage increases.

Many scoff that these “foregone wage increases” are merely a ruse to create the appearance of employee contributions while still ultimately sticking it to taxpayers.

Those suspicions aren’t unfounded, but the reality for most school districts, local governments and, even, the state is that they have nowhere else to find the money, given that personnel costs account for a large share of their budgets.

When the current economic crunch subsides, union leaders will most certainly lobby elected officials to fund both the PERA bailout and standard wage increases. If lawmakers, city councilors or school board members give in, then voters should throw them out.

Either way, the cost of funding PERA will soon become a tremendous, inescapable burden for government and for employees covered by PERA.

A PERA member whose job pays $50,000 will have $4,000 deducted and credited to his or her PERA account. The employer will send PERA an additional $5,075 as its employer contribution and another $5,000 for the PERA bailout.

Whether or not some of that money comes from foregone wages, year after year the employer is paying PERA $5,000 that otherwise could have been spent elsewhere. And because personnel costs are the largest part of most government budgets, employees would have undoubtedly received a share of that money if it wasn’t bailing out PERA.

For current retirees, the bailout isn’t so bad; aside from the reduced COLA, they aren’t paying for it. But working PERA members will soon ask if the money their employer is sending to PERA will fix it once and for all – or if they’re trading reduced wages today for more promises that PERA can’t keep and more costly fixes in the future.


Centennial Fellow Mark Hillman was formerly Majority Leader of the Colorado Senate and Colorado State Treasurer.

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