December 12, 2014 10:37 AM UTC

The Colorado Legislature's Chronic Underfunding of the Colorado PERA Pension System.

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• by: PolDancer

Recently, several Colorado PERA retirees contacted the Legislature and requested: (1) statistics regarding payment of the "actuarially required contribution" (ARC) to the Colorado PERA pension system since 2002, and (2) a comparison of Colorado PERA's ARC "funding discipline" over this period with the ARC funding discipline of other major US public pension systems.

Since Colorado PERA retirees rely entirely on their public pension benefit (Colorado PERA benefits replace Social Security for PERA members) retirees very much appreciate the attention given to the request by members of the Legislature.

Several members of the Legislature forwarded the retiree's request for statistical information to the staff of Colorado PERA. But, rather than providing the requested statistical and financial information to legislators, Colorado PERA staff provided what is in essence a political response from a Colorado state agency.

The requested ARC statistics were not provided, and instead of providing the requested analysis of relative ARC "funding discipline" among major US public pension plans, state legislators and PERA retirees were referred to a website. It is disappointing that the request for information was so casually dismissed.

Note that the credit rating firm, Standard and Poor's, stresses the importance of pension ARC funding discipline. A Standard and Poor's (2013) report on US public pensions, condemns the failure of public pension systems to meet annual ARC payments:

"For some states that decided to achieve budgetary relief by underfunding their pensions during the Great Recession or more chronically, a significant portion of the new revenue would be absorbed by restoring higher contributions to their pension systems, making this decision even more difficult. The decision to underfund the ARC might have turned out to be a very costly one."

"We believe that not fully funding the ARC is a short-term solution that will likely result in a larger unfunded actuarial accrued liability down the line."

"We've observed that persistent underfunding of ARC correlates highly with pension funding contributions that are statutorily or contractually determined."

http://www.nasra.org/Files/Topical%20Reports/Credit%20Effects/A_Bumpy_Road_Lies_Ahead_for_US_Public_Pension_Funded_Levels.pdf\

S&P emphasizes the importance of pension ARC funding discipline. Yet, Colorado PERA staff, in their response, casually dismiss ARC funding discipline, and ignore the fact that (as S&P's analysts have noted) fixed statutory contribution levels, like those set for Colorado PERA, result in pension systems "with the weakest funded ratios."

The State Legislative Counsel provided the following PERA response to a PERA retiree's request for ARC funding statistics:

"I learned that the State of Colorado has always paid PERA the amount that has been owed by statute." "According to PERA staff, PERA has never been shorted on receiving these contributions." "PERA staff also explained that the ARC is just an actuarial calculation and measurement, and it roughly amounts to $3.3 billion for the whole system since 2001."

Members of the Colorado Legislature should know that merely setting PERA pension system contribution rates in statute is not the equivalent of annually meeting the Colorado PERA ARC obligation. Failure to pay the pension ARC is simply borrowing from the future. The failure to pay the PERA ARC is largely responsible for accrued liabilities in the Colorado PERA pension system. Why must Colorado legislators hear these truths from PERA retirees instead of from the PERA pension system's fiduciaries? Why would the pension system's fiduciaries downplay the failure to make the full PERA ARC payment since 2002, and the continuing failure to meet the ARC obligation?

A recent study by the Tennessee Treasurer's Office reveals that the cost of delaying public pension plan actuarially required contributions [with an assumed 7.5 percent return assumption] for a 12-year period [the Colorado Legislature began underfunding the PERA pension system 12 years ago] is a premium of 138.2 percent of the skipped pension contribution.

Link to the Tennessee Treasurer's report:

http://s3.amazonaws.com/s3.documentcloud.org/documents/1012837/pension-report.pdf

From the Tennessee Treasurer's report:

"It costs an additional $435,000 to delay a one million dollar pension payment for five years assuming an earnings rate of 7.5%. This is a 43.6% increase in the amount to be paid. The pension cost more than doubles by delaying a payment by 10 years. A $1 million pension cost becomes $2.06 million if delayed 10 years. See Attachment 2 that illustrates the cost of delaying employer pension contributions."

"GASB noted in its release accompanying Statement No. 68 that pension contribution issues are public policy matters. Indeed, leading finance professional organizations, including the Government Finance Officers Association have adopted positions calling for governments to adopt a funding policy based on an actuarially determined annual funding amount."

"Failure to pay annually when due the full actuarially required contribution is in effect underfunding the pension plan. The amount that is not funded increases the unfunded accrued liabilities of the plan. Further, the pension plan will not have the under-funded amount available to invest, thereby resulting in lost earnings opportunity."

"The funding for a pension plan assumes that 100% of the ARC will be paid annually, and further assumes that those contributions will be invested to earn at least the assumed rate of return for the pension plan. Thus, the failure to pay 100% of the ARC can quickly lead to a serious underfunding of the pension plan. Chronic underfunding of the ARC will eventually make the pension plan financially unstable. Nationwide, multiple severely underfunded pension plans that are now financially unstable are examples of the failure to pay annual funding requirements."

As was noted in the initial PERA retiree request for information, former Colorado PERA General Manager Meredith Williams (on February 23, 2012) testified to the House Finance Committee regarding the cumulative harm that results from a lack of Colorado PERA ARC funding discipline:  “We’ve had a significant problem over the years, in that . . . contributions, payments by (PERA) employers into PERA have been kind of the last thing in the budget building process, and we have not made the required payments. Unfortunately, in our line of work, where we’re involved in compounding shortfalls grow, particularly when the shortfalls continue year after year after year.”

Morningstar Analyst Rachel Barkley:

"Although Colorado is still absorbing losses from 2009, the main reason its funding gap is yawning is the state's failure to make the contributions recommended each year by its own budget experts, Barkley said."

"Even if public pensions realize their projected investment returns on average over coming years, the failure by many plans 'to pay less than the full ARC . . . will produce less than full funding over the next 30 years,' according to a recent report by the Center for Retirement Research (CRR)."

http://www.reuters.com/article/2014/03/10/us-usa-pensions-rally-analysis-idUSBREA2907320140310

In my opinion, Colorado state legislators and Colorado PERA retirees deserve factual, rather than political responses to their requests for information from taxpayer supported state agencies. The state legislators who submitted the request to Colorado PERA asked for statistical information. They did not ask for a rationalization of the chronic underfunding of the PERA pension system.

Colorado elected officials may be interested to know that the Tennessee Legislature has recently enacted a bill that requires governmental sponsors of public pension plans in the state to pay their pension bills on time. From Chattanoogan.com:

"Governor Bill Haslam has signed into law a bill that officials said is designed to assure Tennessee local government entities fully pay the annual payment to their public employee pension plans in order to protect the financial stability of local governments and to protect workers’ pensions."

"The legislation, called the first of its kind in the nation, was sponsored by Senate Majority Leader Mark Norris (R-Collierville) and Rep. Steve McManus (R-Memphis) and written by state Treasurer David Lillard, Jr."

"The new law, called the Public Employee Defined Benefit Financial Security Act of 2014, will require all local government entities that operate pension plans in Tennessee to pay the payments recommended by their actuaries each year. These payments, formerly known as the Annual Required Contribution or ARC, are the amount of money actuaries determine is needed to annually fund in a financially-sound manner the benefits provided by public pension plans."

"If local government entities fail to pay 100 percent of the ARC after that phase-in period, the state will have the authority to withhold money it provides to those governments and use it to make the required payments."

“'A local government that fails to pay 100 percent of its ARC each year is like a runner with a shorter stride than the people he is racing against,' Treasurer Lillard said.  'With each stride, the runner falls farther and farther behind the competition. For local governments not funding annual pension payments, it is the taxpayers who ultimately lose.'”

“'This legislation is something all states should consider,' said Charles E.F. Millard, managing director, head of pension relations for Citigroup and a former director of the United States Pension Guaranty Corporation. 'The health of public pensions depends upon their investment returns and plan structures, of course. But the key determinant of the health of our public plans is whether the public employer makes its full annual contribution. If everyone did this, public pensions would be far healthier than they are today.”

"The Public Employee Defined Benefit Financial Security Act of 2014 is Public Chapter 990, which may be viewed at http://www.tn.gov/sos/acts/108/pub/pc0990.pdf."

http://www.chattanoogan.com/2014/5/28/277432/Haslam-Signs-Local-Government-Pension.aspx

Colorado PERA retirees offer thanks to those state legislators who attempted to gather the requested Colorado PERA statistical information.