March 19, 2013 08:59 PM UTC

Lobato's Lessons for the Colorado PERA Pension Case, Justus v. State.

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• by: PolDancer

The Colorado Supreme Court recently heard oral arguments in the Lobato public education funding case:

“The Colorado Supreme Court last week heard oral arguments on a lawsuit that could dramatically change the system of K-12 school finance in Colorado.”  “The Supreme Court’s March 7 hearing included a first: a live video broadcast of the proceedings.”

http://www.coloradostatesman.com/content/994052-lobato-lawsuit-could-have-major-ramifications-k-12-school-finance

As I watched the Lobato oral arguments two important “takeaways” for the Colorado PERA retiree pension lawsuit (Justus v. State) came to mind.  First, the failure of Colorado politicians to raise sufficient revenue to meet the state’s obligations does not excuse the state’s breach of public pension contracts in 2010.  Second, if the Colorado Supreme Court finds for the plaintiffs in the case Justus v. State, this decision need not impose an undue hardship on Colorado governments given that legal, prospective PERA pension reforms may be implemented over as many as seven decades.

http://www.courts.state.co.us/lobatovstate/

TAKEAWAY #1: THE LEGISLATURE'S FAILURE TO RAISE REVENUE FOR DISCRETIONARY STATE EXPENDITURES DOES NOT EXCUSE COLORADO’S BREACH OF CONTRACT.

According to the Denver Post, in Lobato oral arguments Colorado Assistant Attorney General Jonathan Fero (representing the state of Colorado) argues in regard to the state: "They have limited funds.  They cannot become indebted.  They cannot raise revenue on their own power."

Justice Hobbs responded: “‘I’m concerned that the argument ‘we can’t do it,’ becomes an excuse for ‘we won’t do it,’ Hobbs said, his voice rising.” (29 minutes into the 69 minute oral arguments.)

http://www.coloradostatesman.com/content/994052-lobato-lawsuit-could-have-major-ramifications-k-12-school-finance

Justice Hobbs continued: “It’s generally public knowledge we have a balanced budget requirement, that there is TABOR . . .”  “I’m very concerned that what the state’s arguing here is that we simply don’t have any duty and we should give up.”

http://www.courts.state.co.us/lobatovstate/

As we know, Colorado’s constitutional TABOR amendment, does not prohibit the Colorado General Assembly from regularly referring measures to Colorado voters to raise revenues sufficient to meet Colorado’s contractual obligations, and sufficient to fund the state’s discretionary public policy programs.  The 1992 Colorado TABOR constitutional amendment permits the Colorado General Assembly and Colorado local governments to seek voter approval for new revenues.

In 2010, the Colorado General Assembly looked first to break Colorado public pension contracts.  The Colorado General Assembly has never placed a measure on the statewide ballot asking voters for funding to meet the state’s contractual pension obligations.  It’s just easier to break contracts.  Colorado politicians should have some backbone and forthrightly inform the state’s voters that they actually have to pay for state services that are to be consumed . . . and they have to pay contractual deferred compensation for services that have been consumed in the past.

Instead, Colorado politicians propose the breach of state pension contracts while simultaneously making $100 million annual discretionary grants of property tax relief (popular with constituents) and giving away $538 million for local government pension obligations (Old Hire Fire and Police pensions) that are not the state’s obligation (popular with local government lobbyists.)

Although Colorado has (nearly) the lowest state tax revenue per capita in the nation, Colorado politicians do not want to propose tax hikes . . . here’s Hickenlooper on taxes:

“‘It's hard to say whether you have not enough taxes or too much taxes until you get to a point where you are running everything efficiently and you are utilizing the resources you have wisely,’ Hickenlooper said. ‘The enterprise isn't running efficient yet.’”

“John Straayer, a political scientist at Colorado State University who says state fiscal problems will not be solved without more revenue, questioned Hickenlooper's reasoning.”

“‘Obviously, you have to run any organization as efficiently as possible,’ Straayer said.  ‘But when do you know that, and do you do nothing until you know?  That could go on forever.’”

http://www.denverpost.com/news/ci_22277571/hickenlooper-faces-hot-potatoes-second-half-term

“A 50-state study from the University of Tennessee estimated that Colorado's state and local tax revenue losses from untaxed e-commerce sales totaled $172.7 million in 2012.”

http://www.denverpost.com/opinion/ci_22593397/yes-colorado-missing-out-sales-tax-revenue

The thought of actually raising new revenue to meet contractual pension obligations is a non-starter in our state.

Speaker Frank McNulty (R-Highlands Ranch): "I don't think at this point we can expect employer contributions to be part of the (PERA) solution . . .".

http://www.9news.com/rss/story.aspx?storyid=119465

“Employer contribution rates were lowered when PERA reached fully funded status, saving public employers in Colorado millions of dollars.”

http://www.copera.org/pera/about/newsarchives2009.htm#LAC

SB10-001 Proponent Friends of PERA:

“Rate cuts to PERA between 2000 and 2005 equaled some $325 million.”

“There is a misconception that the ‘taxpayers’ are owners of the (PERA) fund; the trust fund is owned by the beneficiaries of the fund . . .”

http://www.friendsofpera.com/facts/index.html

“The fact is that 80 percent of the dollars in the PERA trust fund come from the investment market and from member contributions — not taxpayers,” PERA spokeswoman Katie Kaufmanis said.

http://watchdog.org/63044/co-lawmakers-battle-secret-pension-issue-on-behalf-of-taxpayers/

Governor Bill Owens 2006 State of the State: “These changes should not affect those closest to retirement, but could be phased in for those who have years to go.”

http://www.pewstates.org/projects/stateline/headlines/colorado-state-of-the-state-address-2006-85899394414

“Interestingly, positions attributed to the Governor (Owens) . . . emphasized (PERA) solvency and the unacceptability of taxpayer funding to achieve it.”

http://cppa.utah.edu/_documents/westernstatesbudgets/wpsa-06/colorado-06.pdf

Meredith Williams, PERA Executive Director, May 29, 2011, Pueblo Chieftain:

“In fact, about 90 percent of the changes enacted by Senate Bill 1 are falling on the shoulders of current and future PERA members and retirees — not other taxpayers.”

https://www.copera.org/pera/about/issues.htm

Gino L. DiVito, Tabet DiVito & Rothstein LLC, Chicago, ILL:

“ . . . a short-lived pension reform that is invalidated by court order after protracted litigation . . . would be a disservice to the taxpayers.”

SB10-001 co-prime sponsor Senator Josh Penry:

“‘Republicans and Democrats created this (PERA) mess . . .’.

http://www.9news.com/rss/story.aspx?storyid=130197

In the minds of many Colorado legislators (and voters) public pension contracts are considered to possess an inferior status relative to Colorado’s corporate contracts.  The idea of breaking the state’s corporate contracts would be unthinkable at the Legislature.  Such a proposal would be universally condemned by Colorado’s media.  But, as we recently heard, the breach of Colorado’s public pension obligations is “Colorado Courage.”

In 2010, Colorado’s education establishment looked first to break Colorado PERA retiree pension contracts.  The education establishment put a tax-hike measure (Proposition 103) on the ballot in 2011, AFTER the education establishment had already supported the breach of Colorado PERA retiree pension contracts in 2010.  The proponents of the 2010 Colorado PERA bill that broke pension contracts (largely the Colorado education establishment) cannot claim that they tried to raise revenue PRIOR to breaking PERA contracts.  In 2010, pensioners were considered a great new education funding source.

In 2011, Senator Rollie Heath campaigned for a ballot measure seeking funding for public education in Colorado, but unfortunately the measure was defeated at the polls.  Senator Heath shares Justice Hobb’s concern . . . that the General Assembly not “give up”:

“It’s a conversation,” Heath said, “that we need to keep going.”  “ . . . Heath said he hopes Coloradans will ‘come together to say, we need to make some changes’ and work on what he termed ‘the big fix’ to unwind the knot of the Taxpayers Bill of Rights, or TABOR, the Gallagher Amendment and Amendment 23, three constitutional provisions he described as a fiscal stranglehold on the state.”

The Colorado Education Association (CEA), as a proponent of SB10-001, appears to remain optimistic that Colorado voters will eventually provide sufficient public education funding:

“‘CEA was similarly encouraged by more than 140,000 voters across the state who signed petitions to put Proposition 103 on the election ballot, and thousands more who joined the grassroots coalition led by state Senator Rollie Heath,’ CEA President Beverly Ingle added. ‘The momentum created by this energy and awareness to find new ways to increase public education funding will be Proposition 103’s lasting legacy.’”

http://coloradostatesman.com/content/993126-tax-hike-proves-be-losing-proposition

Geoff Blue, former Colorado Deputy Attorney General, argues that since Colorado’s education establishment has failed at the polls lately, they are now seeking to “legislate through the courts.”

Geoff Blue, Deputy Attorney General for Legal Policy and Government Affairs (now in private practice) made these comments in a 2011 interview (on Jon Caldara’s show The Devil’s Advocate, June 24, 2011) regarding the Lobato case:

Jon Caldara:

“Where is the teachers union on this?”

Geoff Blue:

“I don’t know if they are the plaintiffs, but I’m sure they’re very happy about this case.”

Jon Caldara:

“If the school districts want more money through law we have that ability to get them more money.  We can raise our taxes.  The state legislature can put on tax increases. The local districts can put up mill levy increases.  All they need to do is ask us, that’s what the state constitution says.  Wouldn’t that be easier than this?”

Geoff Blue:

“It would, and as a matter of fact Senator Rollie Heath has proposed such an initiative this year, to raise taxes specifically to fund education and higher education.”

 “Cleary there is a path to do it.  They’ve been losing so they’re trying to legislate through the courts.”

http://www.youtube.com/watch?v=k0ZdUF0L8cU

“Geoff Blue joined the Attorney General’s Office in early 2008 as a senior policy adviser to the Attorney General and the office’s liaison to the governor, General Assembly and local governments.”

http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/AnnualReport.pdf

TAKEAWAY #2, A COLORADO SUPREME COURT DECISION STRIKING DOWN SB10-001 NEED NOT IMPOSE UNDUE HARDSHIP, SINCE PUBLIC PENSIONS ARE REFORMED OVER MANY DECADES.

In Lobato oral arguments, Terry Miller of the law firm Davis, Graham and Stubbs suggested that the Colorado General Assembly address its funding problems incrementally . . . over many years.  This is precisely the manner in which the Colorado PERA trust funds should be strengthened.

From the Lobato oral arguments:

“(Justice) Bender asked if that wouldn't require a lot of time.”

"It doesn't have to happen in one year, as long as they're making reasonable progress toward a constitutional fix," (Terry) Miller said.

http://www.denverpost.com/breakingnews/ci_22738785/colorados-high-court-hears-school-funding-lawsuit-arguments

The actuarial funded ratio (AFR) of the Colorado PERA trust funds declined from a high of 105% to reach about 70% in 2010.  The PERA AFR has been as low as the 50s, back in the 1970s.  In 2010, the Colorado Legislature decided to use the recent market volatility as an excuse to eliminate a large part of the pension debt of Colorado PERA-affiliated employers through breach of contract.  But, dips in the Colorado PERA AFR need not be fixed overnight by breaking contracts. The most recent decline in Colorado PERA’s AFR can be addressed over as many as seven decades.

Colorado PERA:

“PERA is a long-term investor with an investment horizon that spans not just 10 years, but 50 or 70 years.”

https://www.copera.org/pera/about/issues.htm#41211

Colorado PERA Board Trustee and Court of Appeals Judge Casebolt: “PERA faces no immediate danger of being unable to pay benefits, in fact, PERA can pay benefits for many years to come, based on our current funding and our benefit structure coupled with over $30 billion in assets, at present market value.”

http://www.copera.org/pera/about/listeningtour.htm

Deputy Colorado Attorney General Bernie Buescher, “who spent 20 years as a pension attorney,” has “said that he believes Colorado PERA needs changes, but not drastic ones, pointing out that the ‘beauty’ of pension plans is that small changes compound interest over time.  ‘When you're talking about something as complex as retirement plans, the planning horizon is 30 to 50 years — even 20 years is too short.’”

https://www.cu.edu/sg/messages/4829.html

http://m.rockymountainnews.com/news/2006/feb/11/governor-demands-pera-solution/

Bernie Buescher currently serves as Colorado’s “Deputy Attorney General overseeing the Colorado Department of Law’s State Services Section.”  “A native of Grand Junction, Buescher replaces Monica M. Marquez, whom Gov. Bill Ritter recently appointed to the Colorado Supreme Court.”

http://www.coloradoattorneygeneral.gov/press/news/2011/01/18/attorney_general_announces_bernie_buescher_new_deputy_attorney_general_state_s

Meredith Williams, Colorado PERA Executive Director, Pueblo Chieftain, August 13, 2005:

"The liabilities of the system, frankly, will be paid out over multiple decades, and we're talking 70 or 80 years.  We're kind of designed for the long haul and we know we're going to experience ups and downs in the marketplace.  Unfortunately, we're just coming off the worst three years of market performance in history."

http://www.chieftain.com/metro/slow-stock-market-retiree-boom-hurts-pension-system/article_da58863b-1799-50b4-8ff3-0548d16be68c.html

Meredith Wiliams, CAFR Summary to Members, 2002, December, 5/21 (REV 6/03):

 “While the investment markets will always have ups and downs, PERA is a long-term investor and we can ride out the bad times the market experiences.”

http://www.copera.org/pdf/5/5-21-02.pdf

Meredith Williams, Silver and Gold Record, December 4, 2008:

“‘The beauty of a defined benefit plan is that it rolls in a lot of people from different employers and age groups,’ Williams said. ‘We've got a much larger segment of people making contributions and employers making contributions,’ and with its current assets PERA will be able to pay benefits for decades to come, he said.”  “Williams said that gives PERA time to examine its options.”  "We generally can ride out market cycles," he said. "We're built to do that."

https://www.cu.edu/sg/messages/6546.html

Meredith Williams in a 2008 “Shareholder Presentation”:

“Because PERA is a long-term investor, we know that at times we'll have losses, but those losses will be offset by gains over the long run in PERA's diversified investment portfolio.  The bottom line is that the PERA portfolio is well diversified and able to withstand the ups and downs of the market over time.”

https://www.copera.org/pdf/Shareholder/ShareholderPresentation08.pdf

Colorado PERA: “Setting the Record Straight”:

“But what’s not mentioned is that this liability is not due and cannot be made payable today, just like a mortgage. This is the aggregate amount owed by PERA to current retirees and to all existing workers who have begun work for a public employer in Colorado and may not begin receiving a benefit for three or more decades.”

http://www.friendsofpera.com/Setting%20the%20Record%20Straight.pdf

Keith Brainard of the National Association of State Retirement Administrators (NASRA):

“Only 30-40 years ago, most public plans were financed primarily on a pay-as-you-go basis.”

“Even after the most recent and unprecedented financial downturn, most state and local government pension trusts have plenty of assets to continue to pay promised benefits for years, and values already have rebounded sharply since the market low.”

http://judiciary.house.gov/hearings/pdf/Brainard02142011.pdf

SB10-001 Proponent, Colorado Association of School Executives (CASE) in a 2006 CASE (PERA) Issue Brief:

“What is PERA’s financial condition?  Is PERA stable?  Yes.  PERA is quite stable.  As of this writing, PERA's market value is in excess of $35 billion.  If there were flat investment returns in the future, PERA would have enough cash to pay benefits or over 40 years.  By almost every standard, PERA is solvent.”  “Now, some of the same politicians who voted for increased benefits and lower contribution rates are the ones pointing fingers and talking about a ‘crisis.’”

http://www.friendsofpera.com/facts/PERAIssuebrief.pdf

SB10-001 Proponent Friends of PERA:

“Equating PERA’s amortization period (number of years when it will have the unfunded portion paid off) to an actuarial emergency or necessity is erroneous.  PERA continues to have a positive cash flow without selling off assets.”

http://www.friendsofpera.com/facts/index.html

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