Retirement insights from a Colorado PERA perspective

Legislation & Governance

Poked, Prodded, and Perused: PERA Passes!


The studies have been completed and the results are in: PERA is the most cost effective, efficient retirement plan available, is on-track to achieve full funding, and has saved $15 billion as a result of the shared sacrifices in SB 1.

As 2015 comes to a close and we prepare for the next legislative session in January, we wanted to summarize the various studies and reports on PERA conducted this year in order to objectively inform the discussion about Colorado PERA. Three independent studies on PERA were released in 2015 as a result of legislation passed in 2014 (SB 14-214), and 2015 marks the five-year anniversary of the passage of the landmark PERA reform bill (SB 10-001), which requires a report to be issued every five years on the impact of the reforms. Let’s review each study in the order of release throughout the year.

SB 14-214

Prior to the start of the 2014 Colorado legislative session, the Governor’s Office included funding in the Governor’s budget to perform an independent analysis of the retirement plan offered to public employees. The General Assembly appropriated $500,000 and unanimously passed SB 14-214 to:

  • Perform a total compensation study for State employees that includes the retirement benefits provided by PERA (released January 2015).
  • Complete a study comparing the cost and effectiveness of the current hybrid defined benefit plan to alternative plan designs in both the public and private sector (released July 2015).
  • Conduct a sensitivity analysis to determine when actuarial model assumptions are meeting targets and achieving sustainability (released October 2015).

The first study in SB 14-214 required the State Personnel Director to contract with a “third party compensation consulting firm with actuarial expertise and national standing to perform a total compensation study that includes the retirement benefits provided by the public employees’ retirement association (PERA).” From the Executive Summary of the report:

This study requires a comparison between the State and similar workforce structures including private companies and other states. For the retirement benefits that we explicitly valued…the State’s total retirement compensation package is equivalent to 15.7% of pay (15.4% defined benefit and 0.3% retiree health care), relative to the market median of 14.7% (combined sources: defined contribution, defined benefit, Social Security, and retiree health care).

Comparing Colorado to 23 peer organizations (including 18 states and five other private employers like Wells Fargo, IBM, and the University of Denver), the study found the State is just slightly below the prevailing market in total compensation, and the retirement package offered is about 1 percent higher than market peers. As the Milliman report concludes, “The State’s offerings are generally consistent with market trends of survey participants.”

The second study in SB 14-214 required the State Auditor to contract with a “nationally recognized and enrolled actuarial firm” to analyze PERA and compare it to alternative plan designs in the public and private sector. From the Executive Summary of the report conducted by GRS:

This in-depth look at the PERA Hybrid defined benefit Plan (PERA Hybrid Plan) illustrates that PERA is within norms for benefits when compared to its non-Social Security state peer group members. PERA benefits are also comparable to the private sector. This study found that the current PERA Hybrid Plan is more efficient and uses dollars more effectively than the other types of plans in use today. Alternative plans implemented for new hires require greater contributions in order to replace the same retirement income than the current PERA Hybrid Plan. If contributions are kept the same, alternative plans will provide a lower retirement benefit/replacement ratio. Alternative plans studied included defined contribution, cash balance, a combination of defined benefit and defined contribution, plus Social Security private sector model plans. PERA’s costs for new hires (future hires) are lower than under any alternative plan.

Bottom line from the 217-page report: The PERA hybrid defined benefit plan is the most cost effective, efficient plan available, and provides more income at retirement than the alternative plan designs for all ages and career paths. If costs are held constant among the alternative plan designs, PERA provides the highest amount of benefits for the given cost. If benefits are held constant among the alternative plan designs, PERA provides those benefits at the lowest cost. The study could find no plan that is more effective and efficient at providing a retirement benefit than the PERA Hybrid Plan.

The third study in SB 14-214 also required the State Auditor to contract with an independent actuarial firm with experience in public sector plans to conduct a sensitivity analysis of PERA’s actuarial assumptions. From the Report Highlights:

The PERA Hybrid defined benefit Plan is currently on track to be fully funded by 2052-2053 based on current actuarial assumptions. Prior to the changes in Senate Bill 10-001, insolvency was projected. Investment return has the widest range of variability and has the biggest impact on the full funding date. PERA should utilize the proposed signal light reporting annually to give policymakers an assessment of the current projected full funding dates compared to the objective.

A new signal light tool shows that, prior to reforms passed in SB 1, PERA’s major divisions would have been all red or dark red (projected to be insolvent), but after the impact of SB 1, the signal lights improved and all have been light green or better since that time (projected to be fully funded in less than a 40-year period). In addition, the report validated PERA’s actuarial assumptions and projections (including demographic and economic assumptions like investment return, salary increase, payroll growth, and inflation) and calculated a very high likelihood of all funding objectives to be met in a reasonable period of time.

More information:

SB 10-001

As part of the changes implemented in SB 1, PERA is required to report to the General Assembly every five years “regarding the economic impact of the 2010 legislative session changes to the annual increase provisions on the retirees and benefit recipients as compared to the actual rate of inflation and the progress made toward eliminating the unfunded liabilities.”

From the Key Findings of the report released December 2015:

  • As a result of the SB 1 reforms, PERA is sustainable.
  • Over the past five years, SB 1 reforms saved PERA approximately $15 billion in unfunded liability.
  • The SB 1 reform with the most significant impact over the last five years is the reduction in Annual Increase provisions which accounts for over 90 percent of the $15 billion in savings to date.
  • Even recognizing the SB 1 reforms which changed the Annual Increase provisions, PERA benefit recipients kept up with U.S. inflation over the last five-year period.
  • The funded ratios of the two largest Divisions of PERA (State and School) are slightly ahead of the original projections developed at the time SB 1 was implemented in 2010.

Overall, the report highlights how shared sacrifice, fiscal discipline, and legislated reforms provide PERA with the resources it needs to deliver the benefits earned by Colorado’s public workforce, making Colorado stronger for everyone.

More information:

Unfunded liabilityThe difference between the projected amount of money needed to pay benefits earned to date and the amount of money currently available to pay those benefits.Defined benefitA mandatory retirement savings plan in which a participant’s future benefits are known or can be calculated, but contributions are subject to adjustments. Defined contributionA voluntary plan in which participants can save pre-tax income for retirement. Contributions are “defined” by the employee, but the future benefit is not guaranteed.

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