The state budget and school finance aren’t going to be the only big-money headaches facing legislators and education interests in 2010.

StockPERALogo102109The recently announced “rescue” proposal for the 438,000-member Public Employees’ Retirement Association carries a big price tag for school districts and colleges, and could affect the retirement incomes and retirement plans for thousands of past and current school and college employees. The plan also could leave some school districts with little flexibility for teacher raises.

Even though various interest groups in the discussion say they agree there has to be some shared sacrifice to bolster the financially battered pension system, questions and qualms already are surfacing over the plan approved by the PERA board on Oct. 16.

PERA was under a legislative deadline to present a reform plan by Nov. 1. The whole issue will be in squarely the lap of lawmakers in 2010, because only the legislature can change PERA benefits or contributions.

PERA’s challenge – and the proposed solution

Its investments hollowed out by the recession, PERA’s net assets available for benefits dropped from $43.1 billion at the end of 2007 to $30.8 billion at the end of 2008, a loss of more than 25 percent. The system pays about $3.1 billion in benefits a year and receives about $1.7 billion in contributions from covered employees and their employers. PERA overall is about 70 percent funded.

“Projections show that the Colorado Public Employees’ Retirement Association (PERA) cannot invest its way out of the situation created by the worst economic downturn since the 1930s,” according to an agency statement last week.

Source: Public Employees' Retirement Association
Source: Public Employees' Retirement Association

Agency leaders have tried to craft a solution that would share responsibility (translation – “pain”) between members, employers and retirees; provide equity among different age groups; be sustainable long term; preserve PERA as a defined-benefits plan; maintain the same benefits across all agency divisions, and minimize impact on short-term member behavior.

If you think school finance is the most complicated issue in state government, you haven’t delved into public employee pensions. Below is a simplified summary of what the rescue plan, dubbed “2+2+2 Plus” by PERA, would do.

• The good news for employees is that their direct contribution of 8 percent of salary would remain the same. It’s been at 8 percent since 1982. (There is bad news in that employers are being asked to increase their contributions from funds that might otherwise go to employee salaries – that’s explained below.)

• The bad news for retirees is that annual cost-of-living adjustments (COLAs) would be capped at 2 percent until the system recovers its financial health. No COLAs would be paid until one year after retirement.

• The bad news for employers (school districts, in this case) is more complicated.

The overall employer contribution for PERA’s school division fluctuated between 12 percent of payroll and 12.5 percent from 1976 to 2008. But, under a previous legislative rescue plan, that rose to 12.95 percent this year, will be 13.85 percent next year and will go to 16.55 percent at the beginning of 2013.

The new rescue plan would extend increases to 2017, topping out at 20.55 percent. (The employer contribution has three parts, a base and two “equalization” contributions. One of those, known in PERA-speak as the SAED, is supposed to come from employer funds that otherwise would have gone to wage increases. The SAED is proposed to total 5 percent of payroll in 2017.)

• Under the plan, the COLA freeze and the increased employer contributions could be reduced once PERA reaches 110 percent funding but would be reimposed if funding dropped below 90 percent.

Those aren’t the only elements of the rescue plan. Other important features include:

  • Calculating an employee’s highest average salary on five years of pay, not the three currently used. This would have the effect of reducing pension payouts. (If approved, this would apply to non-vested employees – those with less than five years of service.)
  • Changing the rules for when an employee can retire with full benefits. The proposed rule for employees not yet vested would require 30 years of service and age 60 for full retirement, a so-called “rule of 90.” (People hired since 2007 are covered by a rule of 85, with a minimum retirement age of 55. Workers hired before 2007 are under a rule of 80 with a minimum age of 50.)
  • Tightening the rules for early retirement.
  • Eliminating the 50 percent match paid to non-vested (fewer than five years of service) employees who leave service and request a withdrawal of their PERA contributions.
  • Requiring contributions from retirees who return to work in a PERA covered job. (Such post-retirement work currently is limited to 110 days a year without affecting pension benefits. But, this change would have the effect of reducing a person’s pay from a post-retirement job.)

The proposed rescue plan would not apply to the new division for Denver Public Schools employees, who join PERA next Jan. 1.)

“We all want to save PERA, but …”

As Dan Daly, chief lobbyist for the Colorado Education Association notes, “Everybody understands we’ve got to do something to fix the system.”

But, the CEA and other groups already have concerns about the PERA plan.

“We would support the ‘2+2+2’ plan, but it’s the ‘Plus” that PERA has proposed that creates problems,” Daly said.

He’s concerned about the shift from three to five-year salary averaging and fears that some provisions proposed could create incentives for people to retire early. “You could sort of get a run-on-the-bank kind of thing.”

The CEA and other groups also support the idea of setting triggers for ending or easing the COLA freeze and employer contributions but aren’t sure 90 percent and 110 percent are the correct levels.

Daly noted that if PERA ever achieves a surplus, its funds could become a target for cash-hungry legislators, as has happened with Pinnacol Assurance, the state-affiliated workers’ compensation insurer.

Ken DeLay, executive director of the Colorado Association of School Boards, said, “Assuming they (PERA) have done their homework, the concept they’ve come up with seems pretty sound.”

But, “We are worried about the employer contributions … that’s a concern for our members,” DeLay said. “I think we’re going to want to see the whole bill.”

Last year employers paid $430 million into the school division trust fund.

DeLay said school boards also are worried about possible “incentives for mass early retirements. … We don’t want a rush for the door.”

He also alluded to the fact that increased PERA contributions by districts could squeeze the amount of money available for salary increases. Higher contributions would “continue to exacerbate those kinds of conversations” between school boards and teacher unions.

Bruce Caughey, deputy executive director of the Colorado Association of School Executives, wrote this to his members in a recent newsletter: “While the coalition applauds all of the long hours and effort PERA has put into this process and agrees with the guiding principles that were used, we are concerned that the [PERA] board has gone beyond what it may need to accomplish.”

The coalition Caughey referred to is the Colorado Coalition for Retirement Security, a group of nine employee-oriented groups that is monitoring the issue. Education-related members include the American Federation of Teachers/Colorado, CASE and CASB.

A coalition statement said, “We are concerned that the [PERA] board is forgetting the additional framework we find ourselves working in and that is a down economy – we are facing budget cuts at the city and state and school level, employees are being furloughed and health care costs are sky rocketing.”

Let the games begin

Given the amounts of money and numbers of people involved, the PERA reform plan is shaping up as a major fight in the 2010 legislature.

Sam Mamet, executive director of the Colorado Municipal League, predicts a “knock down, drag out” battle that “will make for some interesting bedfellows.” (Local governments have a smaller stake in the battle, since some larger cities and many counties aren’t in PERA. Still, local governments will be watching closely, Mamet said, noting that the recession has hit cities and county revenues hard because of their reliance on sales taxes. School districts get their money from state aid and local property taxes.)

PERA is “obviously gearing up for some heavy-duty lobbying,” one observer noted. The agency has hired two lobbyists from the firm Colorado Communique, Collon Kennedy and Steve Adams, former president of the Colorado AFL-CIO.

The pension system also has hired Mary Alice Mandarich, a well-connected Democratic lobbyist who formerly was chief of staff for Senate Democrats and who worked on campaigns for former Senate President Joan Fitz-Gerald, former Gov. Roy Romer and gubernatorial candidate Gail Schoettler.

Coalition members have their own lobbyists, and the well-staffed higher education lobby is sure to be involved in this issue as well.

While many interests will want legislators to tinker with parts of the plan, PERA is expected to argue that it’s a seamless whole and shouldn’t be cut up.

All that lobbying power will be focused on 100 legislators who will also be wrestling with massive budget cuts and, in many cases, calculating their re-election chances in November 2010.

PERA at a glance

The plan has four divisions with separate trust funds – school, state (including some higher ed employees), local government and judicial. DPS employees will be in a separate, fifth division. PERA-covered employees aren’t eligible for Social Security.

Overall, the system has 190,684 active members, 81,248 benefit recipients and 143,619 inactive members (people with eligibility but no longer working in PERA-covered jobs.)

While often thought of as the state pension system, PERA membership is dominated by employees of schools and colleges. Of PERA’s 190,684 active members, 118,547 are in the school division, which includes all districts in the state except Denver. Some 44,806 people receive benefits from the school division.

In 2008 employers paid more than $430 million into the school division trust fund while employees contributed about $304 million. There were about $1.4 billion in benefit payments. Because of the hit taken in PERA’s investments, in 2008 the net assets of the school division trust fund dropped from about $23 billion at the beginning of the year to about $16 billion at year’s end.

The state division includes employees of 28 colleges, universities and other education agencies, with 11,679 members (about 20 percent) accounted for just by the University of Colorado, Colorado State, Metro State and Front Range Community College. Some higher ed employees have access to other retirement plans.

For the overall PERA system, the average age at retirement was 58 with about 23 years of service, the average age of current retirees is 69 and the average monthly benefit is $2,772.

(Statistical information in this article was taken from PERA documents.)

Do your homework

(Note: You’ll need the latest version of Adobe Reader to open PDF documents from the PERA website.)