06.15.2015 Public Finance
Report: PERA’s $26 Billion Shortfall Threatens Public Workers, Taxpayers
A report issued today shows Colorado’s rising public pension costs are threatening workers’ retirement security and funding for essential public services.
The report, “Risky Retirement: Colorado’s Uncertain Future and Opportunities for Reform,” was published by the Laura and John Arnold Foundation. The Foundation’s retirement security experts work with cities and states to help them assess the problems with their pension systems and analyze reforms that would protect workers and taxpayers.
According to the report, the Colorado Public Employees’ Retirement Association (PERA) is only 61 percent funded, and the state owes public workers at least $25.8 billion in retirement benefits they have already earned.
In light of these worsening problems, Josh McGee and Michelle Welch, the authors of the report, advise that “the state should take immediate steps to preserve services and workers’ retirement benefits by adopting comprehensive reforms that are affordable, sustainable, and fair.”
The report shows that PERA’s growing problems are mostly the result of irresponsible decisions by the state, rather than economic events. For example, when the state received surplus investment returns in the 1990s, it raised benefits beyond what it had promised instead of saving the money to protect against an economic downturn. This left the fund unprepared for the dot-com bust of the early 2000s and put it in a precarious position well before the financial crisis of 2008.
In addition to explaining how the state’s poor funding policies exacerbated the negative impacts of the Great Recession, the report highlights other key findings:
- Employers have increased contributions but are still failing to cover the plan’s full cost, leading to increasing pension debt over the past decade. For example, even though contributions to PERA’s School Division (which covers teachers and other Colorado public school employees) have more than doubled since 2005, its debt has grown by more than 60 percent.
- Eighty-one percent of the increase in the state’s pension debt is due to the state’s failure to make sufficient pension payments on a regular basis.
- Colorado is relying on a risky investment strategy. Two-thirds of its investments are allocated to volatile assets such as equities, real estate, and alternatives.
- The state’s current funding plan will cause PERA to remain in a precarious financial position for decades.
These findings are in sharp contrast to PERA Executive Director Greg Smith’s recent comments to The Denver Post. He was quoted in a May 5 article as saying, “We still have all the money we need and a steady stream of income to pay all the benefits that we owe everyday going forward.” That is not the case, and McGee and Welch explain that “Colorado should take action to avoid dire financial consequences.”
In the report, they outline a series of reforms that would help to improve PERA’s financial stability. Measures include developing a credible plan to pay down the pension debt and adopting a funding policy that will protect state in the event of an economic downturn.
About the Colorado Pension Project
The Colorado Pension Project is a group of Coloradans working to protect and strengthen retirement security for our public servants. For more information, please visit ColoradoPensionProject.org.