As PERA reform legislation makes it way through the legislative process, some have argued that the composition and size of the Public Employees Retirement Association Board of Trustees “is not a critical issue.” In my opinion, both the size of the Board of Trustees and the qualification of the people who govern a plan with an $11 billion deficit is not only a critical issue … it is the critical issue.
In 2004, alarmed by the deteriorating financial strength of the pension plan, I pulled together a group of independent professionals from government, academia and business to study PERA and its financial problems.
The Commission to Strengthen and Secure PERA, chaired by former Colorado Gov. Dick Lamm, examined the system from top to bottom, looking at both how the fund’s financial health deteriorated so quickly, and how to prevent it from happening again.
Topping the commission’s list of recommendations for securing PERA’s long-term future: governance.
The commission found serious fault with the plan’s existing board structure, specifically the lack of balance between the interests of employees, employers and the state taxpayers. Also troubling was the absence of professional finance and pension experience among trustees. While it is true the legislature and not the PERA board can increase benefits or change contribution levels, what is often overlooked is the political power of the board to influence state legislators and their willingness to spend big bucks to do so – more than $130,000 for lobbyists this year alone.
Throughout the plan’s history, particularly during the boom times of the 1990s, the PERA board lobbied the General Assembly repeatedly to increase benefits without regard to who would ultimately pay the bill if the stock market took a dip. By its logic, the taxpayer is on the hook to make up any shortfall, so why not make the system even more generous?
When the market went south, PERA’s funding ratio slipped to just over 70 percent and continues to decline, yet other plans in Colorado successfully weathered the storm. The Denver Employee’s Retirement Plan is 98 percent funded, the Aurora General Employee’s Retirement Plan is 105 percent funded, and the state’s Fire & Police Pension Association stands at 100 percent funded. How is it that all four plans went through the same market conditions but only three of them are financially sound while PERA is not?
The answer? Governance.
The PERA Board of Trustees consists of 16 members, 14 of whom are beneficiaries of the plan itself and elected by other beneficiaries. The remaining two are the state treasurer and state auditor – different opinions, but only two votes. I am not a gambler, but I know that odds of 7-to-1 mean bad news for the Colorado taxpayer. By comparison, the Denver plan has a five-member board, all appointed by the mayor. In Aurora, the board has seven voting trustees: three elected by employees, three appointed by the City Council, and one selected by the other six. The Fire & Police Pension Association has nine members: three employees, three employers and three outside professionals.
As we have seen with the recent failure of private-sector boards – Enron and WorldCom come to mind – the size of the board, the qualifications of its members and the perspectives that those members bring to the table are critical to successful stewardship.
Pension plans such as PERA can work, and they have worked successfully in Colorado, but leadership is a vital part of the equation. Any reform proposal for PERA this session must include fundamental changes in governance. Anything less keeps the status quo: PERA beneficiaries in, taxpayers out.
Mike Coffman is Colorado’s state treasurer.
