Nov 10, 2009

A Looming Cloud Over Colorado’s Retirement

Colorado PERA and a long road to recovery.

Once upon a time, Americans worked diligently for forty plus years in a job and in exchange, companies counted on their workers and rewarded them with the promise of a good retirement.
The current working generation has hardly heard the word pension or the term, “defined benefit plan.” Although not extinct, they are becoming a rare breed. Across the U.S., state pension plans are struggling and the State of Colorado is no exception. 

Many government employees still rely on a pension as part of their retirement. Public employees in the State of Colorado are counting on the Public Employees Retirement Association, also known as Colorado PERA. PERA is the largest public pension plan in the state, and is a large piece of the retirement pie for over 400,000 individuals in the state. Folks counting on PERA come from many walks of life; from school teachers, to fire fighters, judges, law enforcement officers and many
other public employees. 

Colorado PERA is the 23rd largest public pension plan in the United States and the fund saw a drop in assets of 29% during the 2008 market crash. As a defined benefit plan, PERA promises to pay a certain amount of money to retirees in a lump sum or in the form of a monthly payment during retirement. The plan also provides healthcare, long-term care and other benefits. After the staggering loss in 2008, the fund now has $29.5 billion in assets and roughly $27 billion in unfunded liabilities. This means that the promises that were made to Colorado Employees to provide retirement benefits are a distant reality. 

The entities that provide PERA for employees pay a fixed percentage into PERA on behalf of employees, while a slightly smaller percentage, deducted from the employee’s pay, funds the rest of the plan. This funding is in lieu of Social Security Payments. The folks relying on PERA do not put into the Social Security system and thus their Social Security benefit ends up being very little, or nothing at all, for life-long public employees. 

Last year, the Social Security Trust saw little effect from the negative economy, while the PERA Trust saw sizable losses. Without a fix, this could drastically affect many employees who fully rely on the Public Employees Retirement. 

So what can be done? On a state level, a number of Band-Aids are being slapped on the PERA system but we have yet to see a real fix. Legislators are forced to manage the situation without stepping on toes. On one end of the scale are the public employees who were promised a sustainable retirement and on the other end are tax payers who refuse to be handed the burden. Finding a real solution is no easy task but circumstances have forced discussion on the topic.  

Former Governor Bill Owens suggests that we swap the ragged old Defined Benefit system, which promises an ongoing, consistent benefit in retirement for a Defined Contribution Plan model. States such as Alaska, Michigan, and Oregon have adopted this model which takes the obligation away from the employer and places it on the employee. This would create a ‘fend for yourself’ mentality and would force Coloradans to manage their retirement more efficiently. 

In the past, we have seen governments take on debt to fund retirement benefits. We even see this in the private sector as automakers work with unions to manage staggering pension liabilities. It seems in some cases that automakers are no longer in the auto industry, but are in business solely to fund the retirement of employees. This creates a difficult situation on a state level when the legislators choose to rob Peter, the tax-payer to pay Paul, the retired public employees. Citizens of the state who do not benefit from PERA may be a bit irritated when their tax dollars are funding their neighbors retirement, civil servants or not. 

Another question arises when we ask who is on the hook for the whole thing. It is possible that PERA will try to declare an emergency and pass the whole thing on to the state. The legislators will have quite a task on their hands with the balancing act. If they force the problem back on PERA, they are turning their back on public employees, while if they take it on, taxpayers may deal with the burden. 

More than likely we will see quite a show as the state edges out on a tightrope, trying to create a balance; the audience is sure to cringe at the sight. PERA will be forced to cut benefits and go back on promises that should not have been made, struggling to come up with a way to pay the difference. More than likely, mandatory contribution rates from employers and employees will shoot upward to help bridge the gap. 

If we brush the problem under the rug long enough, will it disappear? Within the pension system there is a smoothing process that protects the fund from being destroyed by one year’s staggering losses. As the economy looks up, the $27 billion in unfunded liabilities, a chasm that today seems too deep to span, may be reduced by market forces. Even a strong recovery would not fix the problem completely, but may ease the strain on PERA and keep legislators from eying your pocketbook.

According to a Colorado State Review released by Standard & Poor’s on July 15, 2009 Colorado has “a broad and diverse state economy that is dealing with a national recession, but continues to exhibit better-than-average income, employment, and population trends.” The unfunded PERA liabilities were mentioned as a concern in the report. 

As for the individuals counting on PERA for their retirement, now is a great time to look ahead and begin planning for a future that is secure. Make sure you understand your PERA benefits, or find someone that can help you. Pay down debt, maximize savings, and understand how your assets, including Colorado PERA will affect your retirement.
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