State pension members in Colorado are likely to face another round of benefit cuts and contribution hikes within the next two years, board members learned last week, after a study found that the public retirement system has been underestimating some of its future debts.
The Colorado Public Employees’ Retirement Association holds a review every four years to ensure it is accurately estimating a range of assumptions about its investments, the public workforce and the lifespans of its retirees. Think of it like a financial checkup to make sure that the assumptions underpinning the future payments it owes to retirees are unfolding as expected.
But each of the past three times PERA has conducted this review, the results have come back the same: PERA continues to underestimate its long-term debt to public sector retirees.
In the wake of the latest study, conducted by benefits consulting firm Segal, PERA’s board last week voted to update its demographic assumptions to reflect the latest shifts in the public workforce, some of which can be attributed to the pandemic.
According to Segal, the changes make it likely that PERA’s finances will deteriorate, at least on paper, triggering another round of austerity measures under state law, which requires the pension to stay on a path to full funding by 2048. When PERA veers too much from that path, the law triggers automatic cuts to retiree cost-of-living raises, and automatic increases to contributions from public workers and their employers.
“It seems likely to happen,” Brad Ramirez, an actuary with Segal, told the board.
A strong investment year in 2024 could buy the pension some time before the provision is triggered, Ramirez said. But if it doesn’t happen during this year’s annual financial update, which comes out in June, the threshold is likely to be hit in the summer of 2026, he said.
PERA’s finances are heavily dependent on its actuarial assumptions, which determine how much money employers and employees need to contribute to fund future benefits. The best known of these is PERA’s 7.25% rate of return target on its investments, but its demographic assumptions about its members also play a sizable role.
The longer people live, the more money the pension owes in retirement payments. On the flip side, the more workers public agencies hire, the more contributions are being made to PERA to help pay off its long-term debts.
The study confirms what’s been evident for some time. Even as PERA’s investments have boomed in recent years, the pension’s finances remain unstable, triggering multiple rounds of benefit cuts and contribution hikes for public agencies and their workers.
One reason for that is the investment gains have been partially offset by PERA’s assumptions about the public workforce being wrong.
Over the past four years, public employees have gotten bigger raises than in the past, thanks to a tight labor market and new collective bargaining agreements struck by workers’ unions. Retirees have also been dying younger than expected in the wake of the pandemic — saving the pension money it would have otherwise owed. But the higher mortality rates didn’t offset the financial losses, driven primarily by higher-than-expected pay increases.
Pay raises for teachers and state workers added nearly $800 million to the unfunded debt in 2023 alone. Over the past four years, the missed demographic assumptions add up to $1.8 billion in financial losses, according to Segal.
Looking ahead, PERA also expects school districts to add new employees more slowly than in years past, as fewer families have children.
If an auto-adjust is triggered, retiree cost-of-living raises would fall to 0.75% a year from 1% currently. Public workers and employers would each contribute an additional 0.5% of each paycheck to PERA.
Today, most public employees contribute 11% of their salaries to the pension, while school districts and the state government contribute an additional 21%.
Monthly retirement benefits are determined by how long you work and how much you earn in your highest paid years of public sector employment.