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.

As regular readers of PERA on the Issues know, Senate Bill 18-200 (SB 200) was passed by the General Assembly and signed by Governor Hickenlooper earlier this year. Changes resulting from this legislation will put PERA on a path to full funding in approximately 30 years and give PERA’s members and retirees, as well as Colorado taxpayers, a stronger, more stable retirement fund.



Included in SB 200 is an innovative mechanism that automatically adjusts both contributions to and distributions from the PERA trust funds in order to keep the plan on track to that goal of full funding.



The provision requires automatic changes to four components of PERA funding: member contributions, employer contributions, the State’s direct distribution and the annual increase (AI) paid to retirees. Prior to SB 200, the only way that contribution rates or annual increase percentages could change was by passing legislation.



If PERA’s period to reach full funding falls behind the funding goal, contributions and the direct distribution would increase while the AI would decrease. If the funding period moves ahead of the goal, contributions and the direct distribution would decrease, and the AI would increase. There are limitations on increases or decreases in a single year.



Through implementation of the automatic adjustment, PERA’s funding will continue to make progress toward full funding within 30 years of SB 200.



A fact sheet on the automatic adjustment can be found <a href="https://content.copera.org/peras-automatic-adjustment-provision-a-case-study-for-pension-risk-sharing/" target="_blank" rel="noreferrer noopener">here,</a> and a video explaining the provision can be viewed <a href="https://youtu.be/aePAHw2hhLY">here</a>.

Senate Bill 200’s automatic adjustment keeps PERA full funding on track

On Monday afternoon, Governor Hickenlooper signed into law Senate Bill 18-200, <a href="https://leg.colorado.gov/bills/sb18-200" target="_blank" rel="noreferrer noopener">Modifications To PERA Public Employees&#8217; Retirement Association To Eliminate Unfunded Liability</a> (SB 200). The ceremony took place in the Capitol Building foyer outside the Governor’s office and was attended by the bill’s co-sponsors, General Assembly leadership and staff, PERA representatives, and media.



The Colorado legislature passed the bipartisan legislation just before midnight on May 9, in the waning hours of the 2018 session. The bill was co-sponsored by four lawmakers: state senators Jack Tate (R-District 27) and Kevin Priola (R-District 25) and state representatives KC Becker (D-District 13) and Dan Pabon (D-District 4). It is designed to restore Colorado PERA’s retirement plan for public employees to full funding within 30 years.



In praising the legislature for passing the complex bill, Governor Hickenlooper acknowledged that it contains components that each group of stakeholders might like or dislike, and by doing so, “[SB 200] is an example of a genuine Colorado compromise.”



Echoing the governor, state Senator Tate added, “I’m very happy with this outcome, primarily because we had an outcome. [This bill] was always about one thing, which was maintaining retirement security for Colorado’s public servants.”



SB 200 adopted many of the recommendations that the PERA Board proposed in late-2017. The Board finalized its proposals after a yearlong fact-finding process by PERA staff that solicited extensive input—from financial experts and various stakeholder groups, including PERA members, retirees, and employers—which PERA then passed on to lawmakers.&nbsp; “These behind-the-scenes conversations were where the action really happened, and we credit the PERA Board for setting the tone early on,” said state Senator Priola.



The Board’s proposal and SB 200 both advocate for sharing responsibility in such a way that will pay down PERA’s unfunded liability within the actuarially sound 30-year timeframe, which will also help sustain, and possibly improve, Colorado’s credit rating.



“When the 2018 session started, more than a few people told me this bill had about a five percent chance of passing,” said House Majority Leader Becker. “But the shared responsibility aspects of SB 200 are a win for retirees and their families, as well as for the entire state.”



For more information about SB 200, view <a href="https://www.copera.org/contributions-to-colorado-pensions-lower-than-average" target="_blank" rel="noreferrer noopener" class="broken_link">this rundown</a> of how the new law will affect PERA employees, employers, and retirees.

Governor Hickenlooper signs Senate Bill 200

Now that Governor Hickenlooper has formally signed Senate Bill 200 (SB 200), the work begins on implementing it. (Read more about the passage of SB 200 <a href="https://content.copera.org/direct-distribution-of-225-million-helps-return-pera-to-full-funding/" target="_blank" rel="noreferrer noopener">here</a>.) This complex piece of legislation naturally raises numerous questions for Colorado PERA members, retirees and employers. PERA on the Issues will continue to provide details on all aspects of the bill, and we encourage you to <a href="https://www.copera.org/contact-us" target="_blank" rel="noreferrer noopener">contact us</a> if you’re unclear about any of the new provisions.



Why did the Board advocate for any changes to the PERA plan?



During the General Assembly’s deliberations about the bill questions arose about why this was necessary given that the legislature had passed another PERA-related bill in 2010. The primary reasons are that PERA members are living longer, which increases the cost to provide their retirement benefits; and that more conservative projections of future investment returns have emerged, which requires PERA to adjust its prior assumptions about our investment portfolio. The result of these two factors is that PERA’s <a href="https://www.copera.org/colorado-pera-board-endorses-package-reforms" target="_blank" rel="noreferrer noopener" class="broken_link">risk profile had become too high</a>.



Did SB 200 include all of the PERA Board recommendations?



The PERA Board and staff recognized these trends in 2016 and subsequently spent all of 2017 formulating recommendations for the structural changes that became the basis of SB 200. The final bill contains many of the <a href="https://www.copera.org/senate-bill-200-what-you-need-to-know" target="_blank" rel="noreferrer noopener" class="broken_link">PERA Board’s proposals</a>, all of which are designed to reduce PERA’s risk profile moving forward and decrease the amount of time it will take to reach full funding for each of its divisions to within 30 years. A comparison of the Board’s recommendations with the final version of SB 200 can be found <a href="https://www.copera.org/house-approves-senate-bill-18-200" class="broken_link">here.</a>



What assurances are there that these changes will continue to keep PERA sustainable?



Of course, economic and demographic trends will continue to evolve. But SB 200 accounts for that by including an innovative automatic adjustment provision that—should PERA stray from its 30-year funding timeline—modifies employer and employee contributions, the direct distribution and the annual increase as needed.&nbsp;(Read more about the automatic adjustment provision of SB 200 <a href="https://peraontheissues.com/wp-content/uploads/2018/05/AutoAdjustment-WORK_REV_5.17.18.pdf" target="_blank" rel="noreferrer noopener">here</a>.)



What else does the bill include besides changes to the PERA benefit structure?



SB 200 mandates that the state pay a $225 million <a href="https://peraontheissues.com/wp-content/uploads/2018/05/DirectDistribution-final.pdf" target="_blank" rel="noreferrer noopener">direct distribution</a> every year until the unfunded liability is paid off. It also establishes an oversight committee comprised of four legislators and 10 appointed, non-governmental experts from relevant fields. Neither of these provisions were included as part of the PERA Board’s recommendations.



Because of SB 200, PERA members, retirees and employers, as well as Colorado taxpayers, will benefit from a stronger, more stable retirement fund. PERA’s funded status will improve over time, the state’s credit rating will remain strong and PERA retirees will continue to receive retirement benefits, contributing to Colorado’s economy and the state’s well-being. For more comprehensive details about how SB 200 will affect you, <a href="https://www.copera.org/contributions-to-colorado-pensions-lower-than-average" target="_blank" rel="noreferrer noopener" class="broken_link">see our fact sheet</a>.

Senate Bill 200: What you need to know

With the 2018 legislative session soon drawing to a close, <a href="http://leg.colorado.gov/bills/sb18-200">Senate Bill 18-200</a> (SB 200) cleared its latest legislative hurdle on Tuesday morning, when the Colorado House passed the legislation.



The vote came after a clarification about 21(c) rules, which enable legislators to recuse themselves from a vote if they have a conflict of interest in the matter at hand. The final tally was 38-23, with four lawmakers excused. On May 2, the Senate moved to create a <a href="https://legisource.net/2018/03/29/conference-committees-a-quick-review-of-the-options-2/">conference committee</a> to work out the differences between the two chambers.



On Monday evening, SB 200 passed the House on a voice vote during second reading, after about 90 minutes of spirited and amicable bipartisan debate. The deliberations didn&#8217;t begin until just after 8:00 p.m., reflecting state lawmakers&#8217; packed agenda with only nine days left on the legislative calendar.



During approval discussions about the House Finance Committee report, representatives offered 16 amendments, including four related to restoring the defined contribution plan option that the House previously amended out of the Senate version of the bill. Those four motions all failed, but eight of the other amendments passed. These included:



<ul>
<li>Three technical amendments that corrected or clarified prior language in the bill</li>



<li>A deletion of the previous version with new members after December 31, 2019, retiring at any age and 40 years of service credit at 65 with 5 years of service credit and adding retirement eligibility for new hires at age 60 with 30 years of service credit</li>



<li>Expansion of the existing Police Officers’ and Firefighters Pension Reform Commission to include oversight of PERA and creating a Subcommittee exclusively focused on PERA and staffed with four legislators appointed from the Commission and ten appointed external experts in relevant industries.</li>



<li>A provision that allows the annual direct distribution from sources in addition to the General Fund via the budgeting process</li>



<li>A change to the direct distribution provisions that delineates the amount assigned to the state and to K-12 public education</li>
</ul>



Later on Monday evening, during the Committee of the Whole reading after the main proceedings, Rep. Polly Lawrence (R-Roxborough Park) offered two amendments. The first would change the Highest Average Salary calculation to seven years and was defeated, 37-28. Rep. Lawrence&#8217;s second amendment to raise the retirement age for new PERA hires to age 65 also went down, 36-29. Rep. Kevin Van Winkle (R-Highlands Ranch) reintroduced his amendment to reinstall the defined contribution option for new PERA hires into the bill, but it also lost, 36-29. And Rep. Justin Everett (R-Jefferson County) moved to indemnify the State Legislature and taxpayers against legal action as a result of the passage of SB 200. This amendment also was defeated, 37-28. The House voted to adopt the Committee of the Whole report, 43-22.



To see a comparison of the latest version of Senate Bill 200 with prior versions and the Board&#8217;s recommended package, please see <a href="https://www.copera.org/house-approves-senate-bill-18-200" class="broken_link">this chart</a>.

House approves Senate Bill 18-200

On Tuesday, June 26, Colorado PERA conducted telephone town halls for members and retirees. If you missed the calls, recordings and transcripts of each call have been posted <a href="https://www.copera.org/telephone-town-hall-frequently-asked-questions-3-2" target="_blank" rel="noreferrer noopener" class="broken_link">here</a>.



A summary of the most asked questions and responses is below. Questions about individual retirement benefits may be answered by contacting PERA Customer Service at 1-800-759-7372.



Q: How does the automatic adjustment feature in Senate Bill 200 work?



A: The provision requires automatic changes to four components of PERA funding: member contributions, employer contributions, the State’s direct distribution, and the annual increase (AI) paid to retirees. Prior to SB 200, the only way that contribution rates or annual increase percentages could change was by passing legislation.



With the automatic adjustment feature of SB 200, if PERA’s projected period to reach full funding falls behind the funding goal, contributions and the direct distribution would increase (the direct distribution will not exceed $225 million) while the AI would decrease (but not lower than 0.5 percent). If the funding period moves ahead of the goal, contributions and the direct distribution would decrease, and the AI would increase. There are limitations on increases or decreases in a single year.



See the <a href="https://peraontheissues.com/wp-content/uploads/2018/05/AutoAdjustment-WORK_REV_5.17.18.pdf" target="_blank" rel="noreferrer noopener">Automatic Adjustment fact sheet</a> for details.



Q: Why are the different divisions within PERA treated differently? For example, employers in the Local Government Division won’t be contributing more and won’t receive any of the direct distribution from the State.



A: The reason behind a different contribution level for Local Government employers is the division has a better funded status and the additional contributions were not needed to bring the division to full funding within 30 years. Keep in mind that employers in the Local Government Division do not receive funding from the State currently and therefore are not included in the divisions receiving a portion of the direct distribution.



Q: What was the impact of SB 200 on PERA’s funded status?



A: Each division is a separate trust (School, State, Denver Public Schools, Judicial, Local Government). The projected amortization period (or the time it will take to be fully funded) for each division, recognizing the changes in SB 200 and incorporating the 2017 investment return, is below.



Amortization Period for Each Division



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



Q: How does the direct distribution work?



A: In short, the direct distribution of $225 million will come directly to PERA from the state budget each year. This amount may decrease, if the automatic adjustment provision kicks in, but will never exceed $225 million. For more information, please see this PERA on the Issues <a href="https://www.copera.org/telephone-town-hall-frequently-asked-questions-3-3" target="_blank" rel="noreferrer noopener" class="broken_link">post</a> and <a href="https://peraontheissues.com/wp-content/uploads/2018/05/DirectDistribution-final.pdf" target="_blank" rel="noreferrer noopener">fact sheet</a>.



Q: I recently read an article about PERA’s investment expenses. Can you explain what PERA spends on investment fees?



A: The article was focused on private equity and real estate investment fees. The goal of these asset classes is outperformance and diversification versus the public markets over the long term, which they have provided. For the 10-year period ending December 2017, PERA’s investments have outperformed a hypothetical 60 percent global equity, 40 percent fixed income portfolio by approximately $3.1 billion dollars. In other words, PERA’s investment program that includes private equity has generated $3.1 billion more than if PERA didn’t invest in the asset class. .



<a href="https://peraontheissues.com/wp-content/uploads/2018/05/PERA-Investment-Fees-Fact-Sheet.pdf" target="_blank" rel="noreferrer noopener">Read more on investment fees</a>.



Q: What is PERA’s position on divesting from certain investment opportunities, such as fossil fuels?



PERA invests on behalf of the membership to achieve one goal: to secure the retirement benefits promised to Colorado’s current and former public employees. The PERA Board has a fiduciary obligation to the membership and, in part, fulfills its obligation by designing an investment strategy that seeks to maximize returns. That said, the Board routinely reviews its existing policies related to investment prohibitions. In June 2018, the Board’s Investment Committee began reviewing and possibly updating the <a href="https://www.copera.org/pera-board-of-trustees-updates-divestment-policy-statement" target="_blank" rel="noreferrer noopener" class="broken_link">Statement on Divestment</a> adopted by the Board in 2007. The Investment Committee members received educational presentations from their fiduciary counsel, their investment consultant, and PERA staff regarding divestment and engagement. The Board will continue its process of deliberation on this topic over the next few months.



Q: What is PERA doing about the Windfall Elimination Provision in Social Security?



A: Because the Windfall Elimination Provision (WEP) saves the Social Security trust fund money (and getting rid of it would cost the federal government money), Congress has been reluctant to act. PERA and the national organizations in which we participate track movement on federal legislation and if there is any news on this front, we will certainly share it with PERA members.



Read more on the WEP <a href="https://www.copera.org/2017-federal-legislation-update" target="_blank" rel="noreferrer noopener" class="broken_link">here</a>.



Q: Will PERA employees and the Board be sacrificing like the rest of us?



PERA employees and Trustees elected by the m



On Tuesday, October 3, Colorado PERA conducted telephone town halls for members and retirees. If you missed the calls, recordings have been posted&nbsp;<a href="https://www.copera.org/telephone-town-hall-frequently-asked-questions-3-2" target="_blank" rel="noreferrer noopener" class="broken_link">here</a>.



A summary of the most asked questions and responses is below.



Why is the Board recommending benefit cuts and contribution increases when the stock market is at a record high this year?



The Board’s recommendations are intended to reduce PERA’s risk profile in the future, making PERA more sustainable and able to adapt to our changing environment. Two key changes have increased the time it will take PERA to become fully funded. First, the PERA Board lowered the long-term rate of return assumption (which made the cost of providing retirement benefits higher). While the U.S. stock market may be doing well this year, the long-term forecast for the global financial markets is not as optimistic. (Read more about PERA’s&nbsp;<a href="https://www.copera.org/2018-markets-year-in-review" target="_blank" rel="noreferrer noopener" class="broken_link">diversified portfolio</a>&nbsp;of investments and its&nbsp;<a href="https://www.copera.org/colorado-pera-board-endorses-package-reforms" target="_blank" rel="noreferrer noopener" class="broken_link">risk profile</a>.) Second, the Board adopted new mortality tables that reflect the longer lives of PERA retirees.



Haven’t retirees already sacrificed enough with the reduction in the&nbsp;COLA&nbsp;in 2010? Why can’t PERA members who are still working pay more?



The Board is keenly aware that recommended changes impact public employees who have provided valuable services to the state and their communities. The Board’s &nbsp; approach to lowering PERA’s risk profile was to spread the responsibility of ensuring PERA’s financial strength across the PERA membership (this includes PERA’s employers). More than 90 percent of PERAtour attendees agreed with the principle that &nbsp; the PERA benefit should allow retirees to maintain their standard of living throughout their lifetime, meaning that a dignified retirement starts with a livable base benefit that is maintained through annual increases. And more than 80 percent of&nbsp;<a href="https://www.copera.org/telephone-town-hall-frequently-asked-questions-3" target="_blank" rel="noreferrer noopener" class="broken_link">PERAtour</a>&nbsp;attendees agreed that the PERA retirement plan should require shared responsibility among members, retirees and employers.



Is PERA worried that increased contributions from members will make public employment in Colorado unattractive?



Yes. One of the Board’s objectives established before the recommended legislative package was finalized was that PERA remain fair and attractive to future public &nbsp; employees. In other words, the PERA retirement benefit needs to continue to adapt and be flexible to the needs of the modern workforce. A correlated principle was that PERA should serve as a tool for employers to recruit and retain top quality talent.



I have heard a lot of people expressing concerns about PERA. Why is PERA constantly a topic of discussion?



PERA believes conversations about the retirement system covering more than 560,000 current and former Colorado public employees should be based in fact and that’s why the&nbsp;<a href="https://www.copera.org/colorado-pera-board-endorses-package-reforms" target="_blank" rel="noreferrer noopener" class="broken_link">PERAtour website</a>&nbsp;was created. By proactively working with experts and engaging the PERA membership and stakeholders around the state, PERA is promoting sensible and workable reforms that ensure a secure retirement at a low cost for Colorado’s current, future, and former public employees.



When will the proposed changes go into effect?



The Board was careful to create a package of recommendations that would not influence member behavior. Details on the timing and what segment of the PERA membership each recommendation will impact may be found in this&nbsp;<a href="https://www.copera.org/2018-pera-on-the-issues-legislative-preview" target="_blank" rel="noreferrer noopener" class="broken_link">fact sheet</a>. Only the Colorado General Assembly can change PERA benefits and contribution rates. The 2018 legislative session begins on January 10, 2018.



Still have a question? Submit it to&nbsp;<a href="mailto:PERAtour@copera.org" target="_blank" rel="noreferrer noopener">PERAtour@copera.org</a>.

Tag Archives:

Senate Bill 200’s automatic adjustment keeps PERA full funding on track

Governor Hickenlooper signs Senate Bill 200

Senate Bill 200: What you need to know

House approves Senate Bill 18-200

Telephone Town Hall Frequently Asked Questions

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