Something’s missing from the Colorado state budget proposal — and it’s a biggie.
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Read moreThe Joint Budget Committee last week finalized its budget package without deciding what to do about Proposition 130: the voter-approved requirement that the state spend $350 million to support law enforcement.
But the six-member panel does have the makings of a plan.
The JBC was briefed last week on a draft bill to dole out the $350 million in regular installments over the next 10 years.
If only it were that simple.
To pay for it, the JBC would execute a complicated series of transactions that loops in the Public Employees’ Retirement Association and the state’s $2.4 billion reserve fund — then somehow emerges in 10 years without spending an extra dime of taxpayer money.
Confused? Well, that’s par for the course in Colorado budgetland.
Here’s how it would work:
Under the draft proposal, the state would issue PERA a warrant for $500 million that PERA would then invest alongside the rest of its portfolio. If PERA’s staff can generate the 7.25% return it expects on its investments, that would produce $36 million a year for the pension — just enough to cover the cost of a $35 million annual installment for Prop. 130.
There’s just one problem: The state can’t take money out of PERA once it’s been given, because of federal laws protecting pension funds. So those investment returns have to stay within the retirement system, which is trying to climb its way out of a financial hole of its own.
Instead, the state would make its annual payments to law enforcement by reducing its own required payments to PERA by the same amount. That would cut the $225 million it has to give to PERA each year to $190 million a year.
The initial $500 million would come from the general fund reserve — and here’s where it gets even more complicated.
Under the proposal, the state would still count the $500 million as part of its 15% reserve, even though the state can’t really access the money.
This concept is kind of a mashup of two other plans that have surfaced over the past 12 months.
Last March, former state budget director Henry Sobanet pitched the JBC on an idea that would have allowed PERA, as well as colleges and universities (like Colorado State University, where Sobanet now works), to invest some of the state’s reserves in order to generate higher returns.
More recently, in his January budget request, Gov. Jared Polis suggested tapping the rainy day fund to pay for Prop. 130. His plan wouldn’t have involved PERA, though. Instead, the legislature would have distributed the grants over six years, and repaid the reserve fund in $50 million installments over seven years.
What happens on a rainy day?
Suffice it to say, the maneuver is not risk-free. The whole point of an emergency reserve is that you can actually spend the money in an emergency.
That has Rep. Emily Sirota, a Denver Democrat who serves on the budget committee, worried that the scheme could hurt the state’s credit rating.
At a briefing last week, Mark Ferrandino, the governor’s budget director, conceded that it might be frowned upon by rating agencies. But, he noted, giving the money to PERA could offset those concerns.
“I do think it would probably be close to neutral for them, and here’s why: When you talk to credit agencies, one of their biggest concerns is always the unfunded liability on your pension fund,” Ferrandino said. “And this moves us to a better place on funding the pension fund.”
The bill would have some safeguards in place. If a recession hit and state lawmakers depleted the general fund reserve below $1 billion, the state could cut its annual PERA distribution entirely to pay back the reserve as fast as possible.
Sen. Barbara Kirkmeyer, a Brighton Republican, said that even if the state had to cut PERA’s funding in such a situation, the pension would still be better off financially under the proposal.
During the last economic crisis in 2020, the state responded by cutting its payment to PERA. If the state gave the pension $500 million ahead of time, PERA would be better positioned to weather future cuts.
“If we did end up in a COVID (situation), PERA is actually in a better position if we do this versus what we did in COVID,” Kirkmeyer said. “We don’t ever want to short-change PERA.”
PERA hasn’t taken a position on the proposal, which hasn’t been formally introduced.
“We appreciate the bill sponsors and stakeholders including us in discussions and are working through the details of how the proposal might work,” PERA spokesperson Patrick von Keyserling said in a statement.
As for the state, Ferrandino said the remaining reserve should be large enough that the state government wouldn’t need the $500 million back all at once.
“We are comfortable with this,” Ferrandino told the committee. “When (the Great Recession) hit (in 2008), it wasn’t really until the 2010 fiscal year that it actually really hit the budget in a significant way. You have some time to think about it, to plan and to be able to make this adjustment.”
The move wouldn’t be totally unprecedented. The state already has assets in a different reserve fund that it can’t easily convert to cash.The $600 million state emergency reserve, required by the Taxpayer’s Bill of Rights, has two state buildings in it, the State Services Building and the James Merrick Parking Garage, which are valued at a combined $40 million. In practice, however, the larger general fund reserve serves as the state’s rainy day fund.