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Colorado Enacts Pension Reform

June 13, 2018

The Colorado Legislature and Gov. John Hickenlooper enacted some reforms to the state’s public pension system.

The Colorado Legislature and Gov. John Hickenlooper enacted some reforms to the state’s public pension system.

The new law will allow local government employees to join the state’s defined-contribution (DC) pension program, previously available only to state employees.

DC plans, similar to 401(k) pension plans enjoyed by workers in the private sector, provide for more predictable worker costs and enable employees to take their benefits with them when they move to other jobs in the public or private sector.

The new law also gradually increases the amount of money public-sector employees must contribute to the Colorado Public Employees' Retirement Association (PERA), from 8 percent to 11 percent. The law will phase in over the next two years.

Near-Doubling of Liabilities

Sheila Weinberg, founder and chief executive officer of Truth in Accounting and a policy advisor for The Heartland Institute, which publishes Budget & Tax News, says the state was quickly sinking under the weight of its pension system’s unfunded liabilities.

“Going from $28 billion in 2015 to $51 billion in 2016, Colorado couldn’t put this off any longer,” Weinberg said. “One of the reasons for this dramatic increase is actuaries started to use updated mortality schedules. In other words, they realized people were living longer.”

Fuzzy Math

Colorado state Rep. Lang Sias (R-Arvada) says false assumptions contributed to the breakdown of the system.

“Actuarial assumptions being very incorrect, along with over-assumptions on the rate of return, caused exponential increases in debt over time,” Sias said. “On top of that, PERA used to have a program where existing members were able to purchase additional years at discounted rates, causing billions of dollars in impact.”

Weinberg says the pension shortfalls would have imposed a big, unexpected cost on the public.

“What this means to taxpayers is that the actuaries expected the plan investments to earn less, so the taxpayers would have had to come up with extra money to fund benefits,” Weinberg said.

Overpromising and Underfunding

Colorado state Sen. Jack Tate (R-Centennial), sponsor of the reform legislation, Senate Bill 18, says PERA’s problems were a long time in the making.

“Fifteen years ago, a pattern started in Colorado, where more benefits were promised with a lack of money to back it up,” Tate said. “Other legislation since then has increased funding without redesigning programs, leaving us where we are today. We needed to structurally change our pension programs to essentially stop digging the hole while we’re trying to fill it.”

‘Long-Term Consequences’

Sias says decisive action was necessary to save the state’s pension system.

“The unfunded liability of Colorado is currently, at minimum, $32 billion dollars, which exceeds the entire state’s budget,” Sias said. “We currently have 550 to 600 participants in PERA. Not doing anything this year would have left PERA somewhere around 20 percent funded, as well as [caused] potential credit downgrades for the state. There really were long-term consequences for these decisions.”
Author
Samantha Fillmore writes from Chicago, Illinois.
samantha.heartland@gmail.com