http://www.npr.org/blogs/money/2012/05/24/153442859/bankrupt-in-paradise

Under US bankruptcy law, States and Commonwealths cannot file for bankruptcy. So this fund is arguing that it isn’t a governmental entity – that it merely works for the government. If this legal argument prevails, the new precedent will allow State pension funds across America to declare a “crisis,” file for bankruptcy, and pay their retirees pennies on the dollars they were originally promised.

Last week, I had this vague recollection of having read at one time that Greg Smith, Colorado PERA’s “Interim Executive Director,” or “Chief Operating Officer and General Counsel,” or simply “General Counsel” in recent years (I hope we’re not paying for all of these business cards) had weighed in on the constitutionality of various public pension benefit cuts.

Well, I came across this old article by David Milestead, former Finance Editor for the (now deceased) Rocky Mountain News.

http://m.rockymountainnews.com/news/2005/Aug/17/span-classdeeplinksredpart-four-the-pera-puzzle/

I was pleased to discover that I still have a few functional neurons.

Here are some excerpts from the Milstead article that are interesting:

“The PERA board, however, relying on a legal opinion by General Counsel Greg Smith, thinks benefits cannot be cut for any active PERA member. That means not just current retirees and workers who are eligible to retire but the brand-new employee who has put less than a year of contributions into the plan.”

“Smith argued, however, that there is no precedent for declaring an actuarial emergency unless a pension fund has a serious cash liquidity problem.”

“PERA’s board does not think it can make any negative change to benefits for any active member without getting sued.”

“At the time (2002), stock prices had taken a huge hit, and, with interest rates low, bond prices were at historic highs. PERA sold low and bought high in making the move.”

Are retirees bailing out PERA with SB 10-001?

“Bruce Mendelson, a 58-year-old retired analyst from the Department of Health, said, ‘They took 8 percent out of my check for 30 years. To me, that’s a contract with the state of Colorado. You serve them well, and this is what you get in return. I kept my part of the bargain, and I expect the state to keep their end of the bargain.’”

Over the years, Colorado PERA has published, and periodically updated a memorandum with a title along the lines of “History of Colorado PERA Legislation.”

The 2009 version of this memorandum is stored on the website of the Colorado General Assembly at this link:

http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251603807998&ssbinary=true

Right clicking on this PDF, and then clicking on “Document Properties” reveals that the memorandum was prepared by Mr. Karl Paulson of Colorado PERA on 11/30-2009.

This 2009 version of the memo describes the COLAs in HB 00-1458 and HB 93-1324 as follows:

HB 00-1458

“Established 3.5% compounded annual automatic COLA effective March 2001.” “Prior to this date, the annual COLA equaled the lower of the actual inflation rate or annual 3.5% cumulative increases since retirement.”

HB 93-1324

“Changed annual COLA to 3.5% maximum, compounded annually, based on the CPI, and folded the PERA CLSF into the PERA pension trust funds.”

If the “document properties” are correct, Karl Paulson of Colorado PERA described the HB 00-1458 COLA as “compounded annual automatic.”

This 2009 version of the memo lacks a “disclaimer.”

A new, improved, and reformatted version of the memo called the “History of PERA Benefit Changes” is currently available on Colorado PERA’s website at this link:

http://www.copera.org/pera/active/benefithistory.htm

The new, reformatted version of the memo “History of PERA Benefit Changes” eliminates all of the bill numbers, but retains the description of the HB 93-1324 COLA:

“Changed annual benefit increase to maximum of 3.5% compounded annually and folded Cost-of-Living Stabilization Fund into pension fund.”

In PERA’s new version of the memo the description of the COLA in HB 00-1458 has inexplicably vanished.

However, this new version, the “History of PERA Benefit Changes” memo has prudently included a nice disclaimer, whereas the older, 2009 version lacks a disclaimer.

This strikes me as odd. In the newly formatted version of the History of PERA Benefit Changes memo there was insufficient space to include the description of the HB 00-1458 COLA. However, there was sufficient space to include the nice, new disclaimer.

We all have to make editorial choices in our writing.

It surprises me that just an average Joe with a laptop can identify errors in a state lawyer’s legal brief. In their Answer Brief, the attorneys for the state agency Colorado PERA write:

“None of the fact sheets or newsletters make any statement as to frozen benefits for retirees or their spouses.”

The Answer Brief notes that the “fact sheets” have disclaimers, but apparently the “newsletters” do not.

Why does the Answer Brief make a distinction between these two PERA publications? I suppose we could dig around and find some fact sheets that lack disclaimers. Well, we can’t take the time right now to dig through ALL of the PERA fact sheets and newsletters that have been published over the years, there are hundreds, so let’s just sneak a peek at one of them. This one is a favorite, since it refers to the PERA retiree COLA as “automatic,” and “guaranteed.”

From PERA Legislative Update, February 2006:

http://www.copera.org/pdf/Legislation/2006/LegUp2-06.pdf

“Employees hired before January 1, 2007 remain in PERA Pioneer (and will receive) automatic increase of 3.5% per year after retirement.”

“PERA members hired January 1, 2007 or later, called PERA Centennial, no guaranteed annual increase after retirement.”

PERA attorneys, check it out . . . this PERA Legislative Update is an example of a bona fide PERA newsletter that identifies the PERA retiree COLA as “automatic” and “guaranteed,” and it’s “disclaimer free.”

So, Colorado PERA retirees have a “guaranteed,” “automatic,” “annual increase,” i.e., a “frozen” PERA COLA. In defined benefit pension administration a COLA that is not “frozen” is known as an “ad hoc” COLA.

I know that some of you are having difficulty grasping the distinction between “automatic” COLAs and “ad hoc” COLAs. (Apologies for the snark. I’m trying to suppress it, but I’m naturally snarky.) I recommend that you visit with any of the 200+ Colorado PERA staff members about this. Even the Front Desk people know the difference (seriously, they are incredibly knowledgeable for employees on the front line of public calls.)

Some of these PERA employees have worked in defined benefit pension administration for decades, and this distinction could not be plainer to them if it were tattooed on their foreheads.

Well, I want to do my part, so I’m providing a link to simple, succinct descriptions of “automatic,” i.e., fixed, guaranteed, contracted, COLAs, and “ad hoc,” i.e., discretionary COLAs.

Pay close attention to the following passage in the description “An automatic COLA means the retiree’s benefit increases automatically every year by a certain percentage. An ad hoc COLA is granted at the discretion of the plan sponsor.”

This description of “automatic” and “ad hoc” COLAs comes from a recent paper published by the National Institute on Retirement Security (NIRS) at this link:

http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

The NIRS Board of Directors has members who are prominent in public defined benefit pension administration in the U.S., including the President of the National Association of State Retirement Administrators, the Executive Director of the National Council on Teacher Retirement, the CEO of the California State Teachers’ Retirement System, and the Executive Director of the Council of Institutional Investors.

Here are the COLA descriptions:

COLAs

“Even if a pension benefit seems adequate at the time of retirement, its value can erode over time without adjustments for inflation. Because of the damaging effects of inflation, most public retirement systems provide COLAs. Especially for the 30% of state and local employees who are not covered by the Social Security—which provides CPI-indexed benefits to all covered Americans—having a COLA in the pension benefit is all the more important.”

“One key design feature of a COLA is whether it is automatic or ad hoc in nature. An automatic COLA means the retiree’s benefit increases automatically every year by a certain percentage. An ad hoc COLA is granted at the discretion of the plan sponsor, usually when the fund is in a well-funded position and investment gains have exceeded expectation. Another design element of the COLA is whether it is simple or compound. Under a simple COLA, the adjustment each year is calculated based on the employee’s original benefit. This is in contrast to a compounded COLA, which includes past benefit increases in each new COLA calculation.”

(I’ll try to ferret out a PERA “fact sheet” that lacks a “disclaimer” when I get some time.)

I came across this paper by Jim Alexander, PERA Retiree, that provides extensive quotations from the Penry Republican Legislative Preview (it includes lots of other interesting material). Here is a link to his paper:

http://www.leg.state.co.us/Clics/clics2010a/commsumm.nsf/b4a3962433b52fa787256e5f00670a71/84960fa73d53e222872576c600712e80/$FILE/10HseFin0210AttachG.pdf

The Penry “Can’t Miss This Window” comments:

“Senator Josh Penry, in a videotaped discussion with Representative Mike May, (videocenter.denverpost.com) said ‘we can’t, can’t miss this window.’ And, . . . we have an opportunity to pass something that Republicans have long advocated, a significant increase in retirement age, which the PERA Board embraced, reigning in the cost of living increases . . .”

“Penry went on to say, ‘I think it is important to pass something because if you lose actuarial necessity, as you know, it becomes extremely difficult to increase retirement age. You cannot change course and this year, when PERA’s investment numbers come out, their investment returns . . . numbers are going to be significant, like double, 15-16% investment return. So that could change the specter of actuarial necessity. We gotta’ do it this year or else these other structural changes won’t be possible.”

“Senator Penry goes on, ‘The courts have said if the fund itself is in peril, you can go back and change the contract which is why, if the market were to recover over two or three years, we didn’t pass a bill this year, we didn’t pass a bill next year, we couldn’t make those changes.”

Jim Alexander’s paper also quotes the October 2002, PERA Retiree Report:

“In 2002, PERA Executive Director, Meredith Williams was asked, because of a downturn in the stock market, if retirement benefits were safe. He replied, ‘First, the ‘loss’ is due to a decline in the stock market. PERA still owns the same stocks that it did before the decline and this ‘loss’ is a result of the value of the stock decreasing. It is not ‘lost’ since we haven’t sold the stocks, and because PERA is a long-term investor, we can ride out the bad times the market experiences. When the market recovers, the value of these stocks will also increase, offsetting this ‘loss.’”

“Mr. Williams was quoted in the same report as saying ‘Most pension funds are considered sound at 80 percent funding levels.’”

“Meredith Williams ‘said at the Senate Finance Committee hearing in January that PERA needed to be funded at 100 percent. When the PERA representatives were asked by a member of the committee why in view of the fact that PERA had only been funded at 100 percent for about seven of the past thirty years (my comment, actually two of the last forty years), it was necessary now. The answer was ‘it just makes things easier.’”

I am flabbergasted.

I have a document that includes this sentence “More likely, it is in some measure a contrived crisis in order to effect major changes in benefits during what Senator Penry calls “this window” of opportunity that may well be gone after the 2009 investment returns are released.” Penry’s “this window” quotation is from the “Republican Party Legislative Preveiw with Mike May and Josh Penry” which used to be available at this link:

http://videocenter.denverpost.com/services/player/bcpid911353001?bclid=1443717078

Did anyone save a copy of this video? If not, I’m sure it is available from the Denver Post. It would be interesting to read a transcript of the portions of the video relating to SB 10-001.

The Colorado General Assembly has enacted two pieces of legislation of particular relevance to the case, Justus v. State, House Bill 00-1458 and House Bill 93-1324.

In 2000, the Colorado General Assembly enacted House Bill 00-1458. This bill fixed the PERA pension COLA at 3.5 percent compounded annually.

Here’s an excerpted summary of the HB 00-1458 COLA provisions from the 2000 Colorado General Assembly Digest of Bills:

Summary of House Bill 00-1458, (see page 152 at this link):

http://www.state.co.us/gov_dir/leg_dir/olls/digest2000/00digest.pdf

“Effective March 1, 2001, makes the annual increase to PERA benefit recipients 3½% of the base benefit rather than the lesser of 3½% of the rate of inflation and redefines ‘base benefit’ for purposes of the annual increase.”

The attorneys at the Colorado General Assembly who wrote this Bill Digest summary of House Bill 00-1458 made no mention of the PERA COLA being “capped.” They state clearly that the bill “makes the annual increase to PERA benefit recipients 3½% of the base benefit.” HB 00-1458 improved the COLA benefit of PERA retirees, they were not harmed . . . their PERA pension benefits were not diminished. With the enactment of HB 00-1458, rather than the lesser of 3.5 percent or inflation, the retirees were granted a contracted, flat 3.5 percent COLA benefit.

If the intent of the bill sponsors or bill drafters of HB 00-1458 was to “cap” the COLA at 3.5 percent, the attorneys writing the Bill Digest would have written “capped” instead of writing “makes.”

If the intent of the bill sponsors or bill drafters was to describe an “ad hoc” PERA COLA, they could have used the identical language in HB 00-1458 that they used in Colorado statute six years earlier: “Cost of living increases in retirement benefits and survivor benefits shall be made only upon approval by the general assembly.”

Instead, the sponsors and drafters placed a fixed, automatic, compounded COLA of 3.5 percent in Colorado law.

I wonder, why would a bill drafter prior to 1994 place such an explicit and specific description of the General Assembly’s discretion to diminish the PERA COLA in Colorado law, and then six years later be satisfied to leave the General Assembly’s discretion to diminish the COLA benefit a murky implication? They would not.

Colorado legislators and bill drafters have written statutes specifying the number of pennies of reimbursement that a Colorado state employee will receive for driving her car one mile on state business.

The defendants in Justus v. State would have us believe that this legislature would leave the future allocation of hundreds of millions of taxpayer dollars ambiguous . . . that the drafting of Colorado law is wholly erratic.

Well, it isn’t necessary that we speculate about the intent of a bill sponsor or a bill drafter, we can listen to recordings of these people presenting their bills, or we can simply ask them about their intent!

If the Colorado PERA COLA was an “ad hoc” COLA in 2000, why did the drafter and sponsors of HB 00-1458 bother putting the figure “3.5 percent” into the Colorado statutes at all? If the “3.5 percent” COLA is meaningless, the drafter may as well have placed a “10 percent” or “20 percent” COLA in the law. Or simply stated: “The General Assembly shall provide PERA COLA benefit increases at its discretion.”

If the 3.5 percent COLA in HB 00-1458 was intended to draw a line at a “maximum” COLA, then why would the Legislature have bothered to amend the statute? There would have been no point in making the change. Under the existing statute the COLA would already have been “capped” at 3.5 percent.

Assume for the moment that the legislative intent with HB 00-1458 WAS to change the COLA from the lesser of 3.5 percent or inflation, to a COLA that was “capped” at 3.5 percent, but could drop to 0 at the discretion of the Legislature. How would that change be considered an improvement in the COLA? It would not be an improvement. Such a change would have removed the “inflation” floor from the COLA.

Perhaps, you might argue that the Legislature intended to diminish the value of the COLA by removing the “inflation” floor in HB 00-1458. If this is true, then why did Governor Owens and PERA state at the time that the intent of HB 00-1458 was to create incentives for early retirement?

PERA told us:

From the PERA document “2000 PERA legislation, updated May 4, 2000 (on the web).”

“The bill was initiated by the Owens’ administration and includes some features to make it more attractive for some long-term employees to leave state service and retire.”

Why would Colorado PERA consider a legislative change that diminishes the value of the contracted COLA a feature making it more attractive for long-term employees to retire?

One might argue that other provisions of the bill were “retirement incentives,” but not the COLA change. Then, I might ask what possible motive a bill sponsor has in including provisions in his bill that have conflicting objectives?

Simple elimination of the “inflation floor” on the COLA in HB 00-1458 would have created a disincentive to early retirement, contrary to the purposes of the bill.

It seems unlikely that PERA members in 2000 would jump at the chance to retire after having their COLA retirement benefit slashed from “3.5% or inflation” to “3.5% or maybe 0%.”

The fiscal note for HB 00-1458 reads as follows: “Effective March 1, 2001, the bill provides that the annual increase to PERA benefit recipients is to be 3½ percent of the base benefit rather than the lesser of 3½ percent or the rate of inflation.”

Why would the legislative employee who wrote this “fiscal note” state that the annual increase in the COLA “IS TO BE 3½ PERCENT OF THE BASE BENEFIT” if he really meant that the COLA was simply to be “capped” at 3½ percent?

As we have seen, in 2004, in another bill, the General Assembly “grandfathered” in past PERA members at the 3.5 percent COLA level enacted in HB 00-1458. Going forward into 2005 and beyond, new PERA members were granted a COLA of the lesser of 3 percent or CPI. If the Colorado PERA COLA of 3.5 percent enacted in HB 00-1458 was not an “automatic,” “guaranteed,” “fixed” COLA, then why would the Legislature have bothered with grandfathering in 2004? Answer: They would not have bothered. They would have simply reduced the COLA across the board as state legislatures do if their state has an “ad hoc” COLA.

In March of 1994, HB 93-1324 became law in Colorado. This bill replaced the former “ad hoc” PERA COLA statute in Colorado law with an “automatic” PERA COLA benefit. HB 93-1324 struck the following language from the PERA statutes “COLA increases shall be made only on approval of the General Assembly,” and consequently the discretion of the General Assembly to diminish the COLA benefit for vested PERA members was eliminated.

Here is the precise language that was REMOVED from the Colorado Revised Statutes by HB 93-1324:

“(2) Cost of living increases in retirement benefits and survivor benefits shall be made only upon approval by the general assembly. Such increases in benefits shall be calculated in accordance with the provisions of section 24-51-1006 and shall be paid from the cost of living stabilization fund.”

Here is the language that was ADDED to Colorado law by HB 93-1324:

(1) The CUMULATIVE increase applied to benefits paid shall be recalculated annually AS OF MARCH 1 and shall be the lesser of:

(a) The total percent derived by MULTIPLYING THREE AND ONE-HALF PERCENT, COMPOUNDED ANNUALLY, times the number of years such benefit has been effective after MARCH 1, 1993; and

(b) The percent increase in the consumer price index from 1992, OR the year prior to the YEAR IN WHICH THE BENEFIT BECOMES EFFECTIVE, WHICHEVER IS LATER, to the year preceding MARCH 1.

(My desire to “muse” is shrinking faster than a Colorado PERA contracted COLA.)

QUESTION FOR COLORADO PERA: DOES SUCH A BURDEN JUSTIFY THE BREACH OF FULLY-VESTED RETIREE PENSION CONTRACTS?

The report:

NASRA ISSUE BRIEF: STATE AND LOCAL GOVERNMENT SPENDING ON PUBLIC EMPLOYEE RETIREMENT SYSTEMS, January 2011

http://nasra.org/resources/ERContributions.pdf

Pertinent excerpts:

“A closer look reveals that a relatively small portion of all state and local government spending goes to public pensions. According to the latest estimates, less than three percent of all state and local government spending was used to fund public pension benefits (in 2008).”

“An estimated 30 percent of employees of state and local governments do not participate in Social Security, including substantially all of them in seven states, approximately one-half of all of the nation’s public school teachers, and two-thirds to three-fourths of firefighters and police officers. In most of these cases, employers and employees are contributing to the pension fund in lieu of contributions to Social Security, reducing state and local taxpayer costs by an estimated $15.6 billion annually.”

My comments:

In 2008, of the 50 states, Colorado was ranked #32 in the nation in taxpayer support for public pensions. Our contribution that year was 2.16 percent of Colorado state and local government spending. Yet shortly thereafter, this “tremendous burden” forced Colorado to breach its contractual pension obligations.

The average percentage expenditure of state and local government resources on public pensions in the nation in 2008 was 2.89 percent. The highest percentage of state and local spending devoted to public pensions was in Nevada at 5.55 percent. I’ll check, I’m certain that Nevada must have also breached public pension contracts in 2010, after all, Nevada’s pension burden during that period was 250 percent greater than Colorado’s taxpayer public pension burden.

This 2007 survey by the Wisconsin Legislature clearly distinguishes between “ad hoc” COLAs and “automatic” COLAs with the following description of “ad hoc” COLAs:

“20 of the 85 plans are either money purchase plans or provide post-retirement annuity increases only on an ‘ad hoc’ basis, where either the Legislature or a decision-making board determines whether, and when, a post-retirement annuity increase is granted.” The survey places Colorado PERA’s COLA squarely in the category of “automatic.”

I wonder if Colorado PERA has been contacted by the authors of such surveys in the past, and if so, what it is that PERA staff told (or e-mailed) these survey authors that lead them to describe Colorado PERA’s COLA as “automatic.” Colorado PERA, do such e-mails exist? Kindly forward them.

Colorado PERA Board, why do such surveys invariably identify the Colorado PERA COLA as “automatic,” if it is actually “ad hoc” as you claim (or at least your attorneys claim in your Answer Brief)? Does the Colorado PERA Board dismiss all public pension COLA surveys in the United States in the last decade as mistaken? Isn’t it strange that they all got it wrong?

PDF:

http://legis.wisconsin.gov/lc/publications/crs/2006_retirement.pdf

As we have seen, PERA’s Answer Brief attempts to deceive the court by intentionally avoiding the use of the basic descriptors of defined benefit pension structure, “automatic COLA” and “ad hoc COLA.” Is it their hope that the court has no knowledge of pension structure?

Well, the deception continues when PERA’s Answer Brief turns to the matter of pension “funding ratios,” aka, “funded ratios.”
Right away you should know that there are two basic funding ratios used to gauge the soundness of public pension plans, “actuarial funding ratios” and to a lesser extent “market-based funding ratios.”

“Actuarial funding ratios” are commonly used in defined benefit pension administration because they are mandated by financial regulatory agencies.

Here’s an excerpt from a state actuary’s website:

“In financial reporting of public pension plans, funded status is reported using consistent measures by all governmental entities. According to the Government Accounting Standards Board (GASB), the funded ratio equals the actuarial value of assets divided by the actuarial accrued liability calculated under the allowable actuarial methods.”

http://osa.leg.wa.gov/About_Pensions/Glossary.htm

Here is a description from the website of the National Association of State Retirement Administrators:

“The most recognized measure of a public retirement plan’s ability to meet current and future obligations is its actuarial funding ratio, derived by dividing the actuarial value of a plan’s assets by the value of its liabilities.”

The use of “actuarial funding ratios” is the standard practice in public defined benefit plan administration (and this includes Colorado PERA historically.)

A “market-based funding ratio” is calculated using the market value of pension assets rather than the actuarial value of assets. PERA uses the market-based funding ratio throughout its Answer Brief in an attempt to exaggerate the decline in the funded status of PERA’s trust funds.

PERA is mixing up apples and oranges, and hoping that the court fails to note the different types of fruit.

One would think that such a calculating stratagem would irritate the court . . . it confuses the legal investigation unnecessarily.

PERA cites the “52% funding ratio” three times in the Answer Brief. This “52% funding ratio” cited by PERA is a “market-based funding ratio.” The three citations are: “a 52% funded level at the end of 2008,” “a funding ratio of 52%,” and “to fall to 52% funded at the end of 2008.”

Throughout PERA’s history is has used “actuarial funding ratios” to measure of the fiscal soundness of the PERA trust funds. It is only since the inception of PERA’s campaign to take fully-vested PERA retiree benefits that PERA began employing “market-based funding ratios.”

A review of PERA’s publications over the last decade reveals that PERA has rarely employed “market-based funding ratios.” Such an examination of PERA’s communications to members and their publications over the last decade reveals that “actuarial funding ratios” are almost always used as indicators of the financial soundness of the PERA trust funds.

The very bill that Colorado PERA is attempting to defend, SB 10-001, uses “actuarial funding ratios” as a measure of the PERA trust fund’s solvency. The “100% funded ratio” in the title of SB 10-001 is an “actuarial funded-ratio.” The triggers in SB 10-001 are linked to “actuarial funding ratios.”

In their Answer Brief, PERA would like us to believe the fiction that the PERA trust funds had a combined funding ratio of 52% at the end of 2008.

In reality, at the end of 2008, the combined PERA (actuarial) funding ratio stood at 69.8%, according to Colorado PERA’s own reported statistics. (Not quite as scary as the 52% figure PERA would have us believe.)

It is critical that the court see the PERA trust fund’s combined actuarial funding ratio of 69.8% at the end of 2008 in an historical perspective. Below, I provide that historical perspective.

During the 40-year period, 1970 to 2009, the PERA “actuarial funding ratio” ranged from a low of 54.5 percent in 1973 to a high of 105.2 percent in 2000. The average actuarial funding ratio over this 40-year period is 78 percent. At the end of 2008, the PERA actuarial funding ratio of 69.8% was mere 8.2% lower than the average PERA actuarial funding ratio over the 40 year period. At the end of 2008, PERA’s actuarial funding ratio of 69.8 percent was 10.2 percent below an 80 percent funded ratio, considered “well-funded” by Fitch Ratings. During an eleven year span, from 1970 to 1981, PERA’s actuarial funding ratio was actually lower than it was at the end of 2008, and yet there was no PERA campaign during those eleven years to take fully-vested, earned, accrued, contracted PERA retiree pension benefits.

If the PERA trust funds cannot be “sustained” with an “actuarial funding ratio” of 69 percent in 2008, how were the trust funds “sustained” in the past when the actuarial funding ratio approached 50 percent? Obviously, PERA’s trust funds can be “sustained” when their funding ratio is in the 50-60 percent range, since the funding ratio has been there in the past and the pension trust funds still exist . . . the trust funds were “sustained.”

Relevant to this discussion is the fact that Colorado’s aggregate public pension debt is in the middle of the pack among the states. Colorado’s total public pension debt level is typical of state public pension debt in the United States . . . 8 percent of gross state product versus a national average of 7.3 percent.

Should all legislatures in states with pension debt levels above a certain threshold be permitted to breach their contractual public pension obligations? What is the threshold level where state contracts become meaningless?

I realize that there are many well-meaning (but temporarily misguided) people on the other side of this issue. If the defendant’s prevail in this lawsuit, these honest people will want their victory to have been achieved in a forthright manner. I would think that such people (including PERA’s professional staff) would find this type of conduct, intentional deception, disturbing. Perhaps, this is just standard operating procedure . . . anything goes in litigation and I’m just being naïve.

Let’s take a look at some of the instances in which Colorado PERA has cited an “actuarial funding ratio” over the years:

Colorado PERA Update – (Spring 2006 – page 4): “See that PERA’s (actuarial) funded status was lower (61.5 percent) 30 years ago than what it is now. You may recall that there was no perceived “crisis” in PERA’s funded status in 1975.”

Colorado PERA News Archive for 2004 (9-16-2004): “PERA’S funded level was below 60 percent in 1970, and there was not a perceived crisis in PERA’s financial health.”

So, in 2004 the position of Colorado PERA was that an actuarial funding ratio under 60 percent did not constitute a “crisis.” If an actuarial funding ratio below 60 percent in 1970 was not a “crisis” in 2004, then how is it that an actuarial funding ratio of 69.8 percent in 2008 is a “crisis” or an “actuarial emergency”? It just doesn’t add up, does it?

While we’re on the subject of funding ratios, the PERA Answer Brief cites a provision of SB 10-001, allowing the COLA to increase in the future “when PERA returns to financial soundness and its funding ratio reaches 103%.” As we have seen in recent months, Fitch Ratings, one of the three most prominent ratings firms in the United States deems a public pension plan “well-funded” at an 80 percent funding ratio. The PERA trust funds are financially sound at an 80 percent actuarial funding ratio.

A legislative attempt to breach the pension contracts of ACTIVE, WORKING PERA members who have PARTIALLY-vested pension rights in order to unnecessarily reach a 100 percent actuarial funding ratio would constitute a ridiculous overreach.

A legislative attempt to violate the FULLY-vested, contracted, earned, accrued pension rights of CURRENT, RETIRED PERA members to unnecessarily reach a 100 percent actuarial funding ratio truly shocks the conscience.

The drafter of SB 10-001 made it no further than the title of the bill before stumbling into folly. Can you blame him? He put provisions into the draft bill at the direction of the bill’s prime sponsors. These members of the General Assembly were getting their marching orders from PERA lobbyists. These legislators did not bother conducting their own legal research into the contractual nature of pension rights, they held no interim investigations of the matter, and they did not conduct due diligence. As Senator Lundberg said on the Senate floor during the SB 10-001 debate: “This bill is a deal that was cut before this body met.”

Clearly, reaching a 100 percent pension actuarial funding ratio is not a “legitimate” governmental interest. Public pension plans and their governmental sponsors exist in perpetuity. They need not entirely “pay off” their unfunded liabilities . . . ever. If it happens that public pensions reach 100 percent actuarial funding levels, that is all well and good. However, these pensions are “well-funded” at an 80 percent funding level. I have excerpted a few passages from the website of the National Association of State Retirement Administrators that are instructive:

“Although a pension plan that is fully funded is preferable to one that is underfunded, other factors held equal, a plan’s funded status is simply a snapshot in a long-term, continuous financial and actuarial process. A plan’s funding level is akin to a single frame of a movie that spans decades.”

“The fact that a plan is underfunded is not necessarily a sign of fiscal or actuarial distress; many pension plans remain underfunded for decades without causing fiscal stress for the plan sponsor or reducing benefits to current beneficiaries.”

“Because the sponsors of public pensions (i.e., states, cities, etc.) are “going concerns,” operating essentially as perpetual entities, there is nothing particularly important about a public pension plan being fully funded at any particular point. Likewise, the fact that a plan is underfunded does not necessarily present a fiscal or actuarial challenge to the plan sponsor.”

“Attaining full funding of a pension plan has been likened to a mortgage: at the end of the process, when fully paid, the mortgage would be considered fully funded. Although at any point during the 30-year mortgage, part of the outstanding obligation may be considered an unfunded liability, more relevant considerations are a) whether the mortgage holder has the resources to continue making payments until the obligation is resolved; and b) whether the obligation is indeed being amortized.”

Colorado PERA has more to say on this matter of funding ratios, (note that these past communications to PERA members exclusively cite “actuarial funding ratios.”)

From: Shareholders Meeting Fall 2006 document:

http://www.copera.org/pdf/Shareholder/ShareholderPresentation06.pdf

“Note that PERA was over 100% funded in only two years of our 75 year history.”

From, Meredith Wiliams, CAFR Summary to Members, 2002, December 5/21 (REV 6/03)

http://www.copera.org/pdf/5/5-21-02.pdf

“PERA directs its efforts at keeping the funding ratio, (the ratio of assets to accrued liabilities) for the three divisional retirement funds at a minimum of 80 percent. A funding ratio over 80 percent is considered good.”

Well, Colorado PERA, then why try to take fully-vested retiree benefits until the trust funds reach a 100 percent actuarial funding ratio? Why has the goal post been moved?

From, PERA’s Funding Status, 2002 document:

http://www.copera.org/pera/about/newsarchives2002.htm

“Those members who are planning on retiring should not be alarmed by the underfunded status of PERA. Retirement benefits will be calculated and paid, in the same manner, regardless of PERA’s funded status.”

From, PERA Shareholders Meeting Presentation, Fall, 2005 document:

“Note that PERA’s funded status was lower 30 years ago than it is now. You may recall that there was no perceived “crisis” in PERA’s funded status in 1975.”

“What the PERA Board and staff would like is for the funded status curve to be flat or stable at around 80 percent. Why? Because not all benefits are due and payable today or tomorrow . . . PERA can weather the ups and downs in the markets.”

http://www.copera.org/pdf/Shareholder/ShareholderPresentation05.pdf

The National Association of State Retirement Administrators has published research that helps to place Colorado PERA’s taking of fully-vested pension benefits in perspective.

According to the NASRA, at the end of 2009, the average actuarial funding ratio of major US public funds was 80 percent. “The second sharp decline in the value of equities this decade caused public pension funding levels to also go down, to 80 percent in FY 09 from 85 percent in FY 08.”

“An April 2010 issue brief authored by the Center for Retirement Research at Boston College found that for the public pension community as a group, receiving the full ARC (annual required contribution) would require additional pension contributions of two percent of payroll, an amount that varies by plan.”

Here are the PDFs:

http://www.publicfundsurvey.org/www/publicfundsurvey/SummaryofFindingsFY10public.pdf

http://www.publicfundsurvey.org/publicfundsurvey/pdfs/Summary%20of%20Findings%20FY09.pdf

At the end of 2009, the median “actuarial funding ratio” among public pension funds in the NASRA survey was 76.4 percent. At the time of the taking of the PERA retiree’s contracted COLA benefit, the actuarial funding ratio of the PERA trust funds stood at 68.9 percent, a difference of 7.9 percent. (Remember that this 7.9 percent difference was the result of the Colorado General Assembly skipping out on $3.5 billion of its PERA actuary identified annual required contributions during the prior 8 years.) (Also, recall that fully-vested members of public pension plans bear no “market risk.”)

In light of the taking of the contracted COLA benefit, I find the Colorado PERA Board’s inflation assumption of 3.75 percent damning. Recognizing this 3.75 percent board inflation assumption, the Colorado PERA Board essentially wants to inflate away retiree contracted benefits as de facto board policy.

To ensure that the State of Colorado continues to have the lowest per capita state tax receipts in the nation, and retains the option to grant further discretionary tax relief (for example, last month), the fully-vested, contracted retirement benefits of PERA retirees should be inflated away with a COLA of 0 percent to 2 percent.

Colorado PERA wants to do this to retired public employees who, as a condition of employment, were prohibited from participating in one of the “three stool legs” of retirement security, the federal Social Security system.

Colorado PERA’s Executive Director has comforted us during past market volatility:

From, Meredith Wiliams, CAFR Summary to Members, 2002, December 5/21 (REV 6/03)

http://www.copera.org/pdf/5/5-21-02.pdf

“While the investment markets will always have ups and downs, PERA is a long-term investor and we can ride out the bad times the market experiences. “

Meredith Wiliams, CAFR Summary to Members, 2001, December 31, 2001

http://www.copera.org/pdf/5/5-21-01.pdf

“Be assured that your PERA account is safe, and that the benefit you receive when you retire is not affected by PERA’s short-term return on investments.”

Meredith, PERA retirees are not feeling all that “safe” these days.

(I tell you, it’s quite burdensome being a guardian of the truth.)