Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

Innovative strategies for responding to changing
demographics and market conditions are keeping public retirement plans
sustainable, and Colorado PERA is a leading example, according to a new <a href="https://www.plansponsor.com/variable-arrangements-can-introduce-stability-public-db-plans/">report</a>
from the <a href="https://www.slge.org/assets/uploads/2019/09/proactive-pension-management.pdf">Center for State and Local
Government Excellence</a>
(SLGE) and <a href="https://www.aarp.org/">AARP</a>.



Since
the recession in 2008, many retirement systems have struggled with changing
demographics and reduced expectations for their investment returns, resulting
in lower funded ratios for their pension plans. In many cases, making changes
to address these challenges and maintain plan stability required legislative
action.



In response, some plans have created formulas that
give plans the flexibility to make adjustments to their benefits and/or
contributions to maintain long-term stability that do not require unpredictable
or time-consuming legislative changes. 
 
The report
notes that such formulas “enable all stakeholders to understand how, when, and
to what extent contributions or benefits might be subject to formula-based
changes, and as a result, enable them to plan for the long term.”



Legislation passed in 2018 included this type of
provision for PERA, called the <a href="https://content.copera.org/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3/">automaticadjustment</a>. Every June, PERA reviews progress toward its funding
goal. If PERA is behind schedule, member and employer contributions will increase,
and the annual increase decreases. If PERA is ahead of schedule, the annual
increase will rise and contributions will decrease.



Prior to that legislation, making any changes to
PERA’s contributions or benefits required legislation. Over the previous 15
years, annual contribution deficiencies resulted in a <a href="https://content.copera.org/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3/">fundingdeficit</a> of $4.6 billion.



The report highlighted PERA’s lengthy research and <a href="https://content.copera.org/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3/">stakeholderengagement process</a>. The resulting legislation, <a href="https://www.copera.org/pera-on-the-issues/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3">Senate Bill 18-200</a>
affected employers, employees and retirees. Together with adjustable
contributions and rate of annual increase, “PERA may be better able to meet its
fiduciary responsibility to ensure all members will receive their earned
pension benefit both in the short and long term.”



The report notes that while the economy has
stabilized since the 2008 recession and many public pension plans have
maintained or improved their funding rates, “relatively stable economic
conditions are not guaranteed to prevail.” However, these variable funding
structures may help pension plans in responding to shifting conditions.



SLGE does not recommend a particular pension
funding structure, according to an <a href="https://www.plansponsor.com/variable-arrangements-can-introduce-stability-public-db-plans/">article</a>
from <a href="https://www.plansponsor.com/">PlanSponsor</a>.

Colorado PERA provides roadmap for sustainable public retirement plans

New legislative oversight body added
under SB 200 provides additional avenue for PERA transparency



The Pension Review Subcommittee, established by Senate Bill
18-200, met for the first time on Friday, July 12. The Subcommittee was formed
to expand the Police Officers’ and Firefighters’ Pension Review Commission and
create a subcommittee within the commission to oversee PERA.



<a href="https://www.copera.org/contributions-to-colorado-pensions-lower-than-average">SB 18-200</a> directed the <a href="https://leg.colorado.gov/committees/pension-review-commission/2019-regular-session">commission</a> to study, review, and propose legislation related to the funding of police offers’ and firefighters’ pensions in the state and benefit designs of such pension plans and must also study and may develop proposed legislation relating to PERA. The commission is comprised of 10 members: five Senators and five Representatives.



<figure class="wp-block-image"><img decoding="async" src="https://content.copera.org/legislative-subcommittee-meets-to-review-pera/"Pension Review Commission" class="wp-image-2532"/></figure>



As covered previously in <a href="https://content.copera.org/legislative-subcommittee-meets-to-review-pera/">PERAon the Issues</a>, four different legislative committees have oversight
responsibility of PERA. These reporting committees include the Legislative
Audit Committee, Joint Finance Committee, Joint Budget Committee, and Pension
Review Commission.



The <a href="https://leg.colorado.gov/committees/pension-review-subcommittee/2019-regular-session">Pension
Review Subcommittee</a> was tasked specifically with making recommendations to
the Commission regarding PERA. The July 12 meeting began with an overview of
the <a href="https://leg.colorado.gov/sites/default/files/images/committees/2017/r19-739_charge_memo_for_pension_review_commission_and_subcommittee_1.pdf">Subcommittee’s
responsibilities and charge from legislative staff</a>. PERA staff then <a href="https://leg.colorado.gov/sites/default/files/images/pension_review_subcommittee_7.12.19.pdf">presented
to the subcommittee members on a number of topics, with particular focus on the
2018 financials</a>. Questions from the Subcommittee covered a range of topics
including the rate of return assumption, asset allocation, and the progress of
the Board’s current Asset Liability Study. Board Chairman Timothy M. O’Brien
and Treasurer Dave Young joined the panel as well to respond to questions from
Subcommittee members. 



This newly-formed oversight subcommittee is comprised of four legislators and 10 appointed members of the public. Requirements for serving as an appointed member include experience or knowledge of investment management, corporate or public finance, compensation and benefit systems, economics, accounting, pension administration, or actuarial analysis. 



<figure class="wp-block-image"><img decoding="async" src="https://content.copera.org/legislative-subcommittee-meets-to-review-pera/"pension review commission" class="wp-image-2539"/></figure>



In addition, each subcommittee member is required to attend
certain meetings each year, as follows:



<ul>
<li>At least one <a href="https://www.copera.org/legislative-subcommittee-meets-to-review-pera">PERA Board meeting</a>;</li>



<li>The Legislative Audit Committee meeting review
of PERA’s <a href="https://www.copera.org/legislative-subcommittee-meets-to-review-pera">annualactuarial valuation</a>; and</li>



<li>The State Measurement for Accountable,
Responsive, and Transparent (SMART) Government Act hearing of the Joint Finance
Committee when it reviews PERA. </li>
</ul>



The Pension Review Subcommittee’s next scheduled meeting is
Monday, August 12 and the Pension Review Commission will meet for the first
time during the 2019 interim session on Monday, September 9. 



PERA staff will continue to work with legislative staff and
members of all reporting committees to provide education regarding the
importance of ensuring retirement security for PERA’s membership.

Legislative Subcommittee Meets to Review PERA

A recent paper from the National Association of State Retirement Administrators, <a href="https://www.nasra.org/files/Spotlight/Risk%20Sharing%20in%20Public%20Retirement%20Plans.pdf">In-Depth: Risk Sharing in Public Retirement Plans</a>, looks at how different public retirement plans have incorporated a variety of risk-sharing features into their plan designs. Colorado PERA is included as a case study for its use of automatic changes to contribution rates and benefit levels.



<h4 class="wp-block-heading">Why risk sharing</h4>



As the paper notes, a primary objective of any retirement plan is to provide income during retirement by moving a portion of compensation from the working to the retirement years. And while a variety of factors impact the effectiveness of a retirement plan, a few things are especially important: adequate contributions and investment returns, as well as predictions of inflation and the life expectancy of plan members. There are risks – meaning there is a chance of a financial loss compared to what is expected – with each of these factors.



Long-time
readers of PERA on the Issues will be familiar with the following formula:



C+I=B+E 



Which stands for: Contributions + Investment earnings = Benefits + Expenses.



The revenue a retirement plan receives must, over time, equal the cost of the benefits and expenses the plan pays. If the assumptions underlying any of those factors change over time – if contributions decrease or investments earn less than expected, or if benefits or expenses grow faster than inflation – another factor of the equation must shift or the plan gets out of balance.



Who bears the impact of those changes – who takes on the risk and when those changes should occur – must be addressed. As the paper notes, “Nearly every state in recent years enacted reforms to [their] pension plans&#8230;. As a result, although most public employers in the U.S. have retained [Defined Benefit] plans, in many plans, more risk has shifted from employers to employees.”



In different states, cost-of-living adjustments have been reduced, employees have been required to work longer or to a higher age, employee contributions have been increased, and employers have paid higher costs.



The paper focuses on risk sharing plans that do two things compared to traditional defined benefit or defined contribution plans. First, they distribute risk among both employees and employers. And second, they articulate who bears what risk and how, before the loss or gain actually occurs.



Plans in which either the employees or the employers bear all the risk may experience bad outcomes. “Plans in which risks are strategically and optimally assigned&#8230;may be found to be more sustainable,” the paper notes.



The paper points to the automatic adjustment feature of <a href="https://leg.colorado.gov/bills/sb18-200">Senate Bill 200</a>, <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session">approved in 2018</a>, as an example of risk sharing based on the relationship between contribution rates, which are set by the Legislature, and the rate determined by the actuarial experience of the plan’s level of funding (the actuarially-determined contribution, or ADC). Put simply, when the actual rate of contributions to PERA is less than 98 percent of the ADC, the statute requires that employer and employee contribution rates go up by up to 0.5 percent in any one year, not to exceed an additional 2 percent total increase. Conversely, if the rate of contributions were to reach 120 percent or more of the ADC, the contribution rates would decrease. A direct payment to PERA from the state as well as changes to retirees’ cost-of-living adjustments are also triggered. 



The paper notes that it is unusual for such contribution and benefit increases or decreases to be contingent on the ratio between actual contribution levels and the ADC, and that they are projected to eliminate PERA’s unfunded liability by 2047.



<h5 class="wp-block-heading">Read more about PERA’s Automatic Adjustment Provision <a href="https://content.copera.org/peras-automatic-adjustment-provision-a-case-study-for-pension-risk-sharing/">here</a>.</h5>



<blockquote class="wp-block-quote"></blockquote>

PERA’s Automatic Adjustment Provision a Case Study for Pension Risk Sharing

For the past several years, public pension reform has been a
hot topic as states and municipalities wrestle with how to keep their
retirement plans funded. As many Colorado PERA members and retirees know, 2018
saw the Colorado General Assembly pass a <a href="https://content.copera.org/the-year-so-far-in-public-pension-reform/">significant
reform bill</a>, and numerous other states followed suit in 2019. Here’s a
sampling of the new efforts as of mid-year.



Arkansas



<a href="https://content.copera.org/the-year-so-far-in-public-pension-reform/">State Highway Employees’ Retirement System</a>



March 2019



Increased employee contributions over two years, from 6.0
percent to 7.0 percent by July 2020. Increased employer contributions from 12.9
percent to 14.9 percent starting July 2019.



Kentucky



<a href="https://kyret.ky.gov/Pages/index.aspx">Employees
Retirement System</a>



Pending as of June 2019



The Bluegrass State has been debating a variety of pension
reform options for about two years. In early June, <a href="https://www.copera.org/the-year-so-far-in-public-pension-reform">thestate Supreme Court ruled against</a> the governor’s attempts to keep a financial
analysis from public disclosure, and <a href="https://www.copera.org/the-year-so-far-in-public-pension-reform">thegovernor has indicated</a> that a special session of the state legislature may
be necessary later this year to resolve various disputes.



New Mexico



<a href="https://www.nmerb.org/" class="broken_link">Educational Retirement
Board</a>



April 2019



Comprehensive legislation changed the salary thresholds that
determine employee contribution rates; increased employer contribution rates
from 13.9 percent to 14.5 percent starting July 2019; changed years-of-service
multipliers and highest average salary (HAS) guidelines for new hires; increased
minimum retirement age for new hires; and changed return-to-work rules.



North Dakota



<a href="https://ndpers.nd.gov/">Public Employees Retirement
System</a>



April 2019



Eliminated retiree health insurance credit for new hires
after January 2020; redirects employer contributions of 1.14 percent of salary
to the retirement plans; modified HAS calculations for retirees after January
2020; and reduced the HAS multiplier from 2 percent to 1.75 percent.



Oregon



<a href="https://www.oregon.gov/PERS/Pages/index.aspx">Public
Employees Retirement System</a>



May 2019



<a href="https://www.ai-cio.com/news/oregon-pension-reform-squeaks-legislature/">Extends</a>
the fund’s minimum payment schedule by eight years; redirected a portion of
employee contributions (depending on hire date) into an account that supports
pension benefits; cut 30-year employees’ overall benefits by 1 to 2 percent for
those making more than $30,000 per year; mandated a one-time, $100 million
contribution to an “incentive fund” that will provide a 25 percent match to
extra employer contributions; gave employees more control over investment
allocations; removed certain limits on working after retirement; and directed
some proceeds from the Oregon Lottery to the employer incentive fund.



Other developments:



In March 2019,
California’s <a href="https://www.latimes.com/local/lanow/la-me-ln-pension-court-20190304-story.html">state
Supreme Court upheld 2012 reforms</a> that curtailed the purchase of service
credits and raised employee health care contributions.



In June 2019, <a href="https://www.ai-cio.com/news/ohio-teachers-pension-sued-eliminated-colas/">two
retired teachers sued</a> the State Teachers Retirement System of Ohio over the indefinite elimination of
annual increases for retirees. The plaintiffs are seeking to certify their suit
as a class action.



In June 2019, Rhode
Island’s <a href="https://turnto10.com/politics/ri-supreme-court-upholds-pension-reform-in-cranston">state
Supreme Court upheld</a> the city of Cranston’s 2013 reforms that suspended
cost-of-living adjustments, increased retirement ages, and introduced a hybrid
DB/DC plan.

The year (so far) in public pension reform

By now, Colorado PERA members are well aware that their annual increase (AI), or cost-of-living adjustment (COLA), has undergone some belt-tightening changes with the passage of <a href="https://www.copera.org/trend-states-make-adjustments-to-retiree-cost-of-living-payments" target="_blank" rel="noreferrer noopener">Senate Bill 200</a> last year. What members and retirees may not know is that this action followed a broader trend for public pension plans throughout the U.S. In the past decade, pension funds in 18 states, including Colorado, <a href="https://www.nasra.org/files/Issue%20Briefs/NASRACOLA%20Brief.pdf">have enacted reforms</a> that <a href="https://content.copera.org/trend-states-make-adjustments-to-retiree-cost-of-living-payments/">changed COLAs</a> for existing retirees. Seven states have adjusted COLAs for current employees and new hires, and another six have changed them for new hires only.



While there are many types and variations of annual increases and COLAs (ad hoc, fixed, simple, compounding), essentially the adjustments to retirement benefits are meant to counterbalance inflation, which reduces the purchasing power of a fixed income. These adjustments are of additional importance to states such as Colorado, where a majority of public employees do not participate in Social Security. But unlike Social Security, defined benefit plans, including PERA, typically pre-fund COLAs via employee and employer contributions over the course of employees’ careers.



The structure of pension plans varies widely, so it’s only natural that COLAs do, too. PERA’s COLA is automatic, or predetermined by a set formula; and it’s compounded, meaning that annual benefit increases are calculated based on the original benefit plus any prior benefit increases. PERA’s annual COLA changes are influenced by the financial performance of the fund. For some PERA retirees, the COLA is based on factors such as the rate of inflation and the health of the Annual Increase Reserve for each membership division.



The COLA may also be affected by a person’s age, date of hire, or years of service and the length of time in retirement. If all of this seems complex, it is – because it varies for different PERA members. For a full explanation of how PERA’s COLA calculations work in practice, refer to the <a href="https://www.copera.org/trend-states-make-adjustments-to-retiree-cost-of-living-payments" target="_blank" rel="noreferrer noopener">Annual Increase (AI) fact sheet</a>.



The primary reason so many states have targeted COLAs in their pension reform efforts is cost, along with the U.S. economy’s recent track record of historically low inflation. The <a href="https://www.nasra.org/files/Issue%20Briefs/NASRACOLA%20Brief.pdf" target="_blank" rel="noreferrer noopener">NASRA research</a> (on page 3) notes that a compounded automatic COLA of 1.5 percent will add 11 percent to the lifetime cost of a retirement benefit, and a 3 percent COLA adds 26 percent to that cost.



The changes to PERA’s pension fund were enacted by the State Legislature, as is often — though not always — the case with pension alterations around the country. One key component of the Colorado General Assembly’s efforts in 2018 was the addition of an <a href="https://www.copera.org/trend-states-make-adjustments-to-retiree-cost-of-living-payments" target="_blank" rel="noreferrer noopener">automatic adjustment provision</a>, which could enable COLAs to decrease or increase depending on PERA’s progress toward reaching full funding within a closed 30-year time frame. The upshot for PERA members and retirees: The recent changes to the pension plan are not without pain and angst, but they’re part of a national trend toward protecting the long-term viability of public pension funds as well as stabilizing the funded status of the PERA plan which benefits all stakeholders.

Trend: States make adjustments to retiree cost-of-living payments

Looking back on the year, it’s clear that PERA was top of mind—and with good reason. PERA and its future stability dominated the content of PERA on the Issues before, during, and after the 2018 legislative session, as Senate Bill 18-200 (SB 200) became the first PERA-recommended reform legislation to be introduced since 2010. But there were topics aside from legislation that proved to be of interest to readers, including Social Security, health care, taxes, and the recent mid-term elections. Without further ado, here is a closer look at some of the 2018 highlights.



Top Topic of 2018: Senate Bill 200 As was the case in 2017, <a href="https://www.copera.org/colorados-mid-term-elections-provide-some-answers-leave-some-questions" target="_blank" rel="noreferrer noopener">Legislation</a> was once again the most visited section on the site. PERA on the Issues continued to be the best place for readers to receive timely information on the <a href="https://content.copera.org/best-of-pera-on-the-issues-2018/" target="_blank" rel="noreferrer noopener">2018 legislative session</a>, and SB 200 was the dominant topic of discussion. While the continuously updated <a href="https://content.copera.org/best-of-pera-on-the-issues-2018/" target="_blank" rel="noreferrer noopener">2018 Proposed Legislation Status</a> article received the most traffic from our readers, SB 200-specific articles were not far behind. We followed the PERA-reform bill’s progression through the legislative process, including <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">the bill’s initial introduction in the Senate in March</a>; its <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">approval in the Senate</a> following two committee hearings, a spirited preliminary debate, and remarks from legislators prior to the final vote; its <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">approval in the House</a> after about 90 minutes of vigorous and amicable bipartisan debate; its eventual passing by both chambers late on the last day of the session, and <a href="https://content.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session/" target="_blank" rel="noreferrer noopener">its delivery in final form to Governor Hickenlooper to be signed into law</a>. Following the signing of SB 200, readers were keen on understanding the legislation’s impact on their individual circumstances, as seen through notable traffic numbers to articles that detailed the <a href="https://content.copera.org/the-year-so-far-in-public-pension-reform/" target="_blank" rel="noreferrer noopener">final law as written</a>, the <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">FAQs heard on June’s telephone town hall meeting</a>, and particular provisions in the new law such as the <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" target="_blank" rel="noreferrer noopener">automatic adjustment</a>.



Other Top Topics: Social Security, Health Care, and Taxes A number of non-SB 200 matters also interested our readers. There were, of course, the usual articles related to Social Security, which are always popular with PERA on the Issues readers. <a href="https://content.copera.org/best-of-pera-on-the-issues-2019/" target="_blank" rel="noreferrer noopener">One article</a> addressed proposed federal legislation that would replace the Windfall Elimination Provision (WEP) with a more fair formula that would ensure Social Security benefits be based on actual work history. <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">Another</a> looking at the Social Security Fairness Act of 2017 experienced a resurgence in traffic and comments over the course of the year. Other top-of-mind topics for PERA on the Issues readers in 2018 were <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">the rising cost of health insurance premiums</a>, <a href="https://content.copera.org/trend-states-make-adjustments-to-retiree-cost-of-living-payments/" target="_blank" rel="noreferrer noopener">retirement age requirements</a> (and how PERA compares to similar public employee retirement plans across the country), <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">tax-related information</a>, and <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">Colorado’s recent mid-term elections</a>.



Thank You for Being Part of the Conversation Posting your comments and questions to PERA on the Issues articles is a great way to engage with PERA and others. This year’s post with the most comments didn’t have quite enough participation to pass the all-time most-discussed post—that honor is (still) held by <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">a 2015 post</a> on WEP—but the <a href="https://content.copera.org/best-of-pera-on-the-issues-2018/" target="_blank" rel="noreferrer noopener">2018 Proposed Legislation Status</a> article did generate a whopping 112 comments, just a dozen shy of the WEP record holder. This is similar to last year, when the most commented post was <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">2017 Proposed Legislation Status</a>.



Looking Ahead to 2019 <a href="https://www.copera.org/best-of-pera-on-the-issues-2018" target="_blank" rel="noreferrer noopener">The First Regular Session of the 72nd General Assembly</a> will convene on January 4, 2019. Democrats have a “trifecta,” in which one party controls the governorship and both chambers of the Legislature. This will be a major shift from the divided state government Colorado has known the past two years where Republicans held a one-vote majority in the Senate.



Many issues introduced by Democrats but defeated in the Senate with the previous split-chamber will undoubtedly be brought up again in the new political environment of 2019. The agenda will also be heavily influenced by a total of 30 new Representatives and Senators, as well as a Governor who is expected to be more heavily involved in policymaking than his predecessor. While we expect next year’s legislative session to be less active for PERA-related issues than it was this year, we will, as always, keep you apprised of any noteworthy legislation. We hope that you will continue to turn to PERA on the Issues for credible, timely information on policy, retirement, health care, finance, and other topical areas – and share your thoughts, comments, and questions with the PERA on the Issues community.



On behalf of everyone here at PERA, we wish you a safe and healthy holiday season. See you in 2019!

Best of PERA on the Issues 2018

PERA staff are committed to providing regular, transparent updates to state legislators about the status of the PERA trust funds and the economic impact of the public employee retirement plan across Colorado.



Currently, four different legislative committees have oversight responsibility of PERA. Each committee held hearings this fall where PERA staff provided <a href="http://coga.prod.acquia-sites.com/sites/default/files/html-attachments/i_pensionrevew_2018a_20180815t100058z1__hearing_summary/Attachment%20B%20-%20PERA%20Presentation.pdf" target="_blank" rel="noreferrer noopener">general updates</a> as well as specific information tailored to the needs of the different committees. Recent presentations to reporting committees in 2018 included:



<ul>
<li><a href="http://leg.colorado.gov/sites/default/files/images/lac_agenda_august_13-14_2018_.pdf" target="_blank" rel="noreferrer noopener">Legislative Audit Committee</a>, held on August 14</li>



<li><a href="http://leg.colorado.gov/content/ipensionrevew2018a2018-08-15t100058z1-hearing-summary" target="_blank" rel="noreferrer noopener">Pension Review Commission</a>, held on August 15</li>



<li><a href="http://leg.colorado.gov/sites/default/files/images/joint_finance_smart_act_agenda_1.pdf" target="_blank" rel="noreferrer noopener">Joint Finance Committee</a> (SMART Act hearings), held on November 26</li>



<li><a href="https://leg.colorado.gov/sites/default/files/fy2019-20_perahrg.pdf" target="_blank" rel="noreferrer noopener">Joint Budget Committee</a>, held on December 4</li>
</ul>



Led by Colorado PERA Executive Director Ron Baker, PERA staff presented information about PERA’s status and impact as well as major developments in 2018.



PERA continues to have significant economic impact around the state. Contributions to the Colorado economy come from $4.1 billion in total Colorado distributions, creating $6.5 billion in economic output. PERA provides retirement and other programs to one in every 10 Coloradans, paying benefits in every Colorado county, including over 25 percent of payroll in some of the state’s most rural counties.



The investment program continues to meet benchmarks through a diverse asset allocation and a long-term investment time horizon, while maintaining low costs by managing more than half of its portfolio internally, saving approximately $40 million annually in investment fees.



Senate Bill 200 (SB 200) significantly improved PERA’s funded status and every division is expected to reach full funding within the next 30 years. Major provisions of the <a href="https://content.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session/" target="_blank" rel="noreferrer noopener">legislation</a>, approved during the 2018 legislative session, include increased contributions, modified benefits, and an <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" target="_blank" rel="noreferrer noopener">automatic adjustment provision</a>.



The automatic adjustment provision in SB 200 is designed to keep each division on schedule to full funding by 2048, with three components that include employer contributions, employee contributions, and the annual increase that can be adjusted over time if PERA falls behind or moves ahead of schedule to reach full funding. The direct distribution from the State’s budget could also be adjusted but cannot exceed the current funding level of $225 million. The first eligible year for any needed adjustments would be on or after July 1, 2020.



No legislative agenda items have been identified by the PERA Board for the upcoming 2019 legislative session.



In addition to the general overview, PERA staff offered more specific information for the various committees. For example, a PERA audit response plan for the Legislative Audit Committee detailed a process of examining current procedures in place for the review of actuarial reports and a review of controls over financial reporting. For the Joint Budget Committee, staff responded to several questions, such as looking for more detail about the automatic adjustment provision of SB 200 and how funded status might trigger an adjustment in the future.



At each hearing, PERA staff reminded legislators of their willingness to serve as a resource during the 2019 session as retirement security and the financial stability of Colorado’s largest public employee retirement plan continue to be priorities.



Stay up-to-date by following <a href="https://www.copera.org/pera-on-the-issues" target="_blank" rel="noreferrer noopener">PERA on the Issues</a> and <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" target="_blank" rel="noreferrer noopener">subscribing to our newsletter</a> for insights throughout the First Regular Session of Colorado’s Seventy-second General Assembly, convening on January 4, 2019.

PERA staff keep legislators prepared for 2019 legislative session

In 2012, the Governmental Accounting Standards Board (<a href="https://www.copera.org/pera-on-the-issues/pera-staff-comment-on-proposed-actuarial-standard-changes">GASB</a>) introduced revised requirements for public pension plans (<a href="https://content.copera.org/despite-changes-in-accounting-standards-pera-remains-on-track/">GASB 67</a>) and employers affiliated with those public pension plans (<a href="https://www.copera.org/despite-changes-in-accounting-standards-pera-remains-on-track">GASB 68</a>) that significantly changed how public pension assets and liabilities were to be measured and disclosed for accounting and financial reporting (rather than funding) purposes.



Prior to 2012, the assets and liabilities determined for funding purposes typically were appropriate also to be used for accounting and financial reporting requirements under GASB 25 for most public pension plans. But as a result of the 2012 revisions, public pension plans – including PERA – now report two different measures of funded status: the first, based on the actuarial methods and assumptions under the <a href="https://www.copera.org/despite-changes-in-accounting-standards-pera-remains-on-track">pension funding policy adopted by the PERA Board</a> and the second, based on the revised accounting and financial reporting requirements under GASB 67. PERA and PERA employers first began reporting under GASB 67 in 2014 and GASB 68 in 2015, respectively.



The revised GASB statements relate to accounting and financial reporting issues only—how pension costs and obligations are measured and disclosed in audited external financial reports. While in the past there has been a close relationship between how governments fund pensions and how they account and report information, the guidance under GASB 67 and GASB 68 established a decided shift from the former funding-based approach to an accounting-based approach. This shift was designed to improve the usefulness of reported pension information and increase the transparency, consistency, and comparability of pension information across governments.



(To learn more about the changes to accounting rules, visit PERA’s <a href="https://www.copera.org/employers/gasb-reporting-standards">GASB guidance section</a>.)



<a href="https://content.copera.org/despite-changes-in-accounting-standards-pera-remains-on-track/">Under GASB 67</a>:



the rate used to discount projected benefit payments to their present value will be based on a single rate that reflects (a) the long-term expected rate of return on plan investments as long as the plan net position is projected under specific conditions to be sufficient to pay pensions of current employees and retirees and the pension plan assets are expected to be invested using a strategy to achieve that return; and (b) a yield or index rate on tax-exempt 20-year, AA-or-higher rated municipal bonds to the extent that the conditions for use of the long-term expected rate of return are not met.



In 2017, PERA determined the plan’s liabilities using a discount rate of 7.25 percent as set by the PERA Board for funding purposes—applicable to all five division trust funds, but also determined the plan’s liabilities using a blended discount rate considering the 7.25 percent assumption and a municipal bond rate, in part, [as required under GASB 67 provisions (a) and (b) above] for financial reporting purposes—applicable to three of the five division trust funds. For example, this resulted in a 59.4 percent funded status for the School Division and 57.5 percent funded status for the State Division determined for funding purposes and a 44.0 percent and 43.2 percent funded status, respectively, determined under GASB 67, for accounting and financial reporting purposes.



In dollar amounts, unfunded liabilities for the first calculation total $28.8 billion and for the second, $54.6 billion; a difference of $25.8 billion.



So what’s the “real” number? Senate Bill 18-200 reduced PERA’s liabilities, no matter which reporting basis is used. Prior to SB 200, liabilities determined for funding purposes were $32.2 billion and projected to increase another $1.4 billion. With the implementation of SB 200, funding liabilities declined $3.4 billion to $28.8 billion and are projected to be eliminated within a 30-year period.


<div class="wp-block-image">
<figure class="alignleft"><a href=""><img decoding="async" src="https://content.copera.org/despite-changes-in-accounting-standards-pera-remains-on-track/"Lowering the Liability" class="wp-image-2149"/></a></figure></div>

Despite Changes in Accounting Standards, PERA Remains On Track

As Ron Baker begins his new role as Colorado PERA’s seventh Executive Director, the 24-year veteran of the organization sat down with the Denver Business Journal to chat about what’s next for Colorado’s largest public pension fund. With the passage of Senate Bill 200 during the 2018 Colorado legislative session, PERA’s financial profile—as well as the state’s—is now on more stable long-term footing. But keeping the pension fund on its most productive path is an ongoing challenge, and Baker used his discussion with the DBJ to summarize what was accomplished with SB 200, what challenges lie ahead, and how he plans to lead the organization through its next phase.



Read Baker&#8217;s interview with the DBJ <a href="https://www.bizjournals.com/denver/news/2018/09/13/colorado-pera-stabilizes.html?b=1536847739%5E21339113" target="_blank" rel="noreferrer noopener">here</a>.

Denver Business Journal interview with Ron Baker

To briefly summarize the reasons why the PERA Board sought legislation in 2018 that would adjust benefits and increase contributions:



<ul>
<li>Full funding in 30 years complies with Colorado statute and the <a href="https://www.copera.org/despite-changes-in-accounting-standards-pera-remains-on-track" target="_blank" rel="noreferrer noopener">PERA Board’s policy</a>.</li>



<li>Full funding in 30 years gives PERA the ability to withstand inevitable future market shocks.</li>



<li>Full funding in 30 years matches the employment pattern of Colorado’s public employees better, thus ensuring intergenerational equity.</li>



<li>Full funding in 30 years strengthens the <a href="https://content.copera.org/reviewing-the-positive-impact-of-sb-200/" target="_blank" rel="noreferrer noopener">State’s credit rating</a>.</li>
</ul>



Although the changes included in SB 200 are difficult, they were necessary to ensure the long-term retirement security of PERA members. Some of the positive outcomes of SB 200 are below.



Reducing liabilities. With the changes in SB 200 and the 2017 investment return, PERA’s liabilities were reduced by $3.4 billion. This is a significant amount that reflects the sharing of responsibilities for righting the system among current and future members (who will pay more, will potentially have to work longer, and will have to wait at least three years before becoming eligible for an annual increase), retirees (who will have no annual increases in 2018 and 2019 and then a 1.5 percent cap), employers (who will contribute more), and the State of Colorado’s payment of the <a href="https://www.copera.org/reviewing-the-positive-impact-of-sb-200" target="_blank" rel="noreferrer noopener">direct distribution</a>.



Improving PERA’s funded status. The funded ratio is a measure of funds available today compared to current and future payable benefits and is expressed as a percentage. PERA’s funded status also increased as a result of SB 200 and 2017 investment returns, going from 58 percent at the end of 2016 to 61 percent at the end of 2017.



Accelerating the time to reach full funding. The time to reach full funding in each division is now within a 30-year time frame. By shortening the time it will take to reach full funding, the trust funds are better able to withstand inevitable fluctuations in the financial markets.



<figure class="wp-block-table"><table><tbody><tr><td>Division</td><td>Projected Period of Time to Reach Full Funding Prior to SB 200</td><td>Projected Period of Time to Reach Full Funding Post SB 200</td></tr><tr><td>State</td><td>58 years</td><td>27 years</td></tr><tr><td>School</td><td>78 years</td><td>30 years</td></tr><tr><td>Local Government</td><td>55 years</td><td>15 years</td></tr><tr><td>Judicial</td><td>54 years</td><td>15 years</td></tr><tr><td>Denver Public Schools (DPS)</td><td>56 years</td><td>17 years</td></tr></tbody></table></figure>



SB 200 changes positively recognized by S&amp;P. One of the primary reasons cited for needing to pass SB 200 this year was the possible negative effect PERA’s unfunded liability could have on the State’s credit rating. Last fall, the Standard &amp; Poor’s (S&amp;P’s) credit rating agency issued a warning that a potential downgrade to Colorado’s credit rating could occur, due in part to the State’s long record of underpaying its share of the PERA fund costs. After the enactment of SB 200, S&amp;P Global Ratings revised the outlook to stable from negative.



SB 200 is in line with PERA’s mission. The actions taken by the PERA Board, the General Assembly and Governor, alongside PERA’s membership and stakeholders are notable and fulfill a commitment to promote the long-term financial security of the PERA membership while maintaining the stability of the fund.



For more information, see <a href="https://peraontheissues.com/wp-content/uploads/2018/07/CoPERA_financialsnapshot-extension.pdf" target="_blank" rel="noreferrer noopener">The Positive Impact of SB 200</a>&nbsp;fact sheet.

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