COMMITTEE ON JOINT FINANCE
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10:01 AM -- Call to Order
Senator Sandoval called the meeting to order. She explained that several groups would testify after the presentation by the Public Employees' Retirement Association (PERA).
10:02 AM -- PERA Presentation
Mr. Meredith Williams, Executive Director of PERA, began by introducing a panel of PERA professionals, including Mr. Greg Smith, the General Counsel, and Ms. Jennifer Paquette, the Chief Investment Officer. A copy of PERA's presentation is included as Attachment A.
Mr. Williams began the presentation by explaining the different employee groups that comprise PERA's beneficiaries. He explained that each group has a separate investment plan that performs according to its own merits. The assets for the state employee group were, at one time, better funded than the assets for the school division, and that has now been reversed. Each group differs in employee behavior, he said, which includes factors such as how long employees work and when they retire. The employee behavior is based upon many factors.
Mr. Williams continued by explaining the assets and liabilities of PERA (noted in Attachment A on page 3). He explained that in the 1990s, PERA's assets experienced exceptional market performance. During that time, enhancements were added to PERA's retirement system, including early retirement.
Mr. Williams then discussed the history of several legislative proposals. Because the Board of Directors was concerned about additional enhancements, it came to the General Assembly with proposed legislation in 2003, which was eventually vetoed. The board returned to the General Assembly in 2004 with new legislation, which became law. This legislation, among other items, included additional employee contributions. He further explained that in 2006, new legislation was passed that included a 3 percent increase in contributions to be paid by employers out of dollars otherwise available for employee compensation.
Mr. Williams continued providing an overview of recent legislative changes to PERA's retirement system. The 2006 legislation also created a new class of employees that has lower costs to PERA, primarily because these employees have a longer work period. This plan was a thirty year plan. Mr. Williams stated that in 2008, the nation experienced market turmoil that we have not seen in our lifetimes. As a result, PERA's assets declined by over $10 billion in 2008, with a funding gap of over $26 billion. He stated this is a call to action and PERA's system is not sustainable over the coming years.
Mr. Williams provided an overview of the actuarial projections of divisions of PERA's assets, beginning with the state employee division. The actuarial projections (noted on page 4, Attachment A) illustrate when the state division of the program would run out of money, assuming different rates of return ranging from 7 to 10 percent. Likewise, he explained if the system's assets drop below 40 percent of its liabilities, this situation presents new problems for PERA. The portfolio would have to be reallocated, which would affect the ability of PERA's assets to withstand another economic downturn.
Mr. Williams then discussed the actuarial projections of the school division of PERA (noted on page 5 of Attachment A). He explained when this fund would run out of money. The school division is better funded than the state division, he explained, and the local government division has the best funding ratio of PERA's divisions. Mr. Williams provided an overview of the actuarial projections of the local government division and the Judicial Division.
The presentation then moved to a discussion of PERA's comprehensive proposal. Mr. Williams explained the formula C + I = B + E (or Contributions + Investment Income = Benefits + Expenses). He stated PERA generally beats the market in its performance and PERA prides itself in its efficiency. He explained that the board has been working an actuarial plan, which has been submitted to the members of the General Assembly. The objectives of this plan, Mr. Williams explained, include the following: shared responsibility, intergenerational equity, long-term sustainability, preservation of the defined benefit plan, maintaining the same benefit structure for PERA's different divisions, and designing recommendations to have little or no impact on member behavior.
Mr. Williams discussed the board's recommendations to building a foundation for PERA. The plan assumes an 8 percent rate of return because it is more conservative. He also discussed the 30-year amortization period in the plan.
Mr. Greg Smith, General Counsel, discussed the provisions of the board's plan. The comprehensive recommendations of the board, he said, are known as the "2/2/2 Plus" proposal. The proposal includes: a 2 percent Amortization Equalization Disbursement (AED); a 2 percent increase in what is known as the Supplemental Amortization Equalization Disbursement (SAED); and a 2 percent cap and indexed Cost of Living Adjustment (COLA).
Mr. Smith explained the corridor concept, which aims to bring the funding ratio of PERA to between 90 and 110 percent. The corridor plan allows the COLA to be adjusted based on PERA's funded status and the AED and SAED to be adjusted based on each division's funded status.
Mr. Smith stated the comprehensive recommendations also include a 5-year Highest Average Salary (HAS) with a base year and an 8 percent "spike cap" applicable to members not eligible to draw a benefit on the effective date of the statute. The plan would also create a 5-year vesting period, which Mr. Smith further discussed. The recommendations also include an 8 percent employee contribution to PERA for those employees working after retirement.
Mr. Smith explained the other provisions of the comprehensive plan, which include:
- revising the COLA effective date to July;
- requiring a retiree to collect a full calendar year of benefits to be eligible for the COLA;
- calculating a separate benefit when suspending retirement;
- expanding the post January 1, 2007, provisions regarding the retirement effective date and benefit to persons not eligible to draw a benefit on the effective date of the statute;
- revising the existing statutory benefit tables to increase the reduction factors for early retirement; and
- modifying the age and service requirement for members not yet vested to the "Rule of 90," which would not affect State Troopers. The rule of 90 is the age of service required to receive a full benefit, he explained.
He concluded with a discussion about the early retirement provisions in the plan.
Mr. Williams returned to the discussion and stated that the board believes the proposed plan creates shared responsibility and ensures the long-term sustainability of PERA while respecting Colorado taxpayers. He also said that the COLA provisions are a significant part of the plan and reflect today's current economic realities. Mr. Williams concluded his presentation by discussing several modeling changes over a 30-year period and each employee division.
The panel began answering questions from members of the committee.
Senator King began by distributing a summary of his thoughts about PERA's proposal, which is included as Attachment B.
Senator King stated PERA's proposal has several flaws. He said PERA has not found the right tension between retirees, employees, and employers, the three main players. Senator King also stated the proposal dramatically impacts the ability of employers to provide compensation and health care benefits to their employees. He said the plan is not balanced and will impact K-12 education by costing jobs because of its cost to employers. He also expressed his views that the "2/2/2" plan is not a balanced plan because it will primarily impact employers. He continued by expressing his thoughts about COLAs. He said PERA does not have a long-term plan and shared his concerns about stagnate wages.
Senator King stated that PERA has one of the highest levels of unfunded liabilities per capita in the country. Likewise, the 8 percent assumed rate of return is unrealistic and PERA should lower its assumed rate to 6 percent. Senator King concluded by stating it is time for the state to examine an alternative to the defined benefit plan and shared his views about solvency.
Mr. Williams stated that he would like more time to respond to Senator King's comments.
Representative Kefalas asked the panel if there was a way to adjust the plan to a "3/3/3" plan, which would include a three percent increase in the three main areas of the plan discussed earlier. Mr. Williams responded that there are many scenarios. The COLA benefit has the most immediate impact on the plan. Mr. Williams stated a "3/3/3" plan would not do the job, and continued discussing this issue.
Senator Steadman asked the panel about the December 2008 valuations of PERA's assets and whether more recent data exists. Mr. Williams responded that the rate of return of PERA's assets for this year is about 15 percent. However, the actuaries have said that PERA's assets would need to experience about a 60 percent return to resume previous values. Senator Steadman also asked about returns over time of PERA's assets and requested a summary of recent statutory changes concerning PERA. Mr. Williams stated PERA would provide this and any additional information to the committee.
Representative Summers asked about the history of the return on PERA's assets. Mr. Williams stated 2008 was the worst return, and the second lowest was a minus 12 percent return.
Representative Kagan continued the questioning by asking about COLAs, inflation, and the rate of return. Mr. Williams stated that inflation is factored into the rate of return projection. He expressed his concerns about entering into a high inflationary period in the coming years. Mr. Williams responded that in that situation, the cap on the COLA would move fairly minimally year to year. He also expressed his concerns about COLAs and Social Security. He explained that in an inflationary period, it would be a challenge for retirees around the nation. Discussion continued about this issue.
Senator Sandoval also suggested that the legislation could include a provision allowing a vote of the Board regarding COLA increases.
The panel continued taking questions from members of the committee. Representative Gerou expressed her thoughts about not spending more time on PERA over the summer. She stated that PERA can not continue to simply examine its own interests and not consider the potential impact on the entire state of Colorado. Representative Gerou asked the panel several questions, including: why is the local government division better funded than other divisions; has PERA adjusted the future investment risk from the past investment risk level; has PERA considered raising the retirement age for younger members to 65 and allowing a window of retirement benefits for older workers; and was there an adjustment in PERA's investment philosophy when the market was doing well in the late 1990s. She shared her thoughts about being more conservative with investments.
Mr. Williams stated he would have to examine why the local government division is better funded, and stated that public sector pay generally lags behind the rest of the economy. He also discussed employee factors that impact funding.
Ms. Jennifer Paquette, Chief Investment Officer, provided a summary of PERA's asset allocation changes to respond to Representative Gerou. She explained the board changed its investments to fixed income in the past five years. She stated that plan has performed very well. The asset allocations have also been changed in real estate and the credit markets. Ms. Paquette said it is important that asset mix relates to liability of the plan. She also explained that the board has stayed the course over the tough market conditions and will continue to look at the overall risk profile as changes are made.
Mr. Williams stated he would respond to Representative Gerou's questions in more detail at her request.
Representative Kerr, who joined the committee, asked the panel why the state patrol is not considered as a separate entity. He also asked at what point in the legislative process would issues related to PERA go to the courts to determine potential legal obligations. Mr. Smith explained the state patrol has never been a separate division. He also explained the process for advancing interrogatory questions to the Colorado Supreme Court. The process, he said, allows the second house of the General Assembly after second reading to advance questions to the Supreme Court, and the Court has the option of answering them. Discussion ensued about these issues.
Representative Kefalas stated he remains concerned about whether the plan has disproportionate impact on public employees. He asked if PERA's Board evaluated whether the retirement benefits would keep up with the cost of living. Mr. Williams stated this is a very serious question. He said a calculator will be available on PERA's website that will allow individuals to calculate their benefits. Mr. Williams concluded his comments.
The committee began hearing public testimony. The following persons testified.
11:32 AM -- Mr. Scott Wasserman, representing Colorado WINS and the Colorado Coalition for Retirement Security, testified. He distributed a handout which is included as Attachment C.
Mr. Wasserman explained the coalition is interested in preserving the retirement benefits of its members. He explained that employees have contributed more to their retirement than employers over the past 25 year period. In addition, Mr. Wasserman stated PERA employees do not receive Social Security benefits. He stated that while public employees are willing to do their part, they are already feeling the pain of the economic downturn.
11:38 AM -- Ms. Karen Wick, representing the Colorado Education Association (CEA), testified. She stated teachers are facing cuts to education and that she has several concerns about PERA's plan. She expressed her thoughts about the rate of return and stated PERA has averaged a 9.5 percent rate of return. She also shared her concerns about the 30-year amortization plan and the cap on COLA benefits. Ms. Wick stated that an average PERA employee who retired this year and lives until 85 would lose about $400,000 during their retirement years as a result of these changes.
Mr. Wasserman stated the panel has not formed a position yet on PERA's proposal.
11:43 AM -- Mr. Bruce Caughey, representing the Colorado School Association of School Professionals (CASE), testified. He expressed his concerns that the plan impacts classes of employees differently. He suggested allowing for the issue to be reconsidered in five years. Mr. Caughey also raised questions about the actuarial necessity of the proposed changes.
11:46 AM -- Mr. John MacPherson, a Denver Public Schools (DPS) retiree, testified. He discussed the recent merger of DPS and PERA approved in HB 09-282 and that the Denver Public Schools Retirement System (DPSRS) will no longer exist since it has been merged with PERA. He explained one of the key concepts of this legislation is that the funding level of the DPS division over thirty years must be equal to that of the PERA school division. Mr. MacPherson stated the DPSRS Board has taken a position that whatever provisions become effective for the DPS division should become effective for PERA's school division as well.
11:48 AM -- Mr. Billy Husher, representing the American Federation of Teachers (AFT) Colorado, testified. He shared his views about thinking long-term in this effort, and stated the current economic downturn is not the only factor to consider, and he suggested revisiting this issue in five years.
Representative Summers asked the panel what level of funding is appropriate for PERA's assets. Mr. Wasserman stated its about coming up with a long-term plan to pay for the current liabilities, and that one of strengths of a defined benefit plan is that it does not need 100 percent funding at the present. He stated that PERA has been using a 30-year plan every year. Mr. Caughey, who returned to the table, stated he does not think PERA has ever been at 100 percent funding and this issue is worthy of a conversation.
Senator Sandoval stated that the PERA presentation included information about when its assets exceeded its liabilities.
Representative Kefalas asked if the coalition has any specific recommendations. Mr. Wasserman stated that the COLA provisions disproportionately impact lower-paid workers, and that he is still trying to understand the proposal and what sacrifices different groups are willing to make.
Senator King asked about the average $400,000 loss to retirees stated in the presentation, and raised the question of how many retirees bought retirement years previously. He also asked why the coalition believes the SAED is an employee contribution. Mr. Wasserman stated $400,000 is based on an average snapshot of a retiree. He also stated SAED is based on a salary survey conducted by the state every year, and that from the group's perspective, the SAED is an employee contribution.
Mr. Wasserman also explained the concept of driving the "Ferrari," which is PERA's retirement modeling tool.
The committee adjourned.