Colorado’s pension Band-Aid is a cautionary tale

On the surface, the public pension bill passed by Colorado’s General Assembly on May 9, the closing day of the 2018 legislative session, looks impressive. Dig a little deeper, and it becomes a cautionary tale on the difficulty of imposing even modest change on public pensions.

In November 2016, Colorado’s Public Employees Retirement Association (PERA) revised its expected rate of return, updated its mortality tables, and made a very unpleasant discovery: near 2040, the plan’s two largest funds, the State and School Funds, would fall below 20 percent funding.

{mosads}After long negotiations among PERA, the governor, state legislators, stakeholders, and reform-minded groups, the bipartisan Senate Bill 18-200 passed through each house, and then out of conference committee. It increases employer and employee contributions, and limits annual cost of living adjustments (COLAs) to 1.5 percent. If actual funding falls below the 30-year closed amortization schedule, contributions could ratchet up, and the COLA could ratchet down. For the first time, PERA now has its own line item in the state budget’s General Fund, a constant $225 million.

It raises the retirement age to 64 for new employees, and extends to them the defined contribution (DC) option, except for teachers, who remain locked into a defined benefit (DB) plan. It creates a PERA oversight subcommittee with independent experts.

Initial proposals to overhaul the PERA board and prevent it from lobbying, start a new plan for new employees with the defined contribution as the default option, and fund the defined benefit plan using a more accurate, market-based discount rate were dropped.

The net result twists the right knobs and turns the right dials, but retains the flawed defined benefit structure and, for the first time, includes a direct taxpayer bailout of that plan.

The teachers unions hit the roof, hammering Democrats to oppose the final version. House Speaker Crisanta Duran pulled her name off as a co-sponsor and voted against the final bill. It passed, with 23 House Democrats and 11 Senate Democrats voting against it.

What lessons can other states learn from Colorado’s experience? Four come immediately to mind.

First, it’s incredibly hard to get anything done on pensions. Give credit to the legislators who led this effort and didn’t give up at the last minute. Fiscal tweaks are easier than structural changes, because the latter requires rethinking the whole approach to retirement, while the former allows politicians to claim victory, and satisfies those who don’t really want a solution.

Second, the teachers unions are implacable and disingenuous. In the bill’s final form, unions kept their membership locked in the defined benefit jail, eliminated any new plan for new members, and set a retirement age for new members only that’s still three years below Social Security.

Yet still they opposed it, getting nearly two-thirds of Democrats in both houses to vote against.

At that moment, in the eleventh hour, with the union already bailing and serious Democrats staying on board, giving teachers a defined contribution option might have traded off a few Democrat votes for a few Republican votes, but the bill likely would still have passed.

Third, beware new political risks from last-minute changes. Introducing a PERA line item in the state budget’s general fund was sold as an efficient way to get money into the system by detaching contributions from salary. But as a fixed amount, its effectiveness erodes over time. There will be pressure to increase this taxpayer bailout in normal times, or reduce it in the next cyclical recession, hurting PERA’s funding levels.

Last, don’t negotiate with yourself. The bill sponsors began with a moderate plan calculated to be politically viable, based on experience in other states. Many Democrats weren’t convinced that PERA even needed to be addressed this session, so beginning with something less radical than moving all new members into a defined contribution plan was a reasonable show of good faith about reaching an agreement, but extracted no return concessions.

A bolder opening move wouldn’t have jeopardized initial conversations with serious legislators, and might well have preserved more of the bill’s reform provisions.

It may also make it easier to pass a tax increase allegedly for education. A proposed billion-dollar tax increase in 2013 failed largely because it helped focus attention on the pension fund. Having a separate line item might make it easier to distance a future tax increase from PERA.

None of this is to say the reform effort is all bad. It buys PERA some time, at least until the next cyclical recession. It provides a mechanism for more focused legislative oversight, in a forum that will force PERA to publicly answer direct questions from experienced professionals. And it nudges the plan slightly towards a universally available defined contribution choice.

Still, it all but abandoned structural reform in a fruitless pursuit of political consensus. With little appetite to revisit this issue in the near future, such substantive change seems as far away as ever.

Joshua Sharf (@JoshuaSharf) is a fiscal policy analyst at the Independence Institute (@i2idotorg), a free market think tank in Denver.