In a historic shift, the pension plan covering hundreds of thousands of current and former Colorado public-sector employees will seek legislation to reduce benefits for future participants and have them carry more of the investment risk.
The Colorado Public Employees’ Retirement Association board on Monday announced proposed changes creating a tier of benefits and contribution levels for employees hired in 2007 and beyond.
The legislative package, which doesn’t have a sponsor yet, would effectively create a healthy new plan to support the current plan, which faces a $12.8 billion shortfall.
On its current course, the $34 billion plan, which has only 73 percent of the money it needs to meet current and future obligations due to its 360,000 members, could become critically underfunded. The plan benefits state workers as well as many teachers, judges and local government employees.
“The margin for error is very, very slim,” PERA executive director Meredith Williams said. “The board wanted to do something to extend that margin.”
Among the key pieces of PERA’s proposed reforms:
Future hires will receive 2.1 percent of their highest average salary for each year of service instead of the 2.5 percent that current members earn. Highest average salaries will be based on the highest five years of pay rather than three years.
New workers will not receive guaranteed cost-of-living increases, compared with the required 3.5 percent bump in benefits each year to which current members are entitled.
Contributions from the state, school districts and other public employers would accelerate at 0.5 percent a year between 2008 and 2011 rather than the 0.4 percent increase now in place. Employer contributions would top out at 13.65 percent of workers’ pay in 2012 rather than the 13.15 percent cap proposed last year.
In a new and untested feature, the new “Tier 2” plan will shift a larger share of its investment risk to workers. If the new plan falls below 90 percent of the funds it needs, contributions from employees and employers alike will be raised 1 percent.
Once employees contribute 10 percent of their pay, benefit cuts will follow until the plan is stabilized. If the plan reaches 110 percent of funding, contribution levels will be reduced and benefits restored.
To reflect the lower benefits they will receive, future public employees would contribute only 7 percent of their pay, compared with the 8 percent current PERA members contribute.
Assuming the pension plan’s portfolio can return 8.5 percent over the next 30 years, the reforms should see the plan bottom out at a funding level of about 65 percent before returning to health.
Colorado Treasurer Mark Hillman, whose office convened a commission to reform PERA last summer, called the legislative package a “good start.”
“I have to credit the PERA staff and trustees for recognizing the existing program is too expensive to maintain,” Hillman said.
One additional change Hillman said he would like to see is to have PERA streamline its 16-member board and add more independent experts.
Rob Gray, PERA’s director of government relations, said the board has proposed adding two outside experts each to four of its committees.
A key goal of the reforms was to not change the benefits received by current employees, a move that could be deemed unconstitutional, Williams said.
But the proposed benefit cuts would make taking a public-sector job less attractive, said Mil ler Hudson, who heads the Colorado Association of Public Employees.
“Low pay and a lousy retirement package will make it hard to attract workers,” he said.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
