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May 22, 2013 11:53 AM UTC

National Association of State Budget Officers - the Common Funding Ratio Benchmark for Public Pensions is 80%. So, Why is the Colorado Legislature Trying to Break PERA Pension Contracts Until a 100% Ratio is Attained?

  • 2 Comments
  • by: PolDancer

CLEARLY LEGISLATIVE OVERREACH.

Last year, the National Association of State Budget Officers published an Issue Brief that places public pension funding in a state budgetary perspective.  The Issue Brief brings perspective to the Colorado General Assembly's breach of Colorado PERA public pension COLA contractual obligations in 2010.  A lawsuit contesting this state taking of PERA public pension benefits, Justus v. State, is currently pending before the Colorado Supreme Court.

"For over 60 years, the National Association of State Budget Officers (NASBO) has been the professional membership organization for state budget and finance officers."

http://www.nasbo.org/about-nasbo

The Issue Brief, "A State Budgeting Perspective on Public Pensions," is available at the following link:

http://www.nasbo.org/sites/default/files/pdf/A%20State%20Budgeting%20Perspective%20on%20Public%20Pensions.pdf

Below, I provide a few important excerpts from the NASBO public pension Issue Brief (and my observations):

"This brief examines a number of pension issues from a budgetary perspective. A budgetary perspective considers long term pension funding adequacy, and the financial cost of promised benefits in relation to the rest of current state spending."

"Most public pensions have retained a defined benefit status in which retiree payments are guaranteed under state statute, constitution, or contract law."

(My comment: When the Colorado General Assembly enacted the bill breaking Colorado PERA retiree pension contracts in 2010 [SB10-001], scant attention was given to the fact that the issue of governmental taking of contracted public pension COLA benefits had been previously litigated in Colorado.  Decades ago the Colorado Supreme Court invalidated the taking of contracted COLA benefits by Colorado governmental employers as a means of escaping their contracted public pension debt.  Colorado state and local government employers cannot "define" their way out of their contractual public pension COLA obligations in statute or ordinance.  How did the Colorado PERA Board of Trustees and Colorado's public sector unions arrive at the conclusion that state and local government employers, after benefiting from the labor of their employees, did not have to pay contracted deferred compensation for that labor?  This notion defies Colorado case law, and common sense.

Although, many state legislators were generally aware of the recent Colorado Attorney General's Opinion stating that impairment of contracted PERA benefits would be unconstitutional (during debate of SB10-001), few had read the on-point case law, Bills or McPhail.  In 2009/2010 the Leadership of the Colorado General Assembly, encouraged by self-interested public sector unions, preferred to keep rank and file members of the General Assembly in ignorance.  Thus, Leadership abdicated legislative policy-making authority in this area to the state's pension administrator, Colorado PERA.  The Colorado PERA Board of Trustees conducted a statewide campaign to persuade Colorado PERA retirees to relinquish their contractual pension rights.  As planned, the PERA Board of Trustees presented a preordained conclusion to take "fully-vested" PERA retiree pension COLA benefits to the Legislature prior to the 2010 legislative session.

Although encouraged to do so, the Leadership of the General Assembly did not pursue an interrogatory to the Colorado Supreme Court requesting an opinion on the constitutionality of their proposed taking of PERA retiree public pension benefits.  The Leadership of the General Assembly did not propose that an interim study committee be appointed to examine potential PERA pension reforms that would comply with the Colorado Constitution.  Such actions on the part of the General Assembly's Leadership would have resulted in a level of knowledge of public pension contractual rights on the part of the members sufficient to prevent even 27 statehouse lobbyists from pushing SB10-001 through the legislative process.)

NASBO:

"The yearly . . . employer contribution to the fund comes directly from the state’s operating budget and is called the annual required contribution or (ARC).  The ARC represents the level of payment needed for the state to keep pace with the accumulation of benefits."

"When states contribute significantly less than the ARC, assets in the pension fund may not be able to meet the liabilities that accrue, which can necessitate future taxpayer dollars to cover the cost of benefits for services delivered in the past.  States must consider the issue of equity because, as the Government Accountability Office points out, 'When the ARC is not paid in full each year, future generations must make up for the costs of benefits that accrued to employees in the past.'"

(My comment: On August 11, 2009, at the Denver meeting of the Colorado PERA “Listening Tour” Colorado PERA’s General Counsel Greg Smith blamed the Colorado General Assembly for the decline PERA’s actuarial funded ratio: “We have not been paid what’s called the actuarially required contribution.”  “We’ve not been receiving that full contribution in any of our divisions for many years . . . seven years to be specific.”

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

This legislative habit of failing to pay annual public pension bills [the ARC deficiency] has been referred to as "taking a pension holiday," or "putting state expenditures on a credit card."  Skipping out on required PERA pension bills allowed the Colorado General Assembly to redirect this money to discretionary state programs.  Colorado state legislators have racked up their PERA credit card balance on an extended "pension holiday."  Rather than acting responsibly and facing the consequences of their negligence, state legislators now seek to raid Grandma's bank account to pay off their credit card debt.  These are our state leaders . . . setting a example for today's youth.)

NASBO:

"The amount owed on unfunded liabilities can be paid over time because the obligations are amortized much like a mortgage payment."

(My comment: Colorado PERA Executive Director Meredith Williams in "Setting the Record Straight":

“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

Silver and Gold Record, March 9, 2006:

“Williams noted that most people don't have enough money to pay off their mortgages, and that PERA's assets have exceeded its total liabilities only twice in its 75-year history. ‘We have 74 percent of the mortgage, but some people are making hay out of that,’ he said."

https://www.cu.edu/sg/messages/4871.html)

NASBO:

"When a pension plan’s accrued actuarial liability exceeds the actuarial valuation of assets the plan is said to have an unfunded actuarial accrued liability (UAAL) or unfunded liabilities."

"The ratio of liabilities to assets is depicted as a pension plans’ funding ratio, which indicates the level of funds available for paying accrued benefits. The benchmark for many state and local plans is to maintain an 80 percent funding ratio or enough assets to cover 80 percent of accrued liabilities."

(My comment: “Mr. [Meredith] Williams was quoted in the same report as saying ‘Most pension funds are considered sound at 80 percent funding levels.’”

“Meredith Williams ‘said at the Senate Finance Committee hearing [on SB10-001] in January that PERA needed to be funded at 100 percent.  When the PERA representatives  were asked by a member of the committee why in view of the fact that PERA had only been funded at 100 percent for about seven of the past thirty years [actually two of the last eighty-one years], it was necessary now.  The answer was ‘it just makes things easier.’”

Link:

http://www.leg.state.co.us/Clics/clics2010a/commsumm.nsf/b4a3962433b52fa787256e5f00670a71/84960fa73d53e222872576c600712e80/$FILE/10HseFin0210AttachG.pdf

In February 2011, Colorado PERA's General Counsel wrote in the periodical "Government Finance Review," that, in order for a PERA pension reform to be found "reasonable" under the law, changes to the Colorado PERA pension must be "the minimum changes necessary."  The next year, June 26, 2012, Colorado PERA’s independent actuary, Cavanaugh MacDonald Consulting, LLC, wrote in the 2011 Colorado PERA CAFR: that the 100 percent funding threshold put into Colorado law by SB10-001 is much stronger than is necessary [i.e., not “the minimum change necessary”] to meet public pension regulatory [GASB] standards.  Alteration of the statutory Colorado PERA pension contract in 2010 [SB10-001] by incorporation of this 100 percent PERA pension funding threshold placed unnecessary financial pressure on the PERA pension trust funds, creating the Legislature's desired rationale for breaking pension contracts, and does not represent the "least drastic" reform option available to the Colorado General Assembly.

You can see that, in 2010, when Leadership decided to attempt a Colorado PERA pension contract breach, they were determined to "go big."  If they were going to use recent [2008/2009] market volatility as a “window” to attempt to slash state and local government pension debt, why not roll the dice and slash the PERA pension debt dramatically?  Why not push 90 percent of the cost-shift in their bill, SB10-001, onto PERA retirees?  PERA retirees were weak and unrepresented . . . an easy target for PERA’s hired lobbyists.  Instead of placing a PERA pension funded ratio of 80 percent in the title of SB10-001, why not bet the farm and stick in a 100 percent funded ratio threshold?  [Note that another state that has been condemned for its attempt to take public pension COLA benefits, Rhode Island, proposes to continue its own pension theft until just an 80 percent funding threshold is achieved.  The Rhode Island theft is thus, comparatively, the lesser crime.]  This is what happens when lobbyists run the legislative show. Greed takes over.

Note this 2012 Fitch Ratings position on public pension funding levels: “Fitch generally considers pensions with funded ratios 80% and above to be well-funded.”  Also, in a 2011 Fitch Ratings report, Fitch notes that a 70 percent actuarial funded ratio for public defined benefit pensions is considered an “adequate” actuarial funded ratio.

Link:

http://www.ncpers.org/Files/2011_enhancing_the_analysis_of_state_local_government_pension_obligations.pdf)

Back to NASBO:

"In the past, pension dollars accounted for a much greater share of state budgets than they do today (See the graph on page 4 of the NASBO Issue Brief.)"

"Overall, pension contributions represent a small percentage of states’ operating budgets at roughly 3.8 percent."

(My comment: Jennifer Paquette, Colorado PERA Chief Investment Officer, May 22, 2011, Denver Post:

“In fact, employer contributions to pensions account for just 2.16 percent of all Colorado state and local government spending, according to 2008 U.S. Census Bureau data.”

Note that according to the NASBO graph, in the 1980s, U.S. state and local government expenditures to meet public pension obligations reached six percent of total state and local government expenditures, nearly three times Colorado's public pension burden in 2008 as identified by Colorado PERA's Chief Investment Officer above.)

NASBO:

"Center for Retirement Research at Boston College, October 2010 – Public Pension Contributions as a Percent of State and Local Government Budgets."

NASBO:

"Pension liabilities can also be viewed as a debt structure component, comprising one aspect of a state’s long-term outstanding debt. Therefore, state pension systems are a factor that rating agencies consider before issuing an opinion on a state’s ability to repay debt obligations. The degree to which states consistently pay their ARC indicates that other debt obligations will likely be met through the normal budget process."

"Pension obligations are referred to as 'riskless' because the payments are guaranteed to beneficiaries."

Link to complete NASBO public pension Issue Brief:

http://www.nasbo.org/sites/default/files/pdf/A%20State%20Budgeting%20Perspective%20on%20Public%20Pensions.pdf

Colorado PERA active and retired members, the proponents of SB10-001 would have you, and Colorado courts, believe that your accrued pension benefits are a burden on Colorado state and local governments.  In reality, pension contributions made by Colorado governments are a fraction of public pension contributions in other states.  The Colorado General Assembly and self-interested lobbyists want to conceal many truths from you and the courts.  Help bring the truth to light in our state.  Do your part to preserve the rule of law in Colorado.  Contribute at saveperacola.com.  "Friend" Save Pera Cola on Facebook!

Comments

2 thoughts on “National Association of State Budget Officers – the Common Funding Ratio Benchmark for Public Pensions is 80%. So, Why is the Colorado Legislature Trying to Break PERA Pension Contracts Until a 100% Ratio is Attained?

    1. Hey hawkeye, the article you cite makes reference to a recent report from the Center for Retirement Research at Boston College.  While I believe that the Center does produce much valuable research regarding US public pension systems, I also consider the Center's Director to be an apologist for public pension contract breach.  For example, take a look at the report referenced in your article.  The Center's report notes that a number of states have made changes to their public pension COLAs without identifying which of these pension COLAs were "automatic" COLAs like the Colorado PERA pension COLA and are contractual obligations of plan sponsors, and which are "ad hoc" pension COLAs that can be legally diminished by the plan sponsor.  This is akin to stating that a man took cash from a bank vault, without telling us whether or not the money was the man's property.  It is a key omission that just happens to serve what I see as a preference on the part of the Director to break public pension contracts.

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