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HILLMAN: Get taxpayers off the PERA gravy train

By Mark Hillman, Special to the Rocky

Published January 26, 2009 at 12:05 a.m.

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When President Bush and Congress first proposed a financial bailout for Wall Street investors last September, a grass-roots chorus - from the left and the right - decried using public taxpayer funds to pay off the debts of private investors.

In Colorado, the state's largest pension fund has lost 25 percent of its investment assets - $11 billion - in the past year, jeopardizing its long-term ability to pay retirement benefits promised to some 413,000 current and former government employees.

A year ago, after enjoying a 10 percent return on investment, assets of the Public Employees' Retirement Association had grown to $41 billion or about 78 percent of the funds needed to pay $53 billion in promised benefits to retirees.

Now, PERA's assets have fallen to barely $30 billion. An estimate by the legislature's Joint Budget Committee pegged PERA's current funding ratio at 56.8 cents on the dollar, using 2007 liabilities. However, the actual number is undoubtedly worse, given that PERA's liabilities (i.e., promised benefits) grow by more than $3 billion annually.

That costly reality may be inescapable, even for PERA and its sycophantic apologists.

Even in a "good" year like 2007 when PERA's investments grew by 10 percent, its liabilities still grew faster, adding $160 million to its funding deficit.

PERA lawyers assert that benefits can be retroactively increased (as they have been), but that once increased, those benefits can never be reduced. But what if those increased benefits threaten the solvency of the fund? PERA had behaved as if that could never happen.

Worse still, PERA's party line is that the responsibility to make up for any shortfall rests with taxpayers, represented by state and local governments who contribute to PERA's pension funds on behalf of their employees.

With that in mind, it's worth explaining how PERA's retirement plan is funded.

State government, most school districts and many cities and counties deduct 8 percent from their employees' paychecks and send it to PERA, along with a 10.15 percent employer contribution and a 1.5 percent supplemental contribution (which will increase to 6 percent by 2013 to help return to full funding). That's a total contribution rate approaching 24 percent of payroll - compared to 12.4 percent for Social Security.

That money, more than $1.25 billion a year, is invested by PERA staff with direction from the PERA board of directors, 80 percent of whom are themselves PERA beneficiaries. Taxpayers have no meaningful input.

In short, PERA rewards its members with higher benefits when its aggressive investment strategy pays off but soaks taxpayers for a bailout when that strategy backfires.

If PERA can simply charge its losses to the taxpayers, no wonder it sees no urgency in an unfunded liability of nearly $50 billion or an unsustainable benefit structure or funding models that assume incredible rates of return for decades into the future.

That certainly sounds like using public taxpayer funds to pay off the debts of private investors. While that's a great deal for PERA members, most of whom can retire at age 55 and collect $2,658 a month, it's a lousy deal for other taxpayers on Social Security where the retirement age is 67 and the average monthly benefit is $1,089.

Because PERA won't go belly up tomorrow, the expedient course is to kick the problem down the road. When the day of reckoning finally arrives, current PERA board and staff will be long gone.

After contributing generously to fund state employees' retirement and giving those employees virtually unlimited control over their pension investments, Colorado taxpayers deserve to be freed from this heads-they-win, tails-we-lose proposition.

If PERA beneficiaries want their pension fund to invest aggressively, they should also bear the responsibility if those investments backfire.

Former state Treasurer Mark Hillman served as a member of the PERA board of directors. To read more or comment, please go to www.MarkHillman.com.

Comments

  • January 26, 2009

    4:28 a.m.

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    44roger writes:

    We have politicians in charge who fail to look beyond the end of their nose.

  • January 26, 2009

    7:47 a.m.

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    sabooba writes:

    I think that there may be another side to this. At first I was of the opinion that taxpayers should not be burdened with this but then I thought of what we would be "buying". The people that work for the State do so with wages that are about 80% of equivalant private sector wages. Maybe we should consider rewarding their service with good retirement. As health, dental and other benefits are too low to be of much help, the one and only thing that can attract and retain good people to work for the State is a quality retirement. If you let PERA fail, you may be stuck with poor employees.

  • January 26, 2009

    7:57 a.m.

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    Slimjim_800 writes:

    Good job at identifying the problem. I still could not figure out what your solution is. Let me know though because I have some personal liabilities I would like to get rid of too.

  • January 26, 2009

    8:49 a.m.

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    Oh_Wise_One writes:

    sabooba- 80% of private wages? I doubt that. Can you link something that was an independent study of wages? Last time I looked there was no shortage of anybody looking to apply for a job with the state.

  • January 26, 2009

    9:52 a.m.

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    JayRoy writes:

    sabooda: I think you may have a bias in favor of state employees (some personal reason, maybe?) I'm sure if you look hard enough, you can probably find a private sector position that fits your assertion, but be serious: can you really, with a straight face, contend that government employees face anywhere near the expectations and accountability of most private sector employees, who have to deal with the realities of business?

    This is a good, common-sense article, Mr. Hillman.

  • January 26, 2009

    10:21 a.m.

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    enginerd writes:

    The state constitution requires a balanced budget. Perhaps we need an amendment that applies that principle to long-term liabilities such as PERA. About 10 years ago, the PERA board, acting in their own self interest, voted for generous benefit increases that are now contributing to this unfunded liability. That this was allowed to happen is a major flaw in the state constitution, and it needs to be fixed.

  • January 26, 2009

    10:22 a.m.

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    DougH writes:

    Really have to agree with Mark on this one; If PERA beneficiaries want their pension fund to invest aggressively, they should also bear the responsibility if those investments backfire.

    Of course the real question is why do state employees have their own self regulated retirement that is paid for in large part by the taxpayers. Why don't state employees and teachers just use the social security system like the rest of us working stiffs have to do ? If you want to reform government, here is the best place to start. If working taxpayers have to wait until 65 to get retirment benefits , why do state workers get such a better deal ?

    Seems like workers and employers are paying for two retirement funds, their own and state employees and then wind up with the worst deal.

  • January 26, 2009

    10:48 a.m.

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    sabooba writes:

    I did used to work for the State and I left for a better paying job with better benefits and an actual chance for a raise. I worked there for 6 years and for 4 of those years we received NO raises and benefit costs were increased every year. The State moved away from the "step raises" and went to a pay-for-performance based sytem. That new system was only funded one year and was only partially funded that year. So I think that the people do deserve something to look forward to as the pay and benefits are not what you could get in the private sector. Check out this salary comparison. http://www.aft.org/salary/2005/downlo...

  • January 26, 2009

    11:16 a.m.

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    mmannino writes:

    sabooba,

    Your comments are in conflict with the annual compensation survey conducted by state personnel department. Undoubtedly, state salaries will lag in hot disciplines but are higher in most other areas. Your reference is from a union study, a highly suspect source. Many studies have demonstrated that public employees have higher total compensation than private sector counterparts.

    The major problem with PERA is deliberate deception about a comparison of retirement compensation between the public and private sector. PERA and similar plans have highly subsidized early retirement. Most private sector defined benefit plans and Social Security penalize early retirement. PERA members can retire after 30 years at as early as age 50 with full unreduced retirement benefits (75%), inflation protection, and subsidized early retiree medical care. It is a sensible reform to end subsidized early retirement benefits. Subsidized early retirement benefits are the equivalent of a lump sum payment at retirement of more than $500,000 for the typical state employee. This payment is in addition to employee/employer contributions with interest. Please demand an end to golden parachutes for state employees. In this economy, we can no longer afford this luxury.

  • January 26, 2009

    11:25 a.m.

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    Marshdale writes:

    Sabooba: As a public employee I want to thank you for pointing out the facts of being a public employee. I also have my own business on the side. That's a differrent story though. Simply extra cash is all it is, to supplement my meager public salary. I keep my public job because I need health insurance which has gone up 10% a year for the last 7 years. The wage differences are significant. I did make more money in the private sector, but I was killing myself doing it. I worked 60 plus hours a week on salary. It is not worth it. So I chose to make less and work in the public sector. My personal business is a labor of love so, I don't necessarily consider it work. Those that work in private sector who think we have a gravy train are kidding themselves.

  • January 26, 2009

    12:04 p.m.

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    mmannino writes:

    Marshdale,

    I am not saying that public employees have a gravy train. I am asserting that retirement compensation between the public and private sectors is way out of line. Public employees should work to normal retirement age, just like most private sector workers. Perhaps your salary could be increased by moving to the private sector. Overall, your anecdotal experience is not true for most state workers. In addition, private sector workers are facing massive layoffs and salary reductions. If you were working in the private sector now, you would most likely be thankful for employment, not bragging that your private sector salary is much higher than a public sector job.

  • January 26, 2009

    1:18 p.m.

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    JayRoy writes:

    Marshdale,

    "I keep my public job because I need health insurance which has gone up 10% a year for the last 7 years."

    My health insurance and co-pays have gone up more than that in the private sector. I am thankful, as mmannino says, to have a job, even though my hours are being cut, and my employer is discontinuing its company match to my 401K. We all need health insurance because of the greed in the health insurance and health care industries. The health care crisis has absolutely nothing to do with underfunding (as the socialized healthcare promoters assert), but everything to do with over-charging. I am happy for people with the awesome security of a government-funded position, but I think they sometimes have a tendancy to be "spoiled".

  • January 26, 2009

    2:24 p.m.

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    Debunkin8tor writes:

    I worked for the state for seven years, and during that time I saw several colleagues retire at age 55 (or earlier if they "bought years" at a substantial discount during the late '90s), who could look forward to receiving 70% or more of their highest salary FOR THE REST OF THEIR LIFE. Most did not retire and only supplemented their retirement income with private sector work. Given expected increases in life expectancy, PERA is doomed to balloon out of control, only to be bailed out by taxpayers.

  • January 26, 2009

    2:54 p.m.

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    DougH writes:

    mmannino: Good comments on this subject. I really think that a lot of resentment of government is creating by government job security, salaries and benefits that are far better that the average private sector job.

    What is worse is that virtually public jobs were paid for and created by citizens to provide some kind of benefit to the people, yet they all have become self dealing institutions designed to benefit the public workers with an ever increasing cost to the taxpayers.

    I believe most people would be much happier with our government institutions if the taxpayer paid workers faced the same up and downs and uncertainties as the rest of us do.

  • January 26, 2009

    4:12 p.m.

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    BetterEducated writes:

    I totally agree that we should even out the disparities between public and private workers.
    Just for starters, it's very hard to compare these when it's an apples vs. oranges thing. Everybody should get social security, period. Then it would be easy to see whether public workers are paid as well as they might be in private enterprise (typically, the people at the top are, those at the bottom end, not).
    Public workers traditionally intend to give a certain amount of their work effort to the "cause" of the entity; that investment would be easier to calculate without messing around with these public pension issues.
    Why don't they participate in social security?--my understanding is: because the officials of the public entities did not want to, thought they could do better, and were not held to a federal requirement that they do so. That's great when the market is doing well, or if you are mainly interested in getting "yours" without worrying whether future people will ever get "theirs."
    In many states (and in Denver City employment -- not the PERA school districts or DPS which is totally dependent on its own plan), workers get social security AND a pension.
    Because public plans are not ERISA compliant, they can be manipulated (and in Colorado have been) so that, e.g., Years of Service are purchased for a fraction of the actuarial value. The plans have not been funded by the public employers according to actuarial necessity either, and that is a burden on future funds as well.
    It's been my observation that as other states have betrayed their public obligations, Colorado officials have felt OK about it too. I think I liked the place better when we had our own set of values based on simple common sense!

  • January 26, 2009

    6:09 p.m.

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    fpond writes:

    Mr. Hillman you have been proclaiming the problems of PERA for years. In your tenure as senator you cried that the sky was falling and no one paid attention, perhaps because you had no plan other than crying that there was a problem. So what is your solution that can be implemented? I'd love to hear it.

    As a state employee for MANY years, I've been subject to the pay for performance plan (wherein higher ed gets the highest performance ratings and the rest of us are weighted to the bottom). Presently my employees are not receiving raises and haven't for years. For example, one of them is now receiving $60 more per month now than when he started seven years ago and he has received commendable ratings every year. How do you make the compensation fair?

  • January 26, 2009

    6:48 p.m.

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    Toe_nail writes:

    Mr. Hillman,

    Please tell us what your PERA check is every month. That's like calling the kettle black!

  • January 26, 2009

    11:48 p.m.

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    Tree_Hugger writes:

    Why can't state employees use Social Security like the rest of us poor folks?

    I pay more than $700 a month in Social Security taxes, and I still have to try to scrape and save money to put into my 401K. Imagine how much I could invest each month if I was exempt from Social Security like state employees are.

    The worst thing is that I am only 40 years old - so by the time I retire, it's very likely that Social Security will no longer exist. And if it is still around - benefits will be a mere pittance compared to what I will have paid in during 50 years of hard work.

  • January 27, 2009

    7:17 p.m.

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    SantiaChakin writes:

    In 1998 PERA was 96.5% funded.
    In 1999 PERA was 103.1% funded.
    In 2000 PERA was 105.2% funded.
    In 2001 PERA was 98.6% funded.
    Oh , those were the days. Yes, those were the days when the state legislature approved slightly increased benefits and reduced contributions. PERA itself did not increase benefits. Only the state legislature can change future PERA benefits and or contributions. That would have been the time for Mark Tillman to say something since he seems to proclaim great foresight. Where was Mark Tillman back in those days??? According to his website he was in the state legislature. Hmmm. I have not been able to find any comments about PERA from Mr. Tillman during that era.

  • January 29, 2009

    3:10 a.m.

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    SeniorMoment writes:

    PERA is totally different than the pensions in businesses and many other states because it is a REPLACEMENT for Social Security (SS)--not a supplement, since Colorado had the choice of whether or not to join the SS and chose not to. When pensions are mentioned elsewhere they are in addition to Social Security benefits, not a replacement.

    I retired twenty years ago, and got less than I would have under SS (which then used past earnings increased by annual wage inflation), even though I paid more in employee contributions to PERA than I would have paid to SS. PERA is a better deal for Colorado taxpayers than for state employees at least in some situations.

    Because of change in Colorado and the introduction of HMO promoting PeraCare we now pay high health premiums (about $700 a month for the two of us pre-65) for what everyone tells me is the lowest level of benefits for any large employer plan where we live with deductibles starting at $1,500 and the potential for maximum annual out of pocket to be higher than the stated $10,000, yet some prescriptions are much cheaper at Wal Mart without insurance than using the prescription coverage. We are also billed more even though we now live in a state that is 47th in the nation in cost for Medicare because health care has been much more expensive in Colorado..

    PERA’s actual return on investments is good. For the years I worked the annual average was 11% with a lot of ups and downs and a few negative return years that amounted to an 11% compounded return for my career. That return is what is possible for well managed pension plans over a 50 year period. Too much attention is given to yearly ups and downs. Federal rules though for qualified pension plans restrict what is considered an allowable expected rate of return based on an annually published figure, so PERA has to comply. This may create conditions for a future reduction in employer contributions, which no one will comment on.

    Every time PERA is opposed or cuts made it becomes harder to recruit outstanding employees to work in state and local government, except during recessions when the unemployed will take any job. I remember when in a good Colorado economy my agency couldn’t even keep five computer programmer trainees for longer than six months because of better pay and benefits elsewhere and wages that didn’t lag private sector pay for programmers. Taxpayers are the real beneficiary of PERA.

  • January 29, 2009

    5 a.m.

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    SeniorMoment writes:

    In response to old_wise_one, every job is different, so an 80% of wages remark is too general. The group that makes the lowest percentage of wages compared to the private sector are managers.

    When I checked a few years ago, the Jeffco school superintendent was paid only 71% of what my now local school superintendent earned for managing a district less than 1/3 the size, while teachers are paid in the lower half of states nationwide http://www.nea.org/home/29402.htm in spite of initiatives and constitutional amendments that protect school budgets better than the state budget.

    There were and are technical reasons why Colorado public employees get less than private sector counterparts in most years. When I worked for the State of Colorado:

    1) The state only compared a few job descriptions and titles, which was done at the Journeymen pay level, which is why pay match is better for blue collar jobs with lots of comparable private sector workers to compare to. The last method I know of was a survey of survey of raises already given, so it was impossible for state wages to get higher than private wages.

    Newly hired state employees were paid 90% of the wage surveyed, so you had to work two years to get the surveyed pay. There was also no retention pay for exceptionally good worker, whereas they sometimes got overpaid in private businesses and even non-profits. Outside of government high productivity gets much higher compensation based on easier to define criteria, like how much money you earn the company. No taxpayer wants public employee wages to be based on how much additional can be collected in taxes.

    In the private sector pay at least for college educated level work often gets higher pay if bonuses and perks are taken into consideration.

    Wages for occupations not matched were based on relative worth of different job categories and creation of a career route, rather than direct pay comparisons at each skill and experience level.

    2) Because the state surveys wages already given, pay always lagged the private sector where the surveyed wage increases already were in use, but wage decreases also lagged. Private companies rely more on the law of supply and demand than government which must be seen as fair to everyone. In a business if it is too hard to find a replacement worker, you raise pay, while you lower it if you get excessive numbers of well qualified applicants.

    To wage survey increases the legislature added additional months of post survey delay when their were tax revenue drops, so they could balance the state budget, which never relied on debt when I worked for the state.

    When wage gains are rapid, the state always had trouble retaining new hires because of delays. (Relatively few people quit during recessions even with stagnant wages.)

    3) The state had (or still has) an arbitrary salary cap which forced smaller gaps between the better paid management positions. That is politics.