As SB 18-200 makes its way through the Legislature, there has been significant discussion over the goal line: the 30-year timeframe in which PERA becomes fully funded. There has been debate over whether achieving full funding in 30 years is the right goal – some say it is too aggressive while others say it is not sufficiently so. Agreement on the goal is a critical part of the conversation, as the destination surely dictates the direction.
There are several reasons why the PERA Board of Trustees and many others are advocating for a 30-year goal, which is also referred to as an amortization period, and why it served as the basis for the Board’s recommendation to the General Assembly.
Full funding in 30 years is compliant with Colorado statute and the PERA Board’s policy. In 2015, the PERA Board of Trustees adopted The Colorado PERA Defined Benefit Plan Funding Policy to inform decisions on whether to seek legislative changes to benefits and contributions. Within the policy, the time frame to reach full funding is set at 30 years. This is reflective of the section of Colorado State statute that states, “A maximum amortization period of thirty years shall be deemed actuarially sound.”
Full funding in 30 years is achievable. Late last year, after many months of gathering input from stakeholders, the PERA Board finalized a legislative recommendation that would fully fund PERA within 30 years and was based on “shared responsibility” between members, retirees, and employers. These deliberations included months of internal debate, consultations with actuaries and other experts, an extensive in-person listening tour with stakeholders throughout Colorado led by PERA staff, and a series of telephone town hall meetings.
The Board’s recommendation includes a unique feature, the automatic adjustment provision that would allow PERA to remain on a path to full funding in 30 years without requiring additional legislation. The automatic adjustment mechanism would trigger modifications to contributions and the annual increase to ensure the 30-year goal is met.
Full funding in 30 years gives PERA resiliency. While 30 years may seem like a long time to pay down the unfunded liability, it is important to note that the plan will continue to get stronger over that period of time. Under the Board’s proposed 30-year plan, PERA’s funded status would improve as the unfunded liability decreases. This improvement would help the fund’s ability to withstand economic fluctuations and market corrections.
While it might seem enticing to extend the funding deadline to mitigate the effect on benefits and contributions, that path is not prudent fiscal pension policy. For example, the model of a 40-year amortization period shows that PERA’s funding levels remain flat for decades before finally turning upward. This means PERA’s unfunded liability will grow for decades before decreasing.
Full funding in 30 years is fair to all generations of public employees. The average service period for a PERA member is 23 years at retirement. If the length of time to pay off PERA’s unfunded liability were to be extended, it would also spread the cost of paying down the liability over a 40-year time period. In doing so, there would essentially be a transfer of cost to future generations who may well receive no benefit.
Full funding in 30 years helps the State’s credit rating. Standard & Poor’s has indicated the State’s credit outlook will be downgraded unless a plan to retire PERA’s unfunded liability is developed. Extending the period to pay down the unfunded liability to beyond 30 years does not meet the criteria stated by S&P. A credit rating downgrade would raise the cost of borrowing capital for the State and cost Colorado taxpayers.
While the PERA Board has no legislative authority, it does have expertise. The proposal offered by the Board last fall was intended to offer the foundation for the conversations that are underway now at the Capitol. But the fact that the bipartisan SB 200 was introduced with the 30-year funding timeline indicates that lawmakers agreed with the assessment of the PERA Board and its many expert consultants.
As the conversation surrounding the destination of SB 200 continues, the 30-year goal line should remain intact, reflecting the qualities of being sensible, equitable, and achievable.