The hits just keep on coming for the Colorado state employees pension fund. But now there are safeguards in place to absorb the latest blow.
Thanks to a brutal December for stocks, Colorado’s pension lost $1.8 billion on its investments in 2018, according to the annual financial report released Friday. That’s a 3.5% drop for a portfolio that policymakers rely on to fund the retirement plans of more than 600,000 Coloradans.
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As a result of the losses, last year’s landmark deal to rescue the Public Employees’ Retirement Association from the financial brink is going to cost everyone in the state millions more than initially expected.
Under a legislative guardrail installed to protect the system from economic shocks, not only will the 2018 reforms continue as scheduled, but two additional safeguards will kick in next year.
Public employees and taxpayer-funded agencies in 2020 will see their pension contributions increase. And retirees will see their annual cost-of-living raises drop to 1.25% a year, down from the 1.5% annual increase that was negotiated in last year’s reforms. Before the new law, it was 2% a year.
The net result: public workers will pay even more, and get even less from Colorado’s troubled public sector retirement system.
“We know these changes are difficult,” Ron Baker, the system’s executive director, said in a video address to members. “We also want you to know that we believe all of these changes are in the best long-term interests of our fund and the membership.”
State lawmakers were warned in February this was coming, but the depth of the financial damage wasn’t fully known until Friday, when PERA’s board of directors released its annual financial report.
The pension, which covers most state employees, public school teachers and some local government workers, now only has 59.8% of the money needed to pay off all the retirement benefits it owes. The unfunded debt rose $2.2 billion to $31 billion.
School districts are now 41 years from fully funding their debt to employees, while the state is 33 years away, according to new numbers issued Friday afternoon. (PERA’s initial estimates in documents provided to board members and the public earlier in the day were incorrect.) That means PERA is off track to reach 100% funding within 30 years, triggering the automatic guardrails put in place by last year’s legislative reforms.
Sen. Jack Tate, a Centennial Republican who cosponsored last year’s pension legislation, said in an interview that he wasn’t surprised that auto-adjust provision kicked in, because the legislature didn’t leave itself much of a cushion for a bad investment year.
“I would say the bill’s working like it’s meant to,” Tate said. “The unfortunate thing was that the bad return year just happened to be the first year.”
Hilary Glasgow, the executive director of Colorado WINS, a state employees’ union, said she still believed the legislation was necessary to shore up the system’s finances. “We had to do it.”
But she added, “there’s going to have to be further steps to protect PERA” without continually eroding worker benefits. “As public workers, the idea has basically been you’re going to make less pay wise, but you’re going to make a better retirement package,” she said. “If you don’t have those (benefits)…why be a public servant?”
2018 was the first year that PERA lost money on its investments since the 2008 market crash, and the fourth time since then that it has fallen short of today’s 7.25% estimated rate of return. The rate of return is the amount the system’s investments need to grow each year to meet its financial targets.
Public sector workers and retirees will feel the pain in part because of market anxiety over tariffs in 2018 and in part because of bad luck. Markets reversed their losses and global stocks jumped 12.3% in the first quarter of 2019, but since the auto-adjustment mechanism in the new law is based on the calendar year, the guardrail kicked in because of the pension’s poor balance sheet to close out 2018.
The reforms adopted in the 2018 legislative session were needed in large part because government agencies weren’t fully funding the benefits they were promising to pay out. That underfunding compounded the problem for 2018’s financials, increasing the pension’s unfunded debt by $400 million, on top of $1.8 billion in investment losses for the year. The new law seeks to address this in future years.
Here’s how the changes will shake out for employees, retirees and taxpayers:
- Most public workers will now be required to contribute an extra 2.5% of their paychecks to the pension, up from the 2% expected increase. The contribution hikes will be phased in over three years, beginning July 1.
- Government agencies will contribute an extra 0.25% of pay starting July 1, and an additional 0.5% in 2020.
- Retiree cost of living raises are currently suspended, but when they resume in 2020, they will drop to 1.25 percent from an expected 1.50 percent. Previously, benefits went up by 2 percent annually.
Updated 12:45 p.m. June 21, 2019: An earlier version of this story incorrectly stated that an annual state stabilization payment would increase. The state’s annual payments are capped and cannot exceed $225 million.