Federal Reserve Paper Explains Colorado PERA’s Failure to Pay its Public Pension Bills.

Readers new to this discussion should know that the State of Colorado is currently seeking to break contracts to which the State is a party, specifically public pension contracts.  In less than one month, the Colorado Supreme Court will hear oral arguments in the resulting lawsuit, Justus v. State.

In 2009, a public pension system administered by an arm of Colorado state government, (the Colorado PERA pension system) reached a certain funding level, a 69 percent funding ratio (actuarial funding ratio.)  The Colorado PERA pension system arrived at this funding level primarily due to the failure of the Colorado General Assembly to pay its public pension bills (actuarially required contributions, ARC) during the previous decade.  At the time of the PERA pension contract breach, this 69 percent funding ratio was within a few percentage points of the average funding ratio for the PERA pension system in recent decades.  Nevertheless, the Colorado PERA Board of Trustees, and lobbyists hired by the PERA Board, and certain self-interested groups, and lobbyists for the self-interested groups all successfully persuaded a slim majority of state legislators that the 69 percent funding ratio level was a "crisis."  They persuaded the state legislators that this purported "crisis" was of such magnitude that it allowed the State of Colorado to abrogate contracts to which the State was a party.

Below is a link to an article that includes the history of missed Colorado PERA ARC payments:

http://coloradopols.com/diary/44193/u-s-census-bureau-colorado-reneged-on-its-pera-pension-contracts-while-spending-a-mere-2-08-percent-of-revenues-on-public-pensions

Naturally, those whose property was taken when state contracts were abrogated in 2010 filed a lawsuit.  The lawsuit, Justus v. State, has progressed through Colorado courts over a four-year period, and the target of the pension contract breach, Colorado PERA retirees, have studied the law, learned of their contractual public pension rights, and paid close attention to the work of public pension legal scholars in the United States.  Colorado PERA retirees have, in particular, followed the writings of the preeminent U.S. public pension legal scholar, Professor Amy Monahan, of the University of Minnesota School of Law.

Recently, I discovered yet another interesting paper by Professor Amy Monahan, this one produced (with a co-author) for the Federal Reserve Bank of Cleveland in 2012.  Although this Federal Reserve "working paper" is comprehensive, I have extracted (and present below) only certain select portions of the paper that I find germane to the case, Justus v, State.

The title of the Federal Reserve working paper: "Who’s Afraid of Good Governance?  State Fiscal Crises, Public Pension Underfunding, and the Resistance to Governance Reform," Thomas J. Fitzpatrick and Amy B. Monahan, Working Paper, November, 2012.

Excerpts from the Monahan/Fitzpatrick paper:

"This article presents the results of a qualitative study of the funding and governance provisions of twelve public pension plans that are a mix of state and local plans of various funding levels."

"If neither plan participants nor state taxpayers are able to effectively monitor and challenge a state’s inadequate funding or improper investment decisions, public plans are very likely to remain underfunded."

(My comment: Unfortunately, for many state and local government elected officials who oversee public pension plans, political concerns trump any fiduciary obligation or inclination to observe contractual governmental pension obligations.  I also recall former PERA Executive Director Meredith Williams lamenting losses to the PERA Trust Fund sustained as a result of the PERA Board's past decisions to embrace "alternative investments."  Should PERA retirees, who bear no market risk, make PERA plan sponsors whole for Board investment errors by relinquishing their constitutional rights?)

Monahan/Fitzpatrick paper:

"Control of these assets, however, is often in the hands of political actors, whose short-term political interests may be very different than future retiree's interests."

(My comment: The Colorado PERA Board of Trustees is itself a political actor.  The PERA Board's hired outside lobbyists, and in-house lobbyists, influence state politicians.

As a state legislator noted on tape in 2010, the political PERA Board "cuts deals."  Colorado PERA lawyers inform the Board about the deals that were "cut" in regular executive sessions.
The PERA Board codifies these backroom deals in Colorado law via purchased lobbyist influence over the Colorado law-making process.  How many public pension systems in the U.S. engage in such practices?  Remember, this is our state government.

Political considerations prompted the PERA Board to stand idly by last year while the Colorado General Assembly directed $142 million toward local government pensions that are not the state's contractual obligation, this while underfunding state PERA contractual pension obligations.  Total appropriations for this Colorado local government obligation have reached approximately $700 million.

Political considerations prompted the PERA Board to stand idly by while the Colorado General Assembly failed to pay the PERA pension system actuarial required contribution, for a decade.  Why does the PERA Board invariably fail to defend the interests of vested PERA members?)

Monahan/Fitzpatrick paper on the failure of state legislatures to pay their public pension ARC:

"In many states, the decision to fund the state pension plan is subject to the legislative budgeting process.  If legislators decide that other budgetary needs have greater importance, the pension plan simply is not fully funded.  And there are many reasons for legislators to avoid full pension funding, one of which is the time-inconsistency inherent in intertemporal decision making.  That is, legislators may be likely to underfund public pension plans because they mistakenly give current needs greater weight than future needs."

(My comment: As we have observed earlier, state legislatures [like the Colorado General Assembly] that have opted to place employer and employee contribution rates in statute, rather than prioritizing payment of the pension ARC [actuarially required contribution] each year in the budgeting process, are much more likely to have significant unfunded pension liabilities.)

Monahan/Fitzpatrick paper:

"This phenomenon is well documented with respect to individuals making retirement savings decisions, and it is likely that the same psychology affects legislators making pension funding decisions."

(My comment: My observations of legislative hearings on PERA-related legislation lead me to believe that Colorado legislators are generally not aware that the state has failed to meet Colorado PERA public pension [ARC] obligations for the last decade.  I perceive this lack of awareness of the PERA ARC obligation, resulting from the fact that, inexplicably, Colorado PERA officials and PERA trustees have historically felt no obligation to inform Colorado legislators [at their three regular annual PERA meetings with lawmakers] that the General Assembly is not meeting PERA ARC obligations.)

Monahan/Fitzpatrick paper:

"As a result, legislators may attempt to defer contributions to public pensions in order to make room in state budgets for more immediate concerns.  They may do so even though they know that it will require higher contributions in the future, and then for similar reasons resist or attempt to delay making the increased contributions that result.  If the choice is between funding current needs, or funding pension benefits that will be paid out in thirty years, it is easy to see why current needs might win out.  There is also, of course, a public choice aspect to the pension funding dynamic.  A legislator that has an interest in being re-elected would be wise to favor current needs that provide tangible benefits to her constituents over funding future benefits
for state workers."

(My comment: Politicians who seek reelection have an incentive to ignore long-term public pension contractual obligations in favor of discretionary spending that will benefit special interests, especially when these special interests are able to deliver endorsements, campaign cash and votes.  The total amount of PERA-affiliated employer revenue lost to special interest tax subsidies and credits over the last two decades should be determined.)

Monahan/Fitzpatrick paper:

"The problem with systemic underfunding, regardless of its precise cause, is that it shifts the burden of paying for current benefits to future taxpayers.  It is essentially a form of off-balance sheet borrowing."

(My comment: Unless, of course, the politicians succeed in eliminating the "off-balance sheet" debt through breach of pension contracts.)

Monahan/Fitzpatrick paper:

"Given the political influence that is present on many boards, scholars have raised concerns that politicians are likely to interfere in board decision making in order to secure political gain."

(My comment: Colorado legislators have interfered with PERA Board investment decisions and trust fund management, certain divestment requirements and the use of PERA trust funds for business loans [that private lenders apparently won't touch] come to mind.

We do not have a clear picture of genesis of the political scheme to break Colorado PERA pension contracts in 2009.  However, this was clearly the aim of the PERA Board that year since the Board hired former Colorado Supreme Court Justice Jean Dubofsky to create a legal rationale with that specific goal [a taking of accrued PERA pension COLA benefits] identified.  This fact is confirmed in the Dubofsky deposition referenced repeatedly on saveperacola.com in recent years.  Did the contract breach scheme originate with a public sector union, education association, legislator, or a union lawyer?  It would be rather ironic if the plan to target the contracted COLA benefit for 90 percent of SB10-001's "costs savings" originated with an attorney whose firm had previously represented PERA.  It would be ironic if this attorney initially represented the defendant Colorado PERA in the lawsuit, Justus v. State.  The irony would be magnified further if such an attorney's fellow law firm shareholder during a period of PERA legal representation ultimately heard the resulting PERA retiree lawsuit upon arrival at Colorado's highest court.

I speculate that outside political influence was brought to bear on the Colorado PERA Board, and that subsequently the Board decided to hire Jean Dubofsky to create a COLA-taking legal rationale, and later the board directed staff to promote the 2009 "2-2-2" ruse for use in PERA's political, public relations, and legal campaigns to break pension contracts.

My opinion is that the PERA Board also directed PERA lobbyists to seek an amendment to legislation at the conclusion of the 2009 legislative session placing into Colorado law a formal legislative request for the PERA Board to make recommendations to the General Assembly regarding PERA pension "reform."  That is, I think the PERA Board asked itself to develop the plan for PERA pension reform, rather than allowing development of the plan in open state legislative hearings [as is the practice at most state legislatures.]

Given Meredith Williams and Greg Smith's long history of supporting public pension contractual rights, including Smith's legal briefs on the subject, and his testimony before Treasurer Coffman's PERA Commission, I imagine that quite a bit of persuasion was needed to prompt their abandonment of long-held beliefs regarding these contractual rights.  Notably, soon after the contract breach in SB10-001 was adopted, Meredith began job hunting, failed to win the Texas pension position, but soon escaped the self-inflicted PERA legal fiasco when he secured a new public pension industry job in California.

For the record, I also find it truly bizarre that Colorado PERA has abandoned its original "actuarial necessity" legal strategy midstream in favor of DeWitt.  How is this switch of legal strategy explained?  Will we ever know the rationale for the abrupt change in the PERA contract breach legal strategy?  Will PERA retirees ever have the opportunity to read the Dubofsky rationale for contract breach?  Will PERA retirees ever have the opportunity to read Greg Smith's briefs supporting contractual public pension rights?

One hopes that since PERA administrators were aware of the forthcoming litigation of PERA COLA contractual obligations [at least as early as the Dubofsky product was solicited] that these PERA administrators preserved all relevant materials via early adoption of a litigation hold.)

Monahan/Fitzpatrick paper:

"This lack of enforcement gives states the clear ability to act on their inclination to favor current needs over retiree's benefit security."

"The only possible method by which to avoid such a situation is for participants and beneficiaries to exert political power to force adequate funding, but experience shows that in many instances participants and beneficiaries do not wield the necessary amount of power to safeguard their benefits."

(My comment: Does it simply come down to political power?  The State of Colorado will not honor the contracts of parties to state contracts if those parties lack political and lobbying influence?  In 2009/2010, contracts belonging to Colorado PERA retirees were relatively exposed due to their lack of a robust public pension retiree advocacy organization, as exists in many states.)

The Monahan paper (suggests a solution):

"Before moving on to our next example, it is important to note that a state has the ability to change this outcome.  A state could pass a law or amend its constitution to provide that participants have the right to a plan that is adequately funded on an annual basis.  We also saw in our study that state courts have in some instances inferred such a right, even in the absence of a specific statutory or constitutional provision."

"Experts tend to agree broadly about what good governance looks like in the context of public pension plans.  Plans should be governed by trustees who are relatively isolated from the political process."

(My comment: In Colorado, PERA Board trustees are up to their ears in politics.  Each year, they spend at least $400,000 on statehouse lobbyists who pursue political outcomes.  PERA Board trustees have taken money from Colorado PERA retiree trust funds and used the money to hire lawyers and lobbyists to, incredibly, take even more money from those same retirees.)

Monahan/Fitzpatrick paper:

"Plans should be adequately funded on an ongoing basis so as not to burden future taxpayers."

"In other words, there may be other factors, such as the political climate in a state, that have much more influence on a plan's success than the content of its governing rules."

(My comment: Politicians should know that the constitutional Colorado TABOR amendment recognizes public pension obligations as state "debt."  TABOR is, under no circumstances, an excuse for legislators to avoid meeting state contractual pension obligations.)

Monahan/Fitzpatrick paper:

"There are several ongoing lawsuits challenging unilateral reductions in public plan benefits that were justified by the relevant states as ways to address underfunding."

"It is simply too easy in nearly all states and cities to ignore funding requirements when other needs that appear to be more pressing arise."

"If public pension plans are to succeed, we need to get serious not only about reforming plan governance, but also ensuring that there is a reliable method to enforce plan funding requirements grounded in realistic assumptions."

Link to Monahan/Fitzpatrick paper:

http://masonlec.org/site/rte_uploads/files/Monahan%2C%20Amy%20-%20Who%C2%B9s%20Afraid%20of%20Good%20Governance%20State%20Fiscal%20Crises%2C%20Public%20Pension%20Underfunding%2C%20and%20the%20Resistance%20to%20Governance%20Reform.pdf

Support the sanctity of contracts and the rule of law in Colorado.  Visit saveperacola.com.  Since statehood, Colorado government has honored its contracts.  The Colorado General Assembly's recent effort to so blatantly and casually ignore constitutional limits on its authority is certainly unprecedented and shocking.

Algernon Moncrief

About Algernon Moncrief

Independent Nationwide Public Pension Rights Blogger.

One Community Comment, Facebook Comments

  1. hawkeye says:

    The Monahan/Fitzpatrick paper offered several suggestions on how to fix flawed and reckless pension plan governance so common around the country.  One solution was "automatic benefit haircuts".

    In 2010, two branches of state government, the legislature and Governor Ritter, along with the PERA Board of Trustees, all agreed on a "benefit haircut" for retirees.  Employers and active PERA members would get a slight trim.  The whole SB10-001 effort was ramrodded through the legislature with the prodding of a large group of lobbyists hired by corporate leaders and high-level education administrators, especially Higher Ed.  Even former Senator, and CU President, Hank Brown spoke of "Colorado Courage" when referring to SB10-001.

    http://coloradopols.com/diary/39190/hank-brown-former-u-s-senator-supports-colorados-breach-of-public-pension-contracts

     

     

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