Paul Nitze: Don’t call State Bill 1 a fix
The Aspen Times
Aspen, CO Colorado
From reading the papers, you might think that Colorado lawmakers are spending nearly all of their time debating who should be able to smoke marijuana legally. Thankfully, other issues are getting some oxygen. State bills are numbered by perceived importance, so SB1 should be a heavy hitter, and it is.
That bill that claims to fix the state employees’ pension fund, known by its acronym – PERA. SB1 passed the Senate Finance Committee on Tuesday and is on the fast track to passage. That would be a mistake.
Now that Governor Ritter doesn’t have re-election to worry about, he should take the political bull by the horns and veto SB1 if it passes as written. He’s going to take all sorts of licks closing the $1.5 billion hole in the state budget, so why stop there?
To hear Mike Rosen and Vince Carroll and the rest of the right-wing chorus describe it, PERA beneficiaries spend their lengthy retirements sipping champagne and noshing on beluga. Not exactly. Any debate about the current PERA fix needs to acknowledge that beneficiaries will take a big hit if this bill passes.
PERA’s currently funded at about 70 percent of its liabilities. That translates to a nearly $30 billion actuarial gap between assets and liabilities. Or, in other words, two-and-a-half times the state’s annual budget. And that’s before unrealistic assumptions about investment growth are dialed back!
Under SB1, PERA is put back in the black through a combination of increased employer contributions, increased employee contributions, and a reduction in the annual cost of living (COLA) adjustment. Hence the catchy tagline for the plan: the “2/2/2” solution.
Actuarially speaking, it’s the COLA adjustment that’s the key to bringing PERA into balance under the bill. By keeping the COLA low (and flat in some years), benefits are set to increase at a rate well below inflation. The net effect of all this is to pay out much lower benefits to a state employee who’s currently in her 30s than those enjoyed by someone who retires tomorrow.
There’s no shortage of blame to go around on PERA, but the Republicans saw the writing on the wall during their time in office and largely ignored it. The two PERA “fixes” that were passed during the Owens administration did nothing to change PERA’s fiscal destiny.
Where I agree with the conservatives is on the fundamental problems with the current bill. Those can be boiled down to the following: (1) taxpayer money, aka the general fund, is the unspoken kitty from which future shortfalls will be made up under SB1, (2) true reform can only be achieved with a mandatory defined contribution plan for new hires, and (3) the retirement age needs to be much higher.
On the first point, it’s a mystery why Josh Penry and other Republicans, who claim to be budget hawks, would push a bill that puts taxpayers on the hook to cover PERA’s inevitable future deficits. I say inevitable because SB1 assumes long-term appreciation on assets will be 8 percent per year. Yet Warren Buffett and other investment gurus have calculated that PERA can expect gains of no more than 6 percent per year.
Senate President Brandon Shaffer, the Democratic co-sponsor of SB1, would also be wise to study his recent Colorado political history. Ever wonder why, when state Democrats controlled the governor’s mansion and both houses of the legislature, they didn’t do more to dismantle TABOR? A variety of end-runs on TABOR were shelved because savvy Dems knew that keeping TABOR largely intact makes it easier for classic western libertarians to pull the lever for Democratic candidates.
Passing a PERA reform bill that risks blowing a hole in future state budgets, and taking money away from education, cuts directly against that strategy. Political reality dictates that most current employees keep a defined benefit under any fix, but forcing new hires to accept a defined contribution plan would be a clear signal to moderate voters that lawmakers have taken off the tinted glasses and accepted reality. That’s a bitter pill for new hires to swallow, but it’s the same pill that’s been swallowed by millions of private sector employees.
The irony of this bill is that if you’re young and you’re covered by PERA, your future benefits are at the whim of future politicians. It’s basically a dice roll – maybe you’ll get bailed out when the funds run dry, maybe you won’t. And all the while, you will have given up a huge chunk of your wages to pay for those benefits.
Wouldn’t it be better to take your chances with a defined contribution plan, knowing that it’s not going to be taken away? Sure, you may get a raw deal on the employer match down the road, but at least you won’t be subject to a COLA cramdown.
Don’t pillory Shaffer or Penry or the many people who worked on SB1 behind the scenes. They’re being attacked in many quarters for being too aggressive, and they negotiated the bill in good faith in an election year. Unfortunately, a hard look at the numbers shows that the bill isn’t nearly aggressive enough.
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