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May 30, 2014 05:33 PM UTC

Anticipating Colorado PERA's Next Deception: ADC Supersedes the ARC.

  • 2 Comments
  • by: PolDancer

Task Force of Local and State Government National Associations in 2013:

"The most important step for local and state governments to take is to base their pension funding policy on an actuarially determined contribution (ADC)."

http://icma.org/en/icma/knowledge_network/documents/kn/Document/305118/Pension_Funding_Guide_Brief

Public pension retirees in most states can rely on the trustees of their pension plan, or the administrators of their plan to defend their contractual pension rights.  Since Colorado PERA trustees and administrators are thick into the attempt to take the property of Colorado PERA retirees through the 2010 Colorado bill, SB10-001, Colorado PERA retirees must defend their own rights and property in the courts.

Given the track record of attempted deception by Colorado PERA officials (deception of PERA annuitants and Colorado courts) during PERA's political and legal campaigns to escape PERA contractual pension obligations we can expect that Colorado PERA officials will also attempt to use coming changes in federal public pension accounting standards to obfuscate and mislead.

Colorado PERA's lawyers and administrators are grasping at straws in developing arguments to support the breach of PERA pension COLA contractual obligations desired by their client, accordingly it is only prudent that we expect Colorado PERA officials to use the ongoing change in federal public pension accounting emphasis as a vehicle for further deception.  That is, another "straw" Colorado PERA's lawyers will reach for.

The federal public pension regulatory agency, GASB, has changed its accounting standards relating to the reporting of public pension liabilities.  This rule change is currently being implemented by pension plans in the United States.  Rather than employing its traditional emphasis on pension funding (i.e., the ARC, "actuarially required contribution") the federal public pension regulatory agency, GASB, has issued new rules that will emphasize the reporting of "net public pension liabilities" by public pension systems such as Colorado PERA.

Over the last few decades the public pension ARC metric has served as the primary means of measuring public pension plan funding discipline, i.e., the extent to which a pension system's plan sponsors are responsibly contributing to pension trust funds in amounts sufficient to meet the plan's contractual obligations over time.  As we have seen, the Colorado PERA pension system has skipped out on paying its full public pension bills (ARC) for the last twelve years.

To "fill the gap" in the development of public pension funding plans that will be created by GASB's new rules, a group of state and local government national associations has recommended that the metric ADC ("Actuarially Determined Contribution") replace the former pension funding metric ARC ("Actuarially Required Contribution.")

In 2013, the Task Force recommended that the "ADC" Supersede the "ARC" in public pension plan funding:

ADC: "Actuarially Determined Contribution."
ARC: "Actuarially Required Contribution."

In light of the level of deceit that we have seen from Colorado PERA officials in the last five years, I fully expect Colorado PERA's lawyers to attempt to use GASB's change of funding discipline emphasis as a cover for the failure of PERA plan sponsors to meet their pension obligations over the last twelve years.

Their argument may be along the lines of "Well, GASB has apparently found that the ARC is not important, so it doesn't matter that the Colorado PERA pension system has not paid the PERA system ARC (bills) for twelve years."  As we have seen, both Colorado PERA Executive Director Greg Smith and former Executive Director Meredith Williams have (when caught off-script) condemned the Colorado Legislature's failure to pay its pension bills over the last decade.

In this article I highlight some of Colorado PERA's previous deceit, explain my rationale for expecting Colorado PERA officials to embrace this new line of deception, and later in the article provide background information regarding the GASB rule change and the Task Force recommendation of the ADC.

COLORADO PERA'S ONGOING ATTEMPTS TO DECEIVE:

Why should we expect Colorado PERA administrators and lawyers to also use the GASB rule change in yet another attempt to deceive?  In the next few pages I will provide examples of deception from the PERA political campaign to take the PERA COLA benefit, and examples of PERA deception in a PERA Supreme Court brief.  Rest assured that where Colorado PERA officials see a chance to deceive, they will seize upon it.

Here are a few examples of Colorado PERA deception that occurred during PERA's political campaign to break PERA pension contracts in 2009/2010: PERA's deceptive "2/2/2" marketing campaign (under this marketing scheme PERA employers relinquish only a fraction of a percent of future revenues, while PERA retirees relinquish a third or more of the value of their pension contracts); the failure of PERA officials to note that the PERA COLA is an "automatic" public pension COLA benefit, as opposed to an "ad hoc" benefit; and attempts by PERA officials to exaggerate the decline in the funding ratio of the Colorado PERA pension system by replacing the "actuarial funding ratio" that Colorado PERA officials have used historically (this is the funding ratio in SB10-001) with a "market-based" funding ratio.

I also see deception in Colorado Legislative Leadership's failure to submit an interrogatory to the Colorado Supreme Court in 2009, in Legislative Leadership's acquiescence to the scheme to "outsource" legislative debate of public pension policy in 2009, and in the subsequent failure of Legislative Leadership to appoint an interim study committee to examine PROSPECTIVE, legal pension reform options in 2009.  I see deception in the lack of public and PERA annuitant access to the consideration, recommendation and pricing of PERA "reform" options in 2009.

I see deception in the list of 28 reform options that was distributed by PERA officials during their "Listening Tour."  Only two of the options listed required those who actually owe the PERA pension debt to pay their debts.

I believe that PERA's intent to deceive resulted in an initial decision of the Denver District Court that failed to even mention Colorado's long-standing public pension case law, Bills and McPhail.

In 2012, I wrote an article that exposes many of the deceptions of Colorado PERA administrators and lawyers in a PERA Supreme Court brief including: deceptions relating to: the "reasonable expectations" of Colorado PERA retirees; the false claim that the taking of the COLA was "the last option," while the taking was certainly premeditated; the false claim that PERA retirees have a contractual right to the PERA "base benefit (but, not to the PERA COLA benefit) while both are set forth in identical language in Colorado statutes; Colorado PERA's attempts to mislead regarding Colorado public pension case precedent; attempts to mislead regarding "irreducible" versus "unchangeable" pension COLAs; the deference courts give to state governments seeking to escape their own contractual obligations; claimed support of retirees for the breach of their own pension contracts; the need for a 100 percent funded ratio in SB10-001 when an 80 percent funding ratio for public pensions is considered to be "well-funded"; the implication in PERA publications that current employees must work longer under SB10-001 (they don't); the implication that when courts uphold the law in Colorado and protect the Constitution, the courts threaten public pension funding status; the fear mongering that Colorado PERA could "run out of money," while many public pension systems have operated on a "pay-as-you-go" basis as recently as the 1970s (a 2006 Federal Reserve paper, by Ronald A Wirtz, notes that public pension funded ratios in the 50 to 60 percent range were typical in the 1970s); the many "market-based" versus "actuarial funding ratio" deceptions; and finally the ridiculous assertion of Colorado PERA's attorneys that this case is "not about the right to COLAs."

Recall that in their publications Colorado PERA officials note that "actuarial funded ratios” in the 60's do not constitute a "crisis":

Colorado PERA Update – [Spring 2006 – page 4]: “See that PERA’s [actuarial] funded status was lower [61.5 percent] 30 years ago than what it is now. You may recall that there was no perceived “crisis” in PERA’s funded status in 1975.”

Colorado PERA News Archive for 2004: PERA's [actuarial] funded level was below 60 percent in 1970, and there was not a perceived crisis in PERA’s financial health.”

A more complete analysis of deception in the Colorado Supreme Court PERA brief is available here:

http://coloradopols.com/diary/18952/colorado-pera-attempts-to-decieve-the-colorado-supreme-court

Here are a few examples of how Colorado PERA attempts to mislead in their Colorado PERA Supreme Court Brief, an excerpt from the Colorado PERA brief:

“Plaintiffs could have no reasonable expectation that ever-changing COLA formulas would freeze, for the first time, when they retired.”

(My comment: PERA attorneys, EVEN YOUR CLIENT HAS THESE EXPECTATIONS . . . THAT THE COLA BENEFIT IS AN ENFORCEABLE PUBLIC CONTRACT!  If Colorado PERA, your client, has these expectations, why should PERA pensioners not also have these expectations?  Colorado PERA attorneys, please take a minute to read the words of your client provided in testimony to the General Assembly’s Joint Budget Committee.  Your client put it in writing that PERA pensioners have a contractual right to their COLA benefits.  Colorado PERA administrators believe that PERA pensioners have such a contractual right . . . that belief goes beyond a “reasonable expectation.”

Colorado PERA in a written document, to the Colorado General Assembly’s Joint Budget Committee on December 16, 2009 states that the PERA COLA benefit IS a contractual obligation of PERA, “The General Assembly cannot decrease the COLA (absent actuarial necessity) because it is part of the contractual obligations that accrue under a pension plan protected under the Colorado Constitution Article II, Section 11 and the United States Constitution Article 1, Section 10 for vested contractual rights.”

Link:
http://www.kentlambert.com/Files/PERA_JBC_Hearing_Responses-12-16-2009_Final.pdf)

From the Colorado PERA Supreme Court Brief:

“But this mandatory language bound the PERA administrator while the statutes were in effect-not future legislatures.”

(My comment: Colorado PERA attorneys, your client doesn’t believe your argument that the statutes only bind the “pension administrator.”  Your client has testified that the General Assembly cannot decrease the contracted COLA . . . THAT THE GENERAL ASSEMBLY IS BOUND, not the "pension administrator."  Did this not come up in your meetings with your client?  Your client’s testimony is on the record, it has been recorded at the Legislature.  It is not going to simply disappear.)

From the Colorado PERA Supreme Court Brief:

“The General Assembly considered readjusting the COLA for retirees as the last option, only after it became evident that no other viable contribution and benefit changes could prevent the pension fund from running out of money.”

(My comment: First we should note that: "In the 1970s, it was not uncommon for state and local governments to fund their pensions on a pay-as-you-go basis."  [Pension Funding: A Guide for Elected Officials, Report from the Pension Funding Task Force 2013.]

http://www.nasact.org/washington/downloads/announcements/03_13_Pension_Funding_Guide.pdf

In the 1970's it was not uncommon for U.S. public pension systems to be as PERA's lawyers write "out of money," and yet still meeting their contractual obligations out of current revenues.  Greg Smith has been quoted stating that, in accordance with his legal briefs, actuarial necessity [which in any event applies only to pension benefits that are partially vested] only occurs when pension plans have no assets.  Further, state governments cannot petition a court for bankruptcy under federal law.

Colorado PERA attorneys, if the taking of the PERA COLA benefit was the "last option," why was the Colorado PERA Board of Trustees shopping for a legal opinion (Dubofsky) to justify the COLA taking in early 2009, before the purported consideration of PERA "reform" options even began?  As you know, I believe that the General Assembly reduced the contracted PERA COLA benefit from retirees [thus breaking pensioner contracts] as a FIRST OPTION.  I believe that the General Assembly created a façade of deliberation to mask a predetermined attempt to break the PERA pension COLA contractual obligation.  Dozens of viable “less drastic” alternatives to pension contract breach, that were ignored by Colorado PERA administrators, have been documented.)

From the Colorado PERA Supreme Court Brief:

“The (District) court held: ‘While Plaintiffs unarguably have a contractual right to their PERA pension itself . . .’

(My comment: As I have noted previously, I am curious as to how the Denver District Court arrived at this conclusion that “plaintiffs unarguably have a contractual right to their PERA pension itself” without citing either the McPhail or Bills cases in its decision?  On what authority did the Denver District Court base this determination?  Was it pulled out of thin air?)

In the Colorado PERA Supreme Court Brief, PERA’s attorneys write in regard to the pension cases McPhail and Bills: “Those dated cases are distinguishable.”

(My comment:  Let’s get this straight for the record: Colorado PERA’s attorneys believe that the Colorado Supreme Court decisions in McPhail and Bills that address the contractual nature [under the COLORADO constitution’s Contract Clause] of post-retirement benefit increases for retired public employees who have vested rights in Colorado public pensions are “distinguishable,” and that the Supreme Court should not rely on their own authority.

Instead, Colorado PERA’s attorneys argue that the Colorado Supreme Court should rely on a case [DeWitt] that addressed a “statutory revocation of a testator’s former wife’s interest in a life insurance policy” based on FEDERAL Contract Clause authority, a case in no manner involving “vested rights to employee benefits,” a case concerning the “retroactive application of a Uniform Probate Code provision which automatically revoked the designation of a divorced spouse as a life insurance beneficiary.”  Got it?)

THE RECOMMENDED "ACTUARIALLY DETERMINED CONTRIBUTION" (ADC):

The Pension Funding Task Force recommends that the ADC "fill the gap" in funding guidance left by GASB's latest rule change.

On its website, the International City/County Managers Association (ICMA) has a page relating to public pension funding.

http://icma.org/en/icma/priorities/public_policy/policy_priorities/pension_funding

This page includes a link to the publication: Pension Funding: A Guide for Elected Officials published by a Task Force of local and state government national associations.

A few excerpts from the ICMA page:

"The Task Force also released, Pension Funding: A Guide for Elected Officials, with its recommendations for pension funding policies.  The Pension Funding Task Force recommends that governments retain an actuarially determined annual required contribution (ARC) for budgeting, policy, and planning purposes.  The new GASB accounting standards no longer address pension funding and require local governments to report Net Pension Liability."

"Members of the task force include: ICMA, the National Governors Association, National Conference of State Legislatures, The Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, National Association of State Auditors, Comptrollers and Treasurers; Government Finance Officers Association; National Association of State Retirement Administrators and the National Council on Teacher Retirement."

(Note that former Colorado PERA Executive Director Meredith Williams is now leading the National Council on Teacher Retirement.)

"ICMA and the Pension Funding Task Force recommend that state and local governments adopt a pension  funding policy that is based on an actuarially determined annual required contribution.  The policy should address three core elements: (1) actuarial cost method; (2) asset smoothing; and (3) amortization policy."
The ICMA highlights a few well-run public pension systems:  "Some pension plans have remained better funded than others in the aftermath of the economic downturn.  Here are three well-funded pension plans and their characteristics: City of Kalamazoo, Michigan Employees’ Retirement System, Illinois Municipal Retirement Fund, Denver Employees Retirement Plan."

http://icma.org/en/icma/priorities/public_policy/policy_priorities/pension_funding

Chicago Tribune on the Illinois Municipal Retirement Fund:

"'It's not rocket science,' said IMRF executive director Louis Kosiba in an interview Friday. 'We've done it the old-fashioned way, with sound actuarial principles applied consistently.  Each year our board of trustees calculates what the units of government need to contribute, and 99.9 percent of them comply."

"'We know that winter comes every year, and we have to plan for downturns.  We always remember that we're in this for the long term.'"

"IMRF went through the same economic downturn that the rest of us did. 'Our assets dropped from $24 billion down to $18 billion,' said Kosiba.  'But now we're at $33 billion.  Because slow and steady wins the race.'"

http://articles.chicagotribune.com/2014-05-18/opinion/ct-oped-zorn-0518-20140517_1_pension-crisis-state-pension-pension-changes

THE PUBLIC PENSION FUNDING GUIDE:

Below, I provide a few excerpts from the public pension funding guide:

"In the 1970s, it was not uncommon for state and local governments to fund their pensions on a pay-as-you-go basis."
(Pension Funding: A Guide for Elected Officials, Report from the Pension Funding Task Force 2013.)

http://www.nasact.org/washington/downloads/announcements/03_13_Pension_Funding_Guide.pdf

"This guide provides key facts about public pension plans, why it is essential to have a pension funding policy, a brief overview of the new GASB standards, and which issues state and local officials need to address.  The guide also offers guidance for policy makers to use when developing their pension plan’s funding policy."

"Paying the full ARC has been an important measure of whether or not a pension plan is on track to fund its pension promises."

"This is a significant change for government employers because the ARC historically served as a guide for policy mak¬ers, employees, bond rating agencies and the public to determine whether pension obligations were being appropriately funded."

"Because the GASB’s new standards focus entirely on how state and local governments should account for pension liabilities and no longer focus on how employers fund the costs of benefits or calculate their ARC, a new source of guidance is needed."

Filling the Gap in Funding Guidance:

"To help fill that gap, the national associations representing local and state governments established a Pension Funding Task Force (Task Force) to develop policy guidelines."

"The 'Big 7' (National Governors Association, National Conference of State Legislatures, Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, and the International City/County Management Association) and the Government Finance Officers Association established a pension funding task force in 2012.  The National Association of State Auditors, Comptrollers and Treasurers; the National Association of State Retirement Administrators; and the National Council on Teacher Retirement also serve on it.  The Center for State and Local Government Excellence is the convening organization for the Task Force."

"The Task Force has monitored the work of the actuarial community and the rating agencies, as well as considered recommendations from their own organizations to develop guidelines for funding standards and practices and to identify methods for voluntary compliance with these standards and practices."

"A sound pension funding policy should address at least the following three core elements of pension funding in a manner consistent with the policy objectives: Actuarial cost method; Asset smoothing method; and Amortization policy."

"The actuarially determined ARC, the parameters for determining the ARC, and the percentage of the ARC the employer actually paid should be disclosed and reassessed periodically to be sure that they remain effective."

"The most important step for local and state governments to take is to base their pension funding policy on an actuarially determined contribution (ADC).  The ADC should be obtained on an annual or biannual basis."

http://icma.org/en/icma/knowledge_network/documents/kn/Document/305118/Pension_Funding_Guide_Brief

Support public pension contractual rights at saveperacola.com.

Comments

2 thoughts on “Anticipating Colorado PERA’s Next Deception: ADC Supersedes the ARC.

  1. It seems to me that ADC is an accounting contrivance designed to shift public pensions away from a defined benefit guaranteed by the employer, towards a shared sacrifice scenario where beneficiaries shoulder post-retirement 'market risk' after the employer (state government) decides it serves a grearter public purpose (tax breaks and credits) to heed ADC as advisory rather than required (ARC).  The ultimate goal is to reduce contractual protections for public pensioners, even retroactively.  

  2. Why has PERA yet to promulgate basic, fair, and meaningful solvency solutions, e.g., a cap on current highest monthly benefits (3.5% annual increase notwithstanding), reduction or elimination of stand alone benefits like PERAcare, or offering state pension obligation bonds with favorable tax treatment in the current low interest rate environment.  The obvious answer is that resources rightfully for pension obligations are being crowed out by the claims of special interests so meaningful reforms are ignored if they impact the highest paid beneficiaries (that can afford a COLA loss or reduction and don’t need or deserve any PERA based on their revolving door careers of elected to public employments with spiked final years of service and/or private sector perk augmented salaries, yes I’m talking about Ritter, ex-legislators, and PERA employees themselves).

    Why isn’t PERA and the state of Colorado going after deep pockets that caused the so-called financial  problems instead of employing  claw-backs against elderly state pensioners, E.g.:  Arizona and the federal government’s lawsuit against S & P’s parent company McGraw Hill for misleading credit ratings on toxic mortgage bonds (a dozen other states joined that law suit, i.e., Arkansas, California, Delaware, The District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee, and Washington).

    Why would state legislators decrease the amortization period for actuarial soundness from 40 years to 30 years (SB 06-235, a couple of years before the Great Recession started) and not increase the employer’s contributions accordingly to accommodate such a drastic change?

    The obvious answer is the state’s in league with PERA to create a fiscal crisis in order to end run TABOR and walk away from their obligations to retired state employees in order to fund their own pet projects and continue spreading the largesse of corporate welfare at the expense of state pensioners and the integrity of the state’s credit worthiness!  SB 06-235 is the smoking gun in the irresponsible adolescent’s hands who shot his own parents and pleads for mercy because he 's an orphan!  Politicians and PERA are creating this smoke screen of a fiscal crisis in order rob the state pension plan … it really is as simple as that! The only things more simple and plain are the minds of a few doddering beneficiaries who are fool enough to regurgitate the line of “shared sacrifice” which PERA feeds them!  Supporters of SB 10-001 should be charged with elder abuse!

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