PERAfs problems are real but not unique
MARK |
State employees - and taxpayers, in general - are rightly concerned about the long-term health of the Colorado Public Employees Retirement Association (PERA). Unfortunately, PERA's predicament isn't unique. In fact, it's entirely too typical among public pension plans nationwide.
A Wilshire & Associates survey of state retirement systems found that a stunning 93 percent don't have enough assets to meet existing liabilities and that 16 states have pension deficits that exceed their entire state budget.
West Virginia's state pension system can cover only 40 percent of its existing liabilities. Meanwhile, Illinois holds the dubious distinction of the nation's largest public pension deficit, $43 billion, equal to 197 percent the state's annual budget.
In Colorado, PERA's assets currently cover just 71 percent of its liabilities, leaving a deficit of $11.3 billion. For perspective, the state's general fund budget - that portion of spending supported by income and sales taxes - is $6.3 billion. The spending increase proposed by Referendum C is estimated at $3.6 billion over five years.
By contrast, some state pension plans remain strong. Both Florida and North Carolina have more than enough assets to meet existing liabilities. Right here in Colorado, municipal pension plans in Aurora and Denver are funded at 99 and 98 percent, respectively. All of these plans offer "defined benefits."
Like many public plans, PERA seemed to be on solid footing when the stock market was booming. In 2000, PERA's assets represented 105 percent of its liabilities.
Most state plans experienced similar declines, but Lance Weiss of Deloitte Consulting recently told a gathering of state treasurers not to expect the stock market to rescue pension systems.
"No market recovery will be enough to fix it," Weiss said of the nationwide pension crisis.
In fact, the booming conditions in the late 1990s masked existing problems in pensions systems across the country.
Private sector pension plans are required to meet minimum funding standards set by the federal Employee Retirement and Income Security Act (ERISA), but no federal law establishes similar standards for government pension systems.
That's a big problem because governments are notoriously shortsighted and for perfectly understandable reasons, not the least of which is the "moral hazard" which affects elected lawmakers, especially those subject to term limits.
Lawmakers who vote to increase benefits are lauded by state workers and their unions. Lawmakers who vote against increases or for changes that improve the plan's long-term stability are vilified. Thus, the political incentive becomes to increase benefits and pass the problem along to someone else.
"The fact that policymakers are able to make decisions for which they do not have to bear the consequences actually encourages risky behavior," write George Passantino and Adam Summers of Reason Foundation.
Worse still, some interpretations of court decisions conclude that once a pension benefit has been raised it cannot be lowered, except for future employees. Certainly, workers and retirees are entitled to the benefits they have already earned.
However, this "ratchet-up" interpretation suggests that a first-year worker who was on the job when a benefit increase was adopted has a contractual right to continue to rack up those same benefits for the next 20 or 30 years - no matter how much that endangers the plan's ability to pay benefits to everyone else.
By contrast, it is a widely accepted constitutional standard that this year's legislature cannot obligate next year's legislature to spend money in a certain way, so the one-way ratchet-up doctrine is ripe for further examination.
A final, unavoidable problem for state pension plans is the changing demographics of the work force. As baby boomers age, 40 percent of government workers may retire in the next 10 years. Early retirement incentives complicate the problem by taking experienced workers off the job and enabling them to draw benefits even longer, which creates yet another costly burden.
State workers deserve a pension plan they can count on, and taxpayers deserve a plan they can afford. To meet those objectives will require bold, decisive action and a spirit of cooperation from state officials, PERA, and its members.
Mark Hillman is Colorado's acting state treasurer. His e-mail address is mail@markhillman.com .