Pension reform passed in the waning moments of Colorado's legislative session this month will help stave off a credit ratings reduction in the short term but is not the long-term solution the state needs, a policy expert said.
With about 40 minutes to spare on the very last day of session, lawmakers sent Gov. John Hickenlooper legislation that increases the retirement age for future employees to 64; mandates slight increases in employee and employer contribution rates; cuts cost-of-living adjustments after two years, capping annual rates at 1.5 percent after those two years; and pledges $225 million in taxpayer funding annually to pay down the Public Employee Retirement Association's (PERA) debt, estimated at close to $50 billion.
Joshua Sharf, fiscal policy analyst at the Independence Institute told Watchdog.org that, while a step in the right direction, this month's reform package is far from perfect.
“In the short run it will do some good, and it will alleviate the credit rating risk,” Sharf said. “In the short run, it will mean more taxpayer money going into PERA, which we haven’t seen before. I think it buys us some time, but I don’t think it solves the underlying problem. ... Ultimately my belief is in some number of years we’re going to get a cyclical recession. We don’t know when that’s coming. It could be this year. It could be next year. We don’t know.”
Such a recession could persuade lawmakers to rethink the $225 million annual commitment, he said.
“You can see a situation where that overwhelms the political pressure not to make this payment with a potentially lower return that pushes us well outside that amortization period, and again we just aren’t able to catch up,” Sharp said.
Many Democrats voted against the measure because the teachers' union opposed raising the retirement age, Rep. KC Becker, D-Boulder, told Watchdog.org the system was vulnerable and something needed to be done.
“It is very vulnerable to an economic downturn that puts everyone’s retirement security at risk," Becker said. "By passing the bill, I think we are getting it on a path for sustainability and reducing the risk of the system for retirees and current employees that are counting on that retirement.”
Reforming the public pension plan benefits Colorado in the near term as it stabilizes the state's credit rating, he added.
“That’s one of the immediate impacts of the bill,” Becker said. “It means that rating agencies are likely to take us off their watch list and leave our credit rating alone. It also means a lot more money from the state going into PERA to pay off the unfunded liability.”
Longer term, the pension system still we be vulnerable to recessions. He suggests changing to a defined contribution plan similar to 401(k) plans popular in the private sector.
“I think ultimately the right answer is to wind down this defined benefit plan which has proven all over the country, in private settings and public settings, to be unstable and simply not sustainable,” Sharf said. “To wind that down and get people into defined contribution plans that are professionally managed so at the end of the time that they worked and are ready to retire, they can annuitize that.”