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June 28, 2013 03:29 PM UTC

Moody's Condemns the Failure of States to Pay Their Public Pension Bills, i.e., "The Colorado Plan."

  • 9 Comments
  • by: PolDancer

From an article in yesterday's (6/27/13) Reuters:

"The states that have the largest relative pension liabilities have at least one thing in common: a history of contributing less to their pension plans than the actuarially required contributions (ARC)," Moody's said in the report, which looked at data for fiscal 2011.

http://www.reuters.com/article/2013/06/27/usa-states-pensions-moodys-idUSL2N0F21RD20130627

(My comment: The "actuarially required contribution" [ARC] is the amount of the annual pension payment that is necessary, according to actuaries, to keep up with newly accruing pension liabilities, and amortize existing pension liabilities.)

As we have seen, Colorado has not paid its complete public pension (Colorado PERA) bills for many years.  Since the Leadership of the Colorado Legislature has abdicated its public pension policy-making responsibility to self-interested lobbyists, most members of the Colorado Legislature are not even aware of the historical PERA pension underfunding.

From the Moody's report:

"The largest accumulated liabilities most often reflect management decisions not to fund contributions at levels reflecting actuarial guidelines.  Of the ten states with the largest pension burdens, six have been downgraded in recent years for the magnitude and management of their pension obligations, in part a reflection of persistent underfunding."

"In an effort to reduce current expenditures, states that underfund simply increase the portion of their liability that must be amortized, resulting in ever-greater ARCs that become even more difficult to meet. For this reason, funding history is an important credit factor."

"The states with the lowest ratio of ANPL to revenues also have little in common outside of a commitment to making full ARC payments to their pension plans."

"By contrast, for states with statutory contributions less than the ARC (My comment: Like Colorado) or for those who have underpaid for other reasons, the dismal performance of the asset markets in the last decade revealed how quickly such approaches could reduce the funding status of a pension plan."

Colorado has "already eaten its lunch," now it wants to "skip out on the bill."

The State of Colorado and Colorado local governments are attempting to escape their contractual obligations.  Having failed to pay their public pension bills for many years, they now are attempting to use their own negligence as a rationale to break Colorado PERA public pension contracts.  The Colorado Legislature, having intentionally reduced the funding ratio of the Colorado PERA pension system through underfunding, now wants PERA retirees to bear the burden of fixing their problem.  In 2010, the Colorado Legislature enacted a bill, SB10-001, that attempts to shift the accrued public pension debts of Colorado governments onto the backs elderly pensioners (Colorado PERA retirees.)

Note Colorado PERA Executive Director Meredith Williams' comments on February 23, 2012 to the House Finance Committee (relating to the Legislature's historical underfunding of its PERA pension obligations):

"We've had a significant problem over the years, in that . . . contributions, payments by (PERA) employers into PERA have been kind of the last thing in the budget building process, and we have not made the required payments. Unfortunately, in our line of work, where we're involved in compounding shortfalls grow, particularly when the shortfalls continue year after year after year."

Recall the words of Colorado PERA's General Counsel (now Executive Director) Greg Smith.  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.”

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

The recently released 2012 PERA CAFR (financial report), page 34, includes a chart illustrating the failure of the Colorado General Assembly to set PERA contribution rates at a level sufficient to meet PERA's "actuarially required contributions" (ARC).  The chart identifies Colorado PERA pension underfunding from 2008 to 2012, although the pension underfunding has been uninterrupted since 2001, [also occurring in the 1990s.]

Page 93 of the 2012 PERA CAFR identifies the historical underfunding of the Colorado PERA pension (failure of the General Assembly to pay the full ARC) by PERA division.

Note that while the Colorado General Assembly has failed to pay its contractual PERA public pension bills, it has simultaneously paid off $700 million in Colorado local government legacy pension debt (Old Hire Fire and Police Pensions) that ARE NOT the contractual obligation of the State of Colorado.  Having failed to pay its PERA pension bills, and directed state funds to pensions that ARE NOT the contractual obligation of the State of Colorado, the General Assembly now seeks to break its own PERA contracts.

At the 2013 Colorado legislative session, the Colorado General Assembly made a final installment of $142 million to pay off Colorado local government Old Hire Fire and Police legacy pension obligations that ARE NOT the contractual obligation of the State of Colorado, while (according to the 2012 PERA CAFR) again underfunding its Colorado PERA contractual public pension obligations.

2012 PERA CAFR, page 35 – "ARC Deficiency."

"In 2012, the actual (PERA) contributions, as set in statute, were $143.4 million less than the ARC as calculated by the actuaries."

"During the past 10 years, this shortfall in funding . . . has been $3.4 billion."

https://www.copera.org/pdf/5/5-20-12.pdf

Provided below are statistics relating to the failure of the Colorado General Assembly to pay its public pension “actuarially required contributions” (ARCs), from the Center for Retirement Research at Boston College Public Plans Database:

2001 Colorado School – 100% ARC Paid

2002 Colorado School – 100% ARC Paid

2003 Colorado School – 69% ARC Paid

2004 Colorado School – 51% ARC Paid

2005 Colorado School – 48% ARC Paid

2006 Colorado School – 62% ARC Paid

2007 Colorado School – 60% ARC Paid

2008 Colorado School – 68% ARC Paid

2009 Colorado School – 65% ARC Paid

2010 Colorado School – 70% ARC Paid

2011 Colorado School – 89% ARC Paid

2001 Colorado State – 100% ARC Paid

2002 Colorado State – 100% ARC Paid

2003 Colorado State – 69% ARC Paid

2004 Colorado State – 51% ARC Paid

2005 Colorado State – 48% ARC Paid

2006 Colorado State – 58% ARC Paid

2007 Colorado State – 56% ARC Paid

2008 Colorado State – 63% ARC Paid

2009 Colorado State – 61% ARC Paid

2010 Colorado State – 62% ARC Paid

2011 Colorado State – 85% ARC Paid

2001 Colorado Municipal – 100% ARC Paid

2002 Colorado Municipal – 100% ARC Paid

2003 Colorado Municipal – 69% ARC Paid

2004 Colorado Municipal – 62% ARC Paid

2005 Colorado Municipal – 64% ARC Paid

2006 Colorado Municipal – 85% ARC Paid

2007 Colorado Municipal – 84% ARC Paid

2008 Colorado Municipal – 98% ARC Paid

2009 Colorado Municipal – 96% ARC Paid

2010 Colorado Municipal – 101% ARC Paid

2011 Colorado Municipal – 139% ARC Paid

(According to the 2011 PERA CAFR, the dramatic increase in the percentage contributed for the Colorado PERA Local Government Division in 2011, is a “result of the changes contained in SB10-001,”  [2011 PERA CAFR Financial Section, page 82.]  Apparently, when the State of Colorado breaks its public pension contracts it really facilitates the payment of the full ARC in some PERA divisions.)

Colorado PERA active and retired members, when a government creates a problem through its own negligence, and then attempts to fix the problem by breaking its contracts, that is clearly immoral and illegal.  Colorado is better than this.  Support contractual public pension rights in the United States.  Contribute at saveperacola.com, and "Friend" Save Pera Cola on Facebook!

Comments

9 thoughts on “Moody’s Condemns the Failure of States to Pay Their Public Pension Bills, i.e., “The Colorado Plan.”

  1. Excerpt from Moody Article:

    "According to a Moody's Investors Service report released on Thursday that found the Illinois pension bill was equal to 241 percent of its revenues.  After Illinois, Connecticut had the highest pension burden in the country, with a pension liability equal to 189.7 percent of revenues. That was followed by Kentucky, at 140.9 percent; New Jersey, 137.2 percent; Hawaii, 132.5 percent; and Louisiana, s 130.2 percent. Colorado's net pension liability was slightly more than revenues at 117.5 percent and Maryland's slightly less at 99.5 percent."

    _________________________________________________________

    Looks like Colorado is not in good company.  How did we get there?  By chronic and systematic underfunding.  Who pays the price?  Current and future retirees cover 90% of the cost.

    If the courts do rule in favor of the defendants in the lawsuit, I believe PERA would seriously consider using the Social Security COLA for those with a lower monthly benefit, for example, up to $2,500.  Retirees with a higher monthly benefit would have an ad hoc COLA on amounts over $2,500, which would depend on PERA's overall condition and legislative generosity.  

     

     

    1. Hey hawkeye, I cannot see how it would be possible for a court to justify this breach of PERA contracts.  An offer was made to public workers, they accepted the offer and have fully-performed under their contracts.  Colorado PERA officials have already admitted on the record that the COLA is their contractual obligation.  How could a court find that the PERA COLA is not a PERA contractual obligation, when such a finding would contravene the plain language of the statute, the legislative history of the statute, the long-standing expectations of the Plaintiffs, and the legal opinion of the Defendant, stated (and recorded) in testimony before the Legislature?

      So, the PERA COLA is contractual.  Obviously, taking an average of $165,000 from each retiree is "substantial."  Under either McPhail/Bills or DeWitt, all that remains is whether the taking was "actuarially necessary," or "reasonable" and "necessary."

      We have shown that the General Assembly broke PERA contracts at an actuarial funded ratio (AFR) of 68.9 percent, while PERA contracts have been honored in the past when the AFR was as low as 54 percent (in the 1970s).  PERA officials have told us that even without SB10-001, they have plenty of assets available to pay contracted PERA benefits for decades.  So, there was no "actuarial necessity."  It is not possible to intentionally create a problem through underfunding and then legitimately claim that your own negligence makes it "actuarially necessary" to break your contracts.

      Further, paying off local government pension obligations that ARE NOT the state's obligation, while ignoring PERA pension obligations THAT ARE the state's contractual obligation is in NO WAY REASONABLE.

      Underfunding the PERA pension to diminish its funding ratio and then expecting those who DO NOT OWE the debt to bail you out (pay 90 percent of the cost of a proposed pension reform), is in NO WAY REASONABLE.

      Ignoring innumerable "less drastic" pension reforms to bolster PERA's funding status (such as SB 12-149 adopted to PROSPECTIVELY, legally reform Colorado county government pensions) is in NO WAY REASONABLE.

      Off soapbox, and to the Moody's report:

      The Moody's analysis included the use of an absurdly low pension discount rate that artificially exaggerates pension liabilities.

      Although I appreciate Moody's recognition of the failure of the states to pay their public pension bills as (an obvious) primary contributor to the decline of public pension funding ratios in the U.S., Moody's has been criticized lately for its newly adopted methods of calculating pension liabilities.  Here is an interesting comment made relating to the Moody's report on a recent New York Times article:

      "The effort to reduce future (public pension) benefits to a current liability is not the interesting question and is at best a marginally useful indicator.  The interesting question is whether a plan will have the resources in future periods to pay the future benefits promised.  For that question the investment assumption is important, and the discount rate is irrelevant."

      http://dealbook.nytimes.com/2013/06/27/moodys-shows-wider-pension-gap-for-states/?ref=business&_r=0

      (PERA's rate of return assumption is right in line with its historical performance and public pension systems generally, and lower than the average PRIVATE sector defined benefit pension return assumption.)

      Paraphrasing the balance of the NY Times comment:

      Over the last few decades, most public pension plans in the U.S. have returns that come very close to matching their return assumptions, at levels much greater than Moody's assumed rate.  So, reducing plan return assumptions (which are based on a diversified portfolio) to a lower bond rate (NOT based on a diversified portfolio) for purposes of CREATING a balance sheet liability is a statistical creation that makes the problem appear to be worse than it really is.

      Anti-government groups in the U.S. (you know who you are) are seeking to make the public pension funding question into a bigger problem than it really is as a rationale to cut pension benefits, public sector jobs and salaries, i.e., "drown government in a bathtub."

  2. Glen Brown asks, "What about that pension agreement between the We Are One Illinois Coalition and Senate President Cullerton?"

    http://preaprez.wordpress.com/2013/05/07/glen-brown-asks-what-about-that-pension-agreement-between-the-we-are-one-illinois-coalition-and-senate-president-cullerton/

    Algernon, you made a comment on the above article in May.  What's your take on the Illinois legislature shrugging off pension reform this year, especially a retrospective COLA claw back?  Illinois public pensions are worse off than any other state.  Are the Illinois state legislators hoping for a federal bailout, as suggested by Illinois Governor Pat Quinn last year?

    An Illinois Pension Bailout?  Governor Quinn wants you to guarantee his state's pensions.

    http://online.wsj.com/article/SB10000872396390444032404578008291279754994.html

     

    1. Hey hawkeye, there is no need for Illinois to abandon its Constitution, it has the ability to pay its debts.

      A pension reform bill in Illinois will not pass court muster if a "less drastic" reform is available to the Legislature.  Numerous "less drastic" public pension remedies are indeed available to the Illinois Legislature, just as they were available to the Colorado Legislature in 2010.  The Illinois Legislature could simply extend its recent income tax hike to pay down the state's pension debt.  This solution has the advantages of unquestionable morality and constitutionality.  It is perfectly legal and moral for governments in the United States to pay off their accumulated debts.

      The Illinois Legislature could also consider lowering the rate of FUTURE accrual of pension benefits in the state by reducing the public pension "multiplier" on a PROSPECTIVE basis (for pension benefits not yet accrued.)  See Professor Amy Monahan's paper: "Public Pension Reform: the Legal Landscape."  (She is Professor of Law at the University of Minnesota School of Law, and the foremost expert in the U.S. on public pension contractual obligations.)  The Colorado Legislature adopted this "less drastic," prospective reform for Colorado county governments in 2012 (SB12-149.)  The State of Illinois could consider reforming the state tax system, closing corporate tax loopholes that cost the state billions, and re-amortizing the state's pension debt over its life 50-70 years.  (See Ralph Martire's Illinois public pension refinancing plan.)

      But let's be clear . . . taking "fully-vested," contracted, earned, and accrued public pension COLA benefits from current Illinois retirees is the MOST DRASTIC idea that has been put forth, in Illinois and in Colorado.  Touch current retiree contracted benefits . . . be sued . . . arrive back at Square One in a couple of years.

      ILLINOIS SENATE PRESIDENT CULLERTON'S CHIEF LEGAL COUNSEL ERIC MADIAR: COLORADO'S BREACH OF PENSION COLA CONTRACTS WILL LIKELY BE FOUND UNCONSTITUTIONAL.

      Cullerton's legal aid Eric Madiar believes that Colorado's recent theft of fully-vested, accrued public pension COLA benefits is likely unconstitutional.  So, why is Cullerton going down this path in Illinois?

      From “Public Pension Benefits Under Siege”:

      “The adoption of the contractual approach by Colorado . . . however, make(s) it more likely that pension reform efforts (the COLA provisions of SB 10-001) will be found unconstitutional.”

      A PDF of the Madiar paper is available on the website of the National Conference of State Legislatures at the following link:

      http://www.ncsl.org/home/search-results.aspx?zoom_query=madiar%20public%20pensions

      Support public pension contractual rights in the U.S., contribute at saveperacola.com!  Friend Save Pera Cola on Facebook!

  3. Algernon, I read Madiar's paper and found it interesting, but a bit outdated as it did not include last year's Court of Appeals ruling.

    It appears the whole lawsuit hinges on:

    1.  Controlling Precedent:  McPhail or DeWitt; 

    2.  Fixed, guaranteed ABI or de facto changeable COLA.

    The state contends DeWitt controls, and that COLA (or ABI) improvements permanently changes the COLA status to "ad hoc" which allows for future reductions.

    Al, am I on track?  It seems to me the defendants' attorneys will have a tough time making a case using this argument, at least with a straight face.  However, it did work at the District Court level.  

     

  4. Al, just one more question:

    A good part of the state's case rests on DeWitt in control, and then throw in confusion with the argument involving unchangeable COLA versus unreduced COLA.  Since the SB10-001 lawsuit is based on a constitutional approach dealing with contracts, wouldn't it be a cleaver legal strategy on the part of the defendents to use DeWitt as a means to swing Colorado toward promissory estoppel (conceptually at least), such as with the Minnesota COLA case?  

    1. Hey hawkeye, promissory estoppel would be a lower legal standard.  Minnesota's public pension legal theory is discussed in Professor Monahan's paper, "Public Pension Reform: The Legal Landscape" (which, by the way, I don't believe any Colorado state legislators read prior to breaking PERA pension contracts in 2010.  Monahan:

      "States generally protect public pensions under either a contract-based theory or a property rights theory, while one state does so under principles of promissory estoppel."

      The Colorado Supreme Court has rightly found that public pension COLA benefits are a contractual obligation of pension plan sponsors and affiliated employers.  This is only right, we don't people working for an employer who is free to decide what their employee's compensation (deferred pension compensation) will be after they have completed the job.

      Hypothetically, if Colorado PERA offered workers only 20 percent of their highest three year average salary (HAS) at retirement and accompanied this "base benefit" with a very large annual COLA, for example 8 percent, under this pension contract 90 percent of the total PERA pension benefit would derive from the COLA.  In that event, would any reasonable person argue that the Colorado Legislature could legally seize 90 percent of a retired worker's total pension benefit after retirement by slashing the COLA?  This would clearly be recognized as unreasonable.  So, why is Colorado PERA arguing that seizure of 30 percent or 40 percent of contracted PERA pension benefits from retirees is acceptable in SB10-001?

      I don't believe that the COLA-taking provision of SB10-001 is "actuarially necessary" under McPhail or Bills, and I don't believe that the COLA-taking can be found "reasonable" or "necessary" under DeWitt.  PERA's attorneys would like the courts to apply a DeWitt test, but from my reading the COLA-taking would fail the DeWitt test as well.  I'll try to write more about DeWitt later.

  5. Hey hawkeye, what's wrong with Colorado's public sector unions is that they value their revenue stream more than they value morality or the rule of law.  Public sector retirees do not contribute to that union revenue stream as do current union members paying union dues.  Hence, the retired "brothers and sisters" were summarily tossed under the bus in 2010.

    Unlike Oregon state legislators, Colorado legislators did not bother to ask their own attorneys for an opinion on the constitutionality of their proposal to seize accrued pension benefits prior to acting.  Incredibly, Colorado legislators ignored a 2004 Colorado Attorney General’s opinion on this subject, as well as on-point Colorado case law.  Colorado state legislators were encouraged in 2010 to seek Colorado Supreme Court guidance clarifying the legality of their proposal to take accrued Colorado PERA pension benefits.  The Colorado Legislature ignored this advice (to submit a clarifying “interrogatory” to the Colorado Supreme Court) and forged ahead with SB10-001.

    Prior to acting, the Oregon Legislature requested an opinion on a proposal to take back accrued public pension COLA benefits from their in-house legislative attorneys, the Oregon Legislative Counsel. Here is the February 4, 2013 response of Oregon’s legislative attorneys:

    “You asked about the legality of a proposal to limit the cost-of-living adjustment (COLA) to service retirement allowances of retired members of the Public Employees Retirement System (PERS) by applying the COLA only to the first $24,000 of annual benefits. The proposal would amend ORS 238.360, which has long required that PERS make annual adjustments to service retirement allowances based on changes to the cost-of-living as reflected in the Consumer Price Index.”

    “Based on recent Oregon Supreme Court precedent, we conclude that an attempt to limit the COLA in this way would be found to be a violation of the contract rights of the members.”

    “The Oregon Supreme Court has found several times that the 1953 law establishing PERA created a contract between public employers and public employees.”

    “The court stated several times in Strunk that there is a contract right to the COLA. For example, the court found that:

    ‘We note that the status of the law is particularly clear with regard to retired members, and there can be little question that the COLA is a fully accrued benefit for a member who has retired.’”

    Here is a link to the complete February 4, 2013 opinion of the Oregon Legislative Counsel:

    http://media.oregonlive.com/politics_impact/other/LC%20Opinion.pdf

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