PERA, or the Public Employees’ Retirement Association, provides retirement benefits to over half a million Coloradans. Many PERA retirees are teachers, but the program also provides retirement benefits for State Troopers, public works employees, and corrections officers. PERA has been a hot topic this legislative session, largely because of the $32 billion unfunded liability the program currently finds itself under. Legislators on both sides of the aisle agree that changes need to be made to PERA to ensure its future viability.
If the unfunded liability continues to grow, Colorado’s credit rating may be downgraded. A downgraded credit rating makes it significantly more expensive for states to borrow money to complete projects. Additionally, an unfunded liability is an indicator that the program won’t be able to meet the promises it has made to retirees in the future. In other words, an unfunded liability this large is bad for retirees, as well as Coloradans in general.
Senate Bill 200 is the 2018 General Assembly’s proposed solution to the PERA puzzle. The bill’s 4 primary sponsors represent bipartisan and bicameral diversity with 2 Republicans and 2 Democrats from both the House and Senate.
It’s important here to note that any PERA-related bill passed in 2018 is going to require compromise since the House is controlled by the Democrats and the Senate by Republicans. Since SB 200 originated in the Republican-controlled Senate, the original draft of the bill was tilted toward the Republican ideology. Among other provisions, the bill originally expanded the “defined contribution” option for retirees which is similar to a traditional 401(k). Retirees tend to oppose the expansion of the defined contribution, and instead prefer the “defined benefit” model which shifts the risk inherent in any retirement plan away from employees. SB 200 was amended in the House Finance Committee to remove the expansion of the defined contribution. However, since the goal of SB 200 is to lower the unfunded liability, changes needed to be made elsewhere.
The quickest way to ease the pressure of PERA funding is addressing the cost-of-living adjustment, or COLA. The COLA is an increase in benefits designed to counter the effects of inflation. Essentially, the COLA is a raise in retirement aimed at keeping up with the ever-diminishing buying power of a dollar. The discussion of the COLA dovetails nicely with one of the main reasons why PERA’s future has been questioned in recent years: people are living longer. Each year that retirees live longer than previously predicted they’re not only collecting the same benefit as the year before, but the year before plus 2.0% (the current COLA). This, coupled with the fact that PERA was forced to lower their expectations for investment earnings, means that less money is coming in and more money is going out.
PERA’s future needs some tweaks to respond to changing realities and to ensure it’s there for current and future retirees. One bundle of changes that passed House Finance is lowering the COLA to 1.25%, implementing a 2-year freeze out from the COLA for current retirees, and requiring new retirees to wait 3 years to collect a COLA. House Finance also approved an annual payment of $225 million from the State to PERA that will adjust each year to 3% of payroll to make up for NOT increasing employee or employer contributions.
SB 200 is currently waiting to be heard on second reading of the floor of the House. Track its progress here.