There are several key elements in any successful public or personal retirement plan, including understanding and clearly articulating the plan’s objectives, dedicating necessary resources to properly fund the plan, and making realistic assumptions about how large contributions should be without putting other financial obligations at risk. One of the most crucial elements in retirement planning is committing to the plan through any and all potential changes in conditions, economic and otherwise. An old individual financial planning adage is “pay yourself first,” which means following your savings and retirement plan by making those contributions before meeting other financial obligations. Unfortunately, Colorado policymakers didn’t live up to this adage when they recently failed to stick to their own public pension funding plan.
In 2018, Colorado enacted legislation designed to finally get a handle on the debilitating unfunded liability within the Public Employees’ Retirement Association (PERA) that had grown to over $50 billion. Reason Foundation’s Pension Integrity Project lauded the pension reform legislation as steps in the right direction. While the reform package was not perfect, it did lay the groundwork to make significant progress toward addressing the state pension plan’s growing debt. One of the key elements of the Colorado pension reform effort was making an additional $225 million annual contribution to PERA from the state’s general fund.
But, due to the economic uncertainty the COVID-19 pandemic created early in 2020, Colorado lawmakers ignored the vital financial planning elements described above and took a deliberate one-year break from the $225 million contribution. As a result, Colorado’s public employee pension plan will miss out on not only the $225 million payment but also the long-term investment earnings the payment would have generated. Using the state’s assumed investment return rate of 7.25% percent, that money could have grown to $990 million in the long term.
As Axios reported, COVID-19 did not create the state budget problems that lawmakers expected:
A year ago, Colorado cut more than $3 billion from the state budget. Now, the state is showing a massive surplus that combined with the federal stimulus gives state leaders the ability to spend or save $9 billion.
Beyond the financial impact of the missed pension payment, it is also unfortunate that a good piece of reform legislation can be so easily negated, even if it was just for one year. Tremendous amounts of time and effort went into crafting a workable pension reform package leading up to the passage of the Colorado legislation. It should not be acceptable to taxpayers or lawmakers that the mandate of the 2018 law could be summarily dismissed by legislative fiat.
Colorado’s failure to meet the requirements of its pension reform illustrates one of the many pitfalls that face policymakers when managing defined-benefit pension plans. It is easy to sacrifice long-term priorities when faced with immediate challenges.
Generally, state lawmakers and public pension plan administrators focus on short-term needs over long-term commitments, which at times means forgoing pension payments. Over the long term, these missed pension payments have a significant impact on pension funds and increase the annual cost to both taxpayers and public employees. For Colorado, making annual contributions that were below what was needed added $4.6 billion to the state’s unfunded pension liabilities from 2000 to 2016.
Colorado policymakers should be mindful of this particular problem and should act to correct the impacts of the missed 2020 payment. One simple solution—especially with the state sitting on a massive surplus—would be a prompt make-up payment.
Reason Foundation analysis suggests that a $500 million cash infusion—enough to make up for the lost 2020 payment and add a buffer for any future economic uncertainties—would allow the state’s plan to adopt lower contributions for members and employers. This would mean nearly immediate savings for those parties.
Other policy options could slow the growth of pension liabilities and reduce the impact of missed contributions in the future. The Colorado PERA system offers a defined contribution option to all state new hires except for teachers. Defined contribution retirement plans eliminate the potential for unfunded liabilities. Additionally, the traditional defined benefit plan is the default choice upon hiring for new Colorado workers and this plan has the greatest number of participants. But less than 5% of new members earn a full, unreduced pension benefit due to the lengthy vesting period. Making the defined contribution retirement option available to all teachers and simply making it the default choice for new hires would reduce PERA’s funding risks going forward and would better fit the modern needs of public workers in the state.
Colorado’s one-year lapse in contributions will have a significant long-term impact. It is not too late, however, to double down on the goals of the 2018 pension reform package and adopt additional measures to further improve PERA’s funding.
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