Just two years after Colorado approved sweeping pension reforms aimed at wiping out what was then an unfunded $32 billion debt to public sector retirees, state budget writers — facing a financial catastrophe of their own — have temporarily undone a portion of the landmark rescue package.
The Joint Budget Committee tentatively decided to eliminate the state’s $225 million annual payment to the pension next budget year, which begins July 1. Because the pension’s money is invested over time, that would add an estimated $990 million to the pension’s long-term debt if it’s approved by the full legislature.
The vote represents just the latest domino to fall as the fiscal impact of the coronavirus shutdown reverberates across Colorado’s public sector. And there may be more to come. So far, budget writers have not taken action on several other PERA changes they’re considering that could add anywhere from $500 million to $2.5 billion more to the pension’s unfunded debt, deepening a financial hole that the pension was just beginning to repair.
To make matters worse, the Colorado Public Employees’ Retirement Association, or PERA, is facing what’s shaping up to be its worst year since the depths of the Great Recession. As of last week, the pension’s publicly traded holdings, which make up the bulk of its investment portfolio, were down 8% on the year, according to Amy McGarrity, PERA’s chief investment officer.
And any attempts by PERA-covered government agencies to furlough or lay off workers in order to cut costs amid the crisis could further exacerbate the pension’s financial challenges because contributions to pay down the debt are tied to the public sector’s payroll.
All told, the financial pressures could lead retirees and public employees back to a familiar place; the worse things get, the more likely the prospect of additional cuts to benefits or increased contributions from employees becomes.
With more than 600,000 members, PERA covers more than 1 in 10 Coloradans, a group that includes current and former employees of the state, school districts and many local governments. A little over 120,000 of them were currently retired and drawing benefits at the end of 2018.
“This is one certainly of the bigger and more difficult decisions to make,” said Rep. Julie McCluskie, a Democratic budget writer from Dillon, before Friday’s unanimous vote eliminating the payment. “The long-term solvency of PERA and success of PERA is something that so many state employees, teachers, public workers depend on and it’s difficult to see this happen.”
Other options remain on the table, but budget writers last week insisted they were unlikely to adopt all of the proposed changes. Some complained that PERA’s initial presentation to the JBC bundled all the options into one, culminating in a $3.5 billion price tag that lawmakers say they have no interest in pursuing.
“Assuming ‘all of the above’ is a little unrealistic,” said Sen. Rachel Zenzinger, a Democrat from Arvada.
The options for balancing budget come with long-term costs
Still, none of the maneuvers offered to the budget committee would come without a significant cost to the pension’s long-term solvency. Instead of shoring up the pension at this moment of crisis, lawmakers are preparing to make things worse for a pension they just brought back from the brink.
The options still under consideration include temporarily reducing state payments and taxpayer contributions to the pension, either of which could push the system’s path to full funding beyond the 30-year window that actuarial experts recommend. Lawmakers are also considering, on the one hand, cutting employee contributions, and on the other, asking employees to take on some of the state’s share. It’s one reason why state employees could bear the brunt of the budget cuts.
Here’s a rundown of the options on the table for state lawmakers — and what it means for the state pension:
- Canceling a $225 million payment to the pension’s unfunded debt that’s due July 1. Long-term cost to the pension: $990 million. (Approved Friday)
- Delaying the $225 million annual payment due in July 2021 by 364 days. Long-term cost to the pension: $980 million. (Rejected Friday)
- Cutting employer contributions by 5 percentage points for the state division only. Long-term cost to the pension: $660 million.
- Delaying automatic contribution increases of .5 percentage points for employers and employees set to take effect in the 2020-21 fiscal year. Long-term cost to the pension: $420 million.
- Postponing the scheduled employee contribution increase of 0.75 percentage points. Long-term cost to the pension: $500 million.
- Shifting the 2.5 percentage point increase in contributions owed by the employer to employees. Long-term cost to the pension: unknown.
(The long-term costs, provided by PERA, do not match the initial budget impact, because they include the actuarial cost over time of lost investment earnings.)
A short-term crisis faces off against a long-term plan
For PERA, it’s deja vu all over again. The choices facing lawmakers — trading short-term budget relief for varying degrees of long-term financial pain — are just the latest display of the political tensions that have long plagued public pension systems here and across the country.
When Colorado’s pension was fully funded 20 years ago, lawmakers responded by sweetening benefits and racking up debt. When the Great Recession began in 2007, PERA faced the looming prospect of financial insolvency — but government budgets were under so much strain that the eventual fix, Senate Bill 1 in 2010, was phased in over several years to spare the public purse.
As the economy rebounded, policymakers ignored warning signs, allowing the pension to deteriorate further. Years of inaction were made worse by sluggish market returns and longer retiree lifespans. Finally, in 2018, lawmakers passed Senate Bill 200, which included even more safeguards to keep the pension on track in the case of financial problems.
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Those safeguards — which include automatic contribution increases — have emerged as a potential target for lawmakers as they conduct an unprecedented $3 billion budget triage exercise that threatens a number of essential public services, including K-12 schools, colleges and safety net programs.
But for now, the discussions only involve delaying provisions of Senate Bill 200 to get through the immediate budget crisis, and not permanently reversing them.
Sen. Jack Tate, a Centennial Republican who co-wrote the 2018 pension bill, said he favors “discreet temporary action,” such as eliminating the upcoming $225 million payment, if cuts to PERA are needed.
“I would not want to see anything done in the legislature that unwinds the long-term plan based on a short-term crisis,” he said in an interview.
Nonetheless, any changes that are made in this budget could lead to further contribution increases and benefit cuts down the line. Under Senate Bill 200, when PERA moves too far off its 30-year path to full funding, it can trigger an auto-adjust mechanism that aims to shore up the pension’s finances without the need for legislative intervention. The fail-safe mechanism has already been tripped once, in 2019, but the contribution increase it requires is among the potential cuts as lawmakers try to balance the budget.
State Treasurer Dave Young, a Democrat, said it’s imperative that the legislature avoid doing anything that triggers the auto-adjust mechanism unnecessarily, because public employees and government agencies are required to bear those costs long-term. One option on the table, delaying the state’s July 2021 payment, would have done just that, but the JBC voted against doing so Friday.
“It’s linked to the bigger conversation about the (employee) compensation package and how we’re not competitive at this point” with private sector pay, Young said in an interview. “In the long haul, we don’t want to leave really gaping holes in the compensation package that prevents the state from actually being able to (provide) the set of essential services that we’re counting on.”
For public employees, whatever lawmakers decide, it feels like they lose either way. On the one hand, higher contributions will mean more financial hardship for public workers, many of whom are still reeling from the last recession. On the other, cutting contributions to save money will put the pension in worse financial shape, potentially leading to larger contribution hikes or benefit cuts down the road.
“It’s a complicated situation because taking increased contributions right now — while employees are not getting any sort of increased salary to deal with the cost of those cuts — is painful,” said Hilary Glasgow, the executive director of Colorado WINS, the state employees’ union. “It’s also painful if the retirement fund gets hurt.
“Both of those issues are problematic,” she added. “We’re between a rock and hard place and I don’t know if there’s a good answer. You pay the piper now or later.”
State’s credit rating also at issue with reductions in PERA payments
Financially, turning to PERA to shore up the budget brings another risk to the state budget: a credit downgrade, which would increase the state’s borrowing costs.
Rating agencies have warned the state in the past about PERA’s unfunded liability. In 2018, S&P Global Ratings praised Senate Bill 200, while sounding a note of caution that now appears prophetic:
“Its efficacy relies on the commitment of the legislature to … prioritize full funding of the system even when competing needs are present,” the S&P analysts wrote.
Young, the state treasurer, said PERA comes up “every time I have a ratings call,” and analysts are particularly complimentary of the auto-adjustment mechanism, which is now among the items in the JBC’s crosshairs.
“But the whole idea of the auto-adjust was that we didn’t have to go back to the legislature and keep making adjustments,” Young said. “And now here we are having to tinker with it.”
Still, things could be worse. PERA’s annual financial report, due in June, is expected to show a strong performance in 2019, buoyed by a booming market and the first full year the Senate Bill 200 reforms have been in effect.
And following the precipitous sell-off in March, the market so far has proved relatively resilient in the midst of the pandemic, even as the broader economy is buckling from the strain of business shutdowns and high unemployment across the globe.