The Issue

The Issue

At the direction of the 2009 General Assembly, PERA authorized an actuarial study of the PERA Trust Fund that would result in a proposal for returning it to a safe funding level. PERA then presented the study and its recommendations to the General Assembly. Senate Majority Leader Brandon Shaffer (D) and Senate Minority Leader Josh Penry (R) drafted and introduced Senate Bill 1 to carry out that proposal. The bill contains many proposals but we are interested in the provisions regarding the retiree Cost of Living Adjustments. The bill as introduced would set COLA for 2010 at 0%, at the CPI-W inflation rate up to 2% for 2011 (essentially 0% again), and then fix it at 2% after that, with some possibility of less than that. These cuts would apply to all retirees. Most retirees would experience in excess of $100,000 or more  in reduced increases to benefits through their lifetimes. If such a law is not passed, the current COLA would stay in effect and be paid effective March 1 (March 31 paycheck) of each year.

The rationales for not cutting retirees’ COLA

  1. Legality: Under the U.S. and Colorado Constitutions, it is not legal to enact a law that reduces someone’s contracted benefits, (“impairs a contract”) even in the event of a claimed “actuarial necessity.” Some legislators disagree and PERA officials have previously made numerous contradictory statements about this. (U.S. Article 1, Section 10, and Colorado Article 2, Section 11, respectively.) PERA, Shaffer and Penry assert to have a legal opinion that says they can, but have not released it. The 2004 Formal Opinion by Attorney General Ken Salazar which you may read at clearly states that “actuarial necessity” applies only to those PERA members who are “partially vested.” and cites Colorado Supreme Court cases to support this opinion. Current retirees are fully vested with a contractual right to be paid earned benefits increased by the 3.5% COLA annually. See pages 2 and 5.
  2. Actuarial necessity: While PERA does have a significant unfunded accrued actuarial liability and has produced an analysis showing the various division funds being unable to pay their obligations at some points in the future, the connection between this and the recommendations made by PERA has not been made clear. The actuarial analysis has finally been released by PERA after our Colorado Open Records Act request and is being studied. The State of Colorado must exercise “due diligence” as sponsor of PERA by allowing public inspection and debate of the report prior to passing SB1. This will take time for all concerned. A one year legislative task force would permit this to happen.
  3. PERA’s financial woes are overstated in a variety of ways. The fiscal effect of the 2/2/2 Plus Plan may be greater than is necessary to bring back PERA to financial health. PERA asserts that only a 100% funding level is sufficient when public pension plans, including PERA, have safely existed for years at a 70-80% funding level. PERA’s actuarial funded ratio was about 70% at the end of 2008. The 2/2/2 Plus Plan relies on 2008 actuarial figures that do not reflect the dramatic 15% rise in the value of its investments during 2009. The 2/2/2Plus Plan relies on a reduced investment assumption rate of 8.0% from an 8.5% previously used prior to September 2009, which is equal to $3.5 billion of the unfunded liability.
  4. The retirees’ interest in maintaining their fully vested, contractual rights to a full 3.5% COLA has been ignored by employee organizations who endorsed the PERA proposal in a commendable but shortsighted effort to protect their active members. The 2/2/2 Plus Plan appears to place an undue and disproportionate burden upon current and future retirees by gathering far more in immediate and long term benefit cuts through COLA and other changes than from changes to the employer contribution rate. SB1 sponsor Senator Penry has claimed this amount is 90%. It is impossible to state this definitively without consideration of the actuarial analysis done for PERA—another reason for the public release of this information to the media and the General Assembly.
  5. Degradation of the Defined Benefit Plan: PERA and the General Assembly, if successful, will have unwittingly yet effectively changed the Defined Benefit (DB) plan into something substantially less. In a DB plan, PERA members as a group accept the stated benefits and PERA accepts the investment risk. In the PERA proposal, PERA members would  now be assuming the risk of poor investment performance and/or chronic underfunding by employers (mandated by the state) and not reap the rewards of good investment performance. The result would be inferior to a Defined Contribution plan where the individual members accept the risk and reap the rewards. The state could soon look to lowering their contributions in order to balance the state budget.
  6. A bad legal precedent will have been set that permits the state to, in the future, again change retirees’ benefits if deemed necessary due to less than a 100% funding level.

The Strategy

Through a variety of methods, PERA retirees and interested current employees will influence their representatives and senators to vote down the portion of the bill that reduces the 3.5%/3.25% COLA. Failing at that, they will initiate a class action lawsuit that first seeks an injunction preventing PERA from enacting the reduction in COLA, and second seeks that portion of the law to be declared unconstitutional.

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