Final
STAFF SUMMARY OF MEETING

COMMITTEE ON JOINT FINANCE

Date:01/19/2006
ATTENDANCE
Time:09:35 AM to 11:37 PM
Benefield
X
Brophy
X
Place:HCR 0107
Cloer
X
Crane
X
This Meeting was called to order by
Frangas
X
Representative Vigil
Garcia
X
Harvey
X
This Report was prepared by
Jahn
X
Ron Kirk
Judd
X
Kerr
X
Marshall
X
Massey
X
McCluskey
X
Shaffer
X
Taylor
X
Teck
X
Tupa
*
Veiga
E
Vigil
X
Sandoval
X
X = Present, E = Excused, A = Absent, * = Present after roll call
Bills Addressed: Action Taken:
Presentatoin by Legislative Council Staff
Presentation by the Department of Revenue
PERA		-
-
-


09:37 AM -- Presentation by Legislative Council Staff

Mr. Mike Mauer, Chief Economist, Legislative Council Staff, distributed a General Fund table (Attachment A) and gave the committee a brief overview of the revenue forecast. Mr. Mauer pointed out that with the passage of Referendum C, the overview categorizes nonexempt revenue and exempt revenue (lines 2 and 3). Exempt revenue under Referendum C is the TABOR surplus that the state is allowed to retain that otherwise would be refunded to taxpayers. Also, the table shows a full-year SB 97-1 diversion to the Highway Users Tax Fund as opposed to a 7-month diversion. Mr. Mauer pointed out that under Referendum C line 12 shows that the General Assembly can appropriate up to the 6 percent limit. The $114.4 million is available for new programs under Referendum C for the current fiscal year. It is important to note that the General Assembly can only spend a quarter of the $114.4 million in new programs for the remainder of the fiscal year. (The General Assembly would need to have four times the amount ($114.4 million) to fund these new programs for a full fiscal year.)






Mr. Mauer and Representative McCluskey commented on the SB 97-1 transfers and the timing of the transfers to the Highway Users Tax Fund by the State Treasurer. Mr. Mauer pointed out that the State Treasurer has already made a six-month distribution to the fund for the current fiscal year.

Mr. Mauer and the committee continued to discuss the money available under Referendum C for new programs. Mr. Mauer commented that the $114.1 million is one-time money that can grow by the 6 percent limit each year. The committee discussed the paybacks to other funds on line 5.

Mr. Mauer continued by discussing the new revenue cap under Referendum C. Under Referendum C, the state will be able to adjust its spending base to the largest amount of revenues collected by the state over the next five years. After five years, this new spending base will be allowed to grow by population and inflation each year.

The committee continued to discuss the revenue the state can retain under Referendum C. Mr. Mauer reiterated that the money ($114.4 million) includes any revenue that the General Assembly uses to restore programs. Changes in Cash Fund Revenue changes the mix of General Fund Revenue between exempt and non exempt.

Mr. Mauer continued by explaining the interaction between current laws that earmark exempt revenue under Referendum C. The committee discussed appropriations under the 6 percent limit and allowable programs under Referendum C. Mr. Mauer clarified that the senior homestead exemption is an expenditure above the 6 percent limit.

Mr. Mauer discussed two graphs that were distributed with the General Fund Overview and discussed the TABOR and statutory reserves. TABOR requires the state to have a 3-percent reserve based on TABOR revenue. This reserve is generally made up of various Cash Funds and non-cash assets such as state-owned buildings. The statutory reserve is equal to 4 percent of appropriations and is made up of liquid funds. After the passage of Referendum C, Mr. Mauer pointed out that the state has more of an incentive to create a rainy day fund.

Mr. Mauer and the committee closed the discussion by talking about allowable spending under Referendum C.


10:06 AM -- Presentation by the Colorado Department of Revenue

Ms. Michael Cooke, Executive Director for the Department of Revenue, distributed a packet of materials on her presentation (Attachment B). Ms. Cooke began by discussing the department's organizational structure and accomplishments. On May 2, 2005, the department completed the conversion of a new lottery computer system. The conversion enabled 2,800 retailers to use a new lottery sales system. The conversion was done overnight and sales for the month of May 2005 (during the conversion) increased over the previous month. The new system will allow consumers to purchase a greater variety of lottery products. The department saw record lottery sales for 2005, peaking around $416 million over $407 million in the previous year. During 2005, the department also broke a record for scratch ticket sales. Over $282 million was realized from scratch ticket sales.














Ms. Cooke commented on the changes that the Motor Vehicle Division made to drivers' record systems for persons who had court convictions for 2005. With the help from the Judiciary and system changes, it now takes two days or less for a drivers' record to show a court conviction. Prior to the system change, it took data entry clerks two to three weeks to post conviction information on a drivers' record. This system change is important because it allows the department to suspend a driver's privileges when necessary.

Ms. Cooke continued by briefly discussing the Colorado State Titling and Registration System (CSTARS) which will be completed this spring. This system change will greatly reduce the time it takes to train a new motor vehicle clerk to process a registration and title transaction. The system will primarily benefit county clerks or the main system users. Ms. Cooke pointed out that the greatest advantage is that citizens will be able to renew vehicle registrations on-line by the close of 2006.

Ms. Cooke continued by discussing the department's objectives for FY 2006-07. The department's first priority is acquiring a new computer system that administers the state's taxes called the Revenue Integrated Tax Architecture (RITA). Ms. Cooke pointed out several concerns. First, the department's tax system resides on a mainframe system that was initially designed in 1962. Most of the core applications on the system were written when the state overhauled the state tax system in 1964. The mainframe system includes over 800 different programs in multiple computer languages (8) that are no longer taught in computer classes. To add to the department's concerns, there are a shrinking number of IT professionals that know these languages. As an example, of the department's 15 programmers, 6 are eligible to retire within the next three years. In the future, it will become increasingly difficult to find programmers who can make changes to the state income tax system.

Ms. Cooke commented that the current system cannot be easily expanded to accommodate changes initiated by the General Assembly. To add to the concerns, the computer languages are not integrated because they have been developed separately over time and cannot communicate with each other. During FY 2004-05, the department looked at a feasibility study that evaluated the state income tax computer system. The study did not lend itself to the current system demands but offered one option that the department is considering. The option looks at using an off-the-shelf product that can be modified for Colorado's specific needs. For FY 2006-07, the department is requesting a $8.1 million appropriation from the Capital Construction Fund to replace the current system. This approach will allow the department to phase in system components as the department moves forward with the full system conversion. The total estimated cost for the conversion is $41 million. Ms. Cooke closed by saying the department would like to move forward to obtain an RFP to determine a more exact cost and time-line for the conversion.

The committee briefly discussed the level of system modification for an off-the-shelf product. Ms. Cooke commented that the system has been successfully used in other states and would be a preferred alternative to rebuilding the department's existing system from the ground up. Ms. Cooke closed by saying that going forward with a proven off-the-shelf system reduces the concern and chances for a total system failure.

















10:50 AM -- Presentation by Public Employees' Retirement Association of Colorado

Mr. Meredith Williams, Executive Director, distributed an information sheet on proposed legislation for the 2006 session (Attachment C) and a presentation overview (Attachment D) to committee members. Mr. Williams began by discussing PERA's total membership including active members, inactive members, and benefit recipients. PERA's total membership as of November 2005 was nearly 380,000 members. Mr. Williams briefly discussed PERA's benefit programs and member contributions. PERA members contribute 8 percent of their pay for benefits. Employers are required to pay 10.65 percent of an employees pay to a designated pension fund and health care fund.

Mr. Williams continued by discussing PERA's investment asset allocation and mentioned that the largest portion of the $35 billion market asset value is made up of domestic equities (44.1 percent). PERA started off the 2005 year with about $1.3 billion in contributions, $2.2 billion in investments, and paid out about $2.1 billion in benefits to beneficiaries.

Mr. Williams briefly discussed historical PERA funding levels. During the 1970s, the funding ratio reached a low of 57.4 percent. This resulted from a multiple-year decline in the marketplace. The funding ratio reached a high of 105 percent in 2000. Mr. Williams discussed the factors that resulted in a lower funding ratio, such as the recent large number of employees who took early retirements, the changing market demographics, and the price charged by PERA for service years.

Mr. Williams commented that PERA's funding ratio has varied over the years. Mr. Williams discussed the actuary's statement and a funded ratio of 71 percent based on the actuarial value of assets.

Mr. Williams discussed the 30-year projection for asset value. Mr. Williams commented on Slide 19 and pointed out that the blue line, or the operative line, assumes PERA's $35 billion fund receives a 8.5 percent rate of return. For the past 25 years the fund averaged a 10.9 percent rate of return. If the fund earns 10 percent over the next 30 years, PERA's liabilities can be met. If the rate of return is 8.5 percent or less, there may be concerns over the next 30 years because the unfunded liability may make it difficult for PERA to meet its future liabilities.

The committee discussed the rate of return used by PERA to determine the funding ratio. Mr. Williams commented that the rate of return used on the portfolio must reflect a true rate of return that will allow PERA to meet its future pension liabilities. Mr. Williams commented on PERA's diverse portfolio and the rate of return on private equities that can often be significant for PERA. Mr. Williams reiterated that PERA's Board is very comfortable using the 8.5 percent rate of return to calculate the 30-year unfunded liability. Mr. Williams closed by saying that a 9.91 percent rate of return would enable PERA to meet its long-term pension obligations.