Volume 2 Issue 2

Colorado's Public Pensions and Our Schools:

How an Unstable Retirement System Threatens K-12 Education

by Josh Sharf, Director, PERA Project

Is your child being denied access to resources that could be used to improve their public school education? Are resources that could be used to recruit and retain highly qualified teachers instead being used to shore up the state retirement system? If you could put $14.5 million back into Jeffco classrooms every year without raising your taxes—would you?

SAED is the portion of the PERA contribution that should be "funded by monies otherwise available for employee wage increases.”

SAED is the portion of the PERA contribution that should be "funded by monies otherwise available for employee wage increases.”

Colorado’s Public Employees Retirement Association, PERA, faces a precarious financial situation, with serious implications for our state’s schools.

Right now, by some estimates, PERA has only 60 cents of every dollar it needs to be able to fulfill its promises to current and future retirees. PERA has made roughly $26 billion in promises that it simply does not have the money to keep. That comes to roughly $13,000 in additional debt per Colorado household.

Using the proper discount rate, things look even worse. This approach takes into account the state’s long-term rate of borrowing, instead of the expected investment return, which hides the risk to taxpayers and beneficiaries in optimistic return assumptions. PERA could have as much as $60 billion in unfunded promises, or roughly $30,000 per household. Think of that as one year’s worth of student loans for your undergraduate at the University of Colorado’s Leeds School of Business—before he even gets accepted.

Colorado’s public pensions have suffered from the same economic downturns as most of our personal retirement accounts. Thus, in order to keep promises made, the legislature chose to mandate larger and larger contributions to fully fund the shortfall. These larger contributions come out of the general funds, which are supposed to be used to educate our children. The additional contributions are having a negative ripple effect on our schools, threatening the education our children deserve. They make it harder to hire and retain qualified teachers committed to a career in the classroom and harder to recruit the best new graduates or career changers.

Losing Peace of Mind

The situation we face should leave teachers and parents with little peace of mind. Teachers should worry that, after a lifetime of work, they won’t be able to afford to retire. And, parents should realize that the efforts to keep those future promises are weakening our schools right now. Both teachers and parents must recognize that school boards are caught in the middle, subject to intractable political pressures, which force them to choose between the classroom and the demands of an unsustainable retirement system.

Four main factors have contributed to PERA's serious shortfall: 1) poor returns, 2) underfunding, 3) generous benefits, and 4) purchased service credit.

In 2000, PERA was funded at 105 percent, but had over 70 percent of its investments in US stocks. In March 2000, the tech bubble burst, taking PERA’s funded status with it. By 2004, the system was funded at a mere 70 percent. The stock market crash of 2008 took PERA funding down another 10 percentage points.

At the same time, the legislature failed to make its full Annual Required Contributions, calculated to keep PERA solvent over the long run. The annual underpayments, along with the return that hasn’t been earned on them, now accounts for about 10 percentage points of PERA’s underfunding.

PERA benefits for career employees are generous when compared with other states. A PERA retiree with 30 years of service will receive 75 percent of the average of their highest last five years of salary, while a retiree with 40 years of service receives 100 percent—for life.

Adjusted for the state’s cost of living, retirement benefits for those who spend their careers in PERA-funded jobs are the second most generous in the nation, at just under $61,000 per year. Even after the adjustments made in 2010, retirees can begin collecting PERA benefits at age 58. For comparison sake, those receiving Social Security benefits receive about a quarter of these benefits, and then only after turning 67.

Finally, from 2001 to 2005, PERA sold service credits to workers under 60 at a steep discount, allowing some employees to meet eligibility requirements for full benefits sooner than they would have. This move had the effect of buying personnel turnover by stacking up future obligations.

It’s important to remember that employees are not to blame. They were encouraged to take advantage of a good deal. You or I would have done the same.

A Capitol Problem

In 2010, realizing that PERA was grossly underfunded, the legislature passed a series of reforms, called the 2-2-2 plan. It was designed to be sure retirees, employees and employers each contributed to the solution. For retirees the Cost of Living Adjustments (COLA) were capped at 2 percent per year, and the retirement age was raised somewhat for State and School employees.

The legislature also built on prior reforms passed in 2004 and 2006, raising the Amortization Equalization Disbursement (AED) and the Supplemental AED (SAED) contributions, respectively. The AED and SAED are additional, escalating contributions, designed to help the funds slowly recover from their underfunded levels.

The AED is non-negotiable, and must be paid by the employer. By contrast, the SAED should come from money that would otherwise be available for employee raises. Members of the legislature and PERA Executive Director Greg Smith have said that the intent of SB10-001 was for the increase in contributions to be split between the employers and the employees. However, most school districts, under pressure from the teachers unions, have required taxpayers to pick up the entire SAED, using money that otherwise could be put in the classroom.

Efforts to fix the funding problem have serious implications for our schools. The result has been PERA payments that consume an ever-growing portion of districts’ operating expenses. In Jeffco, the total PERA payment for FY2014-15 is expected to be over $72 million, or nearly 12 percent of the entire operating budget. More than $14.5 million of that amount represents a SAED contribution that, by law, should be dollars otherwise available for compensation. However, in the past, those dollars were not being paid by employees. Imagine if there were an additional $14.5 million to allocate to textbooks or technology in Jeffco classrooms.

Despite these reforms, PERA remains only 60 percent funded, and isn’t projected to reach 100 percent funding for two generations. Another significant market downturn in that timeframe is almost certain, yet not being taken into account. How much longer will school districts see increasing retirement costs?

Why Should Newer Teachers Care?

Perhaps just as important, the features of a defined benefit plan, like PERA, do not help in attracting the best graduates to the field. The benefits are back loaded, meaning teachers will only receive full benefits if they spend 30 years in the system. This design discourages people from entering the profession who do not intend to stay that long.

Pension plans are inflexible and unfair to the 46 percent of teachers who leave the profession within five years. If an educator leaves the profession before teaching at least five years, she must forfeit her matching contributions. Also, they are not portable, so even after five years, if a principal switches states, she will have to start accruing years of service all over again in a new defined benefit plan. If given the choice, many newer teachers or career changers might prefer their matching pension contributions in the form of salary increases.

Solutions

Imagine if there were a way to keep our promises to teachers as well as to students—in the form of great compensation and a secure retirement plan. It could be a system that makes it more likely every classroom has a great teacher by attracting the “best and brightest” to careers with a retirement plan that matches a newer teacher’s desire to be more mobile. And, imagine that school boards could be relieved of the political pressures to meet today’s requirements at the expense of tomorrow’s promises.

There are concrete things that could be done to secure retirement benefits for employees, be fair to those who might not spend their entire career teaching, and ensure more dollars flow to the classroom.

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First, the Board of Education (BOE) can require that school employees live up to the spirit of shared sacrifice, as they themselves agreed to do, by contributing their fair share of the supplemental payments to shore up PERA’s funding problem.

Second, the legislature can gradually increase the retirement age for current employees. This step is fair to the taxpayers who work late into their 60s to support the system, and it’s the biggest single change we can make to ensure the program is actuarially sound in the long run.

Third, the legislature can convert the defined benefit pension plan to a defined contribution plan going forward, either a self-directed 401(k) style plan, or an expansion of the current, professionally-managed deferred compensation 457(b) that PERA already operates. It won’t eliminate the unfunded liability. However, it will cap it, and give employees the security, portability, and flexibility of owning an asset, rather than owning an uncertain promise.

Finally, the legislature can calculate the liabilities using an appropriate discount rate, giving Colorado a proper measure of how much we actually owe our public employees.

None of these changes threaten promises already made, or benefits already earned. All of them make promises to employees, our children, and our communities easier to fulfill and help assure that public education dollars actually end up in classrooms.