Colorado’s pension system missed out on millions of dollars in potential investment revenue as a result of lawmakers’ decision last year to park money in a low-interest bank account, according to an analysis by nonpartisan legislative staff.
The legislature set aside $380 million last year in a low-interest bank account to ensure the state could still support the Public Employees’ Retirement Association in the case of an economic downturn.
But nonpartisan legislative staff say the General Assembly should rethink that strategy and instead dump all of the money into PERA now so that the dollars can be invested and yield a much higher return.
State Sen. Dominick Moreno, D-Commerce City, who sits on the powerful Joint Budget Committee, summed up nonpartisan JBC staff’s concerns in five words: “Our money isn’t making money.”
How to best use the $380 million is the latest question in the legislature’s yearslong quest to adequately fund PERA, which has been a perennial political lightning rod at the Capitol. PERA has more than $30 billion in unfunded future obligations to pensioners. Lawmakers must now decide whether to keep stashing money for future years and potentially miss out on hundreds of millions of dollars in investment income, or to put the money directly into PERA to get the biggest financial return.
The state is required to kick in $225 million to PERA each year as part of a 2018 deal to rescue the system, though lawmakers decided to skip a payment in 2020 to help balance the budget during the early days of the pandemic. The payments help cover PERA’s future pension obligations, which state workers have been increasingly asked to shoulder, even as their benefits are reduced.
The $380 million that lawmakers set aside last year has yielded roughly $1 million in the past year, a return of less than 1%.
Money put into PERA is expected to make an average annual return of 7.25% over the long term, legislative staff said. But last year, when stocks soared, it made a 25% return.
“The question is,” JBC staff analyst Robin Smart said, “do I put my money in a savings account that’s earning me 0.35%? Or do I put my money into a diversified plan that is earning me seven and a quarter or more over time?”
Smart acknowledged that lawmakers have other priorities, but said they should keep in mind their financial obligations to PERA because that can affect the state’s broader budget picture.
“If creating new things means that over the long haul, we destabilize the other stuff that’s actually keeping this state stable and functioning, then we have a problem,” Smart said. “What I likened it to was basically spending money to remodel your bathroom and not addressing the termites that are eating the load-bearing beams.”
Smart and JBC staff recommended that the legislature clear out the $380 million cash fund and put it all into PERA.
And their analysis emphasized the financial prudence of investing more money today rather than keeping it in the bank: for every $100 million the state puts into PERA above the annually required $225 million, they project a reduction in unpaid future obligations of $374 million. For that reason, JBC staff recommended lawmakers consider bumping up the July payment to PERA by at least another $100 million.
Smart also pointed out that even though lawmakers created the $380 million cash fund specifically to make contributions to PERA, there’s no legal structure that could stop lawmakers from passing legislation in the future to raid that money for other purposes.
JBC Chairwoman Julie McCluskie, a Democrat from Dillon, said she’d oppose any effort to spend the $380 million on anything but PERA. And she’d be surprised if lawmakers even attempted it.
She said lawmakers stashed that $380 million for PERA to avoid running into a situation where they needed to skip another $225 million annual payment. She called the staff recommendations, “terrific options for us to get back on that solvency path.”
It’s not clear which direction the JBC will take. The committee voted last month to put off the decision until later.
Meanwhile, lawmakers are also slated to consider a proposal next week that would make up for the state’s missing contribution in 2020.
State Rep. Shannon Bird, a Democrat from Westminster and chairwoman of the House Finance Committee, is sponsoring legislation, House Bill 1029, that would send $303.6 million to PERA on July 1, the start of the next fiscal year.
That figure accounts for the $225 million payment skipped in 2020, and the revenue PERA lost as a result of not having that money to invest.
As the state’s obligation to fund PERA grows, she said, “we jeopardize everything else that we pay for in future years. … So because you now will have a bigger and bigger payment to PERA, we will have less money for K-12, less money for roads, less money for environmental protections, less money for the courts, all those kinds of things. So it’s really important that we take swift action now to pay the whole thing back.”
Bird said she supports the idea of eliminating the cash fund, arguing that “one dollar invested today is much better than one dollar invested tomorrow.”
Though her bill would have the state pay back PERA from the state’s general fund, she said she is “agnostic” on where the money actually comes from, and would be fine seeing it come from the $380 million cash fund. Either way, she supports clearing out that cash fund entirely and putting it into PERA.
The House Finance committee is scheduled to take up Bird’s bill on Monday afternoon.