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The engraving outside Colorado PERA headquarters in the Capitol Hill neighborhood of Denver on Sept. 18, 2018. (Eric Lubbers, The Colorado Sun)

Twelve years ago, a Colorado retiree with a public pension could expect a 3.5% raise every year.

It was a generous perk of public service, made possible by the stock market booms of the 1990s, and then sustained by public officials who overlooked warning signs. But the good times came to an end with the Great Recession. In 2010, cost-of-living raises were cut to 2%, roughly tracking inflation at the time. Then they were cut to 1.5%, then 1.25%. Next year, they’ll drop again to 1% — at a time when consumer prices are up 6.2% and Social Security checks, which PERA members don’t receive, are increasing 5.9%.

Each time, the cuts were justified under the mantra of shared sacrifice. The Colorado Public Employees’ Retirement Association was facing catastrophic funding shortfalls that threatened the future benefits of its 630,000 members, and to marshal the political support for financial rescue packages in 2010 and again in 2018, retirees, public workers and taxpayers all had to chip in.

Today’s public workers are doing their part, contributing 10.5% of each paycheck to PERA in exchange for worse benefits than their predecessors. That rises to 11% next year. Their employers put in nearly double that, most of it earmarked to pay down the pension’s $31 billion unfunded debt to retirees. But the state government — far from sharing in the additional sacrifices — still hasn’t made good on what it agreed to in 2018.

The Pension Review Subcommittee — Colorado’s newest PERA watchdog — is trying to change that. Earlier this month, at the subcommittee’s urging, a panel of top state lawmakers OK’d a bill for next legislative session that would repay $225 million the legislature cut from PERA in 2020 at the onset of the pandemic. It would also tack on $79 million in investment gains that PERA should have earned on the money if it had been paid on time, based on its actual market performance last year and expected returns this year.

It’s an extraordinary request. Legislative leaders at the committee hearing described it as “unprecedented” — and “problematic,” casting doubt on its final passage.

Then again, the legislature broke an extraordinary promise, reneging on its annual $225 million obligation to the public employee pension under the landmark 2018 reform deal just two years after it was signed.

“We need to keep our word and make good on what we negotiated years ago,” House Minority Leader Hugh McKean, a Loveland Republican, said at the hearing. “What we negotiated years ago was that we would not shift that burden unnecessarily onto employees and retirees.”

The debate over the repayment represents the first major test of the pension subcommittee, a bipartisan panel of lawmakers and independent financial experts responsible for keeping the pension on financial track. It will also test the extent to which the legislature as a whole is committed to funding PERA — without a financial crisis to force its hand.

“The big issue is how do we keep interest in this?” said Amy Slothower, a consultant for Secure Futures Colorado, a group that advocates for pension reform. “Because it’s a really huge looming threat, and we’re doing the same thing we always do.

“We wait until we’re on the brink and then we deal with it.”

Pensions across the country are thriving. Why not Colorado’s?

In 2018, when lawmakers passed the Senate Bill 200 reforms, the alarm bells going off at the state Capitol were impossible to ignore. PERA’s financial challenges had grown so dire that rating agencies were threatening to downgrade the state’s credit.

Since then, PERA’s balance sheet has deteriorated further, triggering two rounds of benefit cuts and contribution hikes for employees and public agencies. But the reforms have largely held up, keeping the pension on solid financial footing and a path to full funding by 2048, the target date set in state law.

Still, at a time when public pensions across the country are celebrating their best year since the Great Recession, Colorado’s public sector retirement system stands out as one of the few whose balance sheet remains in peril despite strong market gains.

Some of that simply reflects the depths of the hole PERA dug itself into. Routine adjustments to changing workforce and retiree demographics have multibillion-dollar impacts that are hard to overcome when PERA is straining to keep up with the debt already on its books.

But some of it is that Colorado, unlike many other governments, still doesn’t require public employers to put in enough money each year to fully fund the benefits that have been promised to workers. In pension terms, it’s known as the “actuarially determined contribution.” And since 2003, Colorado governments have fallen $5.8 billion short of what actuaries say they need to contribute to fully fund the pension within 30 years.

Senate Bill 200 and the $225 million annual payment from the state was supposed to help. But the contribution shortfalls persist. In 2019, government contributions were $133 million short; in 2020, when the legislature axed its payment, $280 million was added to the shortfall.

The payment was reinstated a year later, but not before lasting damage was done. PERA depends on dollars into the system today to grow on the stock market — and the long-term value of that $225 million was actually closer to $1 billion with compounding interest from expected investment gains.

While the state could sidestep its financial obligations to stem a spiraling budget deficit, PERA’s members got no such reprieve. As supply-chain disruptions send prices skyrocketing, their wallets are getting even lighter. One round of austerity measures has already kicked in, and another is scheduled for July 2022.

“Eventually, (the lost payment) is going to have to get made up somehow,” said Karen Wick, the program manager for Secure PERA, which represents a coalition of PERA members and public employers. “If the state is not doing its part, the others are going to have to do more. And that’s where it gets really challenging when we’re talking about real lives.”

Bipartisan support, bipartisan opposition

The looming fight over the repayment won’t fall along party lines.

The pension oversight committee’s stance was unanimous and bipartisan: PERA must be repaid the full $304 million, including the lost investment gains.

But there are signs of bipartisan opposition, as well. While the measure cleared the legislative leadership panel 15-2, several lawmakers said they supported repaying the $225 million but were skeptical that the legislature owed the pension for the missed investment gains.

Democratic House Speaker Alec Garnett called it “problematic.” Sen. Paul Lundeen, a Monument Republican, worried about the precedent it would set for budget writers. Sen. Dominic Moreno, the outgoing Joint Budget Committee chairman, said it was unfair to other programs that suffered cuts.

“Not a single other program that we restored funding to was restored to an amount greater than the cut that happened,” said Moreno, a Democrat from Commerce City, who voted against the bill. “And I think a lot of other programs would have a case to be made of missed opportunities, of services that were not rendered.”

Colorado Sen. Dominick Moreno speaks during a news conference outside the governor’s mansion Wednesday, March 10, 2021, in Denver. (AP Photo/David Zalubowski)

But whether the investment gains get repaid or not, the more troubling sign for PERA was the appearance that lawmakers may view the $225 million as a discretionary budget item, subject to cuts like any other.

House Speaker Pro Tem Adrienne Benevidez, D-Denver, said she would support repaying the $225 million, but still voted against the bill in opposition to the larger amount.

“That’s a debt, but it’s not a debt set in stone,” she said at the hearing. “We couldn’t afford it last year, and that’s why we didn’t do it. It isn’t really a lot different from other cuts that we had to make and the lost opportunity with that.”

Those who sit on PERA’s oversight board disagree.

“If they view that (the $225 million annual payment) as discretionary, and that as sort of a piggy bank, they’re going to undermine the whole reform,” Lang Sias, a Republican subcommittee member who is running for Colorado state treasurer, told the Colorado Sun in an interview.

And, because of the compounding value of investment returns, forgoing the $225 million has a long-term cost that cuts to the parks budget or transportation just don’t have.

“We have run those numbers — we know that that’s a $993 million hit to PERA over the next 25 years of this fund,” said Rep. Shannon Bird, a Democrat who chairs the pension subcommittee.

(The additional $79 million would be worth over $300 million in 25 years using PERA’s 7.25% return rate.)

“The next decade is critical”

Because money to the pension today is worth more than money tomorrow, PERA’s financial performance in the next few years will determine the fate of its members and taxpayers.

“The next decade is critical to our long term,” Executive Director Ron Baker told the pension subcommittee this fall. “You can’t get through the next 30 (years) without getting through the next 10.”

According to financial simulations by PERA’s actuarial consultant, Segal, the system now has just a 56% chance of reaching full funding by 2048; 27% of the time, the school division would face another crisis of the sort that precipitated the reforms of 2018.

The good news is, the large stock market gains of the past two years still haven’t been fully accounted for on PERA’s balance sheet, because actuaries smooth the gains over multiple years. The upshot: PERA could earn only a disappointing 6% on its investments (that’s 1.25 percentage points below its targets) over the next decade and still meet its funding goals thanks to the unrealized gains.

But that’s only if PERA’s other assumptions are correct.

The subcommittee earlier this year commissioned its first independent audit of PERA’s actuarial assumptions, the pension finance equivalent of getting a second opinion from a doctor.

The findings of the audit by actuarial firm GRS were mixed. On the alarming side, PERA’s long-term cost projections may be short as much as $500 million a year due to demographic changes, an amount that could have cascading financial consequences for the 630,000 current and former government workers and school teachers invested in PERA. The subcommittee split over whether to move the next assumption study up by two years in response to the audit; instead, PERA’s actuary assured the panel it would monitor the issue closely and recommend changes if needed.

The sign on Colorado PERA headquarters in the Capitol Hill neighborhood of Denver on Sept. 18, 2018. (Eric Lubbers, The Colorado Sun)

On a brighter note, GRS found that PERA’s assumed investment return of 7.25% — a frequent point of controversy in recent decades — is reasonable, although that could change in the coming years. Private investment firm expectations have declined since PERA last reviewed its assumptions.

But whether one believes PERA’s existing assumptions or the second opinion, the broader takeaway from both is clear. After two major reforms, PERA isn’t out of the woods yet — and it will be a lot harder to get there if the state doesn’t do its part.

The GRS audit found that there’s a 64% chance that PERA’s auto-adjust mechanism will kick in the maximum number of times allowed by state law. That means retiree annual increases would drop to 0.5%, and employee contributions would rise to 12% of pay. State agencies and school districts would contribute 22.5% of pay. (Notably, the state’s annual payment wouldn’t increase, because the legislature exempted itself from the automatic adjustment.)

And without the state’s $225 million annual commitment? The odds of all that — the worst-case scenario envisioned by the 2018 reforms — rise to 75%.

Special to The Colorado Sun Twitter: @brianeason