THE FUTURE OF PERA. Colorado House Democrats

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Herbert Reeves
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1 THE FUTURE OF PERA Colorado House Democrats

2 WHO IS THE COLORADO COALITION FOR RETIREMENT SECURITY? The Colorado Coalition for Retirement Security (CCRS) supports retirement security for all Coloradans We represented current employees, retirees and some employers inside the PERA system to design SB Have spent the last several years working to keep Senate Bill 1 in place and to allow it to work The CCRS Steering Committee is comprised of the following 8 groups: AFSCME Colorado, American Federation of Teachers Colorado, Association of Colorado State Patrol Professionals, Colorado Association of School Executives, Colorado Education Association, CSPERA Colorado School & Public Employees Retirement Association, Colorado WINS, Friends of PERA. 2

3 WHAT IS PERA? PERA is invested into by over 9% of Colorado s citizens PERA is the 21 st largest public pension plan in the United States PERA is a substitute for Social Security for public employees PERA s average benefit payment is less than $3,000 per month PERA is an economic generator of over $3.2 billion a year into Colorado s economy YES, you heard that right PERA puts over $3.2 billion annually into Colorado s economy 3

4 PERA & THE ECONOMY In 2012, PERA paid $3.2 billion in pension benefits to 87,459 PERA retirees living in Colorado. 3.7 times greater that the amount paid by employer contributions during the same year. And nearly twice as much money as it takes in from employees and employers every year. PERA invests $485 million in Colorado Headquartered Companies $230 million in state and local tax revenue 24,334 jobs sustained in Colorado because of PERA retiree spending 4

5 WHO IS IN PERA? State Division School Division # Active Members 54, ,294 Avg Age Avg Years of Service Avg Annual Salary $43,123 $33,125 Avg Monthly Benefit $3,124 $2,939 Avg Age at Retirement Avg Age of Current Retiree Avg Years of Service

6 HOPEFULLY NOW YOU UNDERSTAND WHY PERA IS SO IMPORTANT TO COLORADO AND TO PUBLIC EMPLOYEES 6

7 WHY IS OUR UNFUNDED LIABILITY SO HIGH, OR IS IT? 7

8 WHERE DOES PERA S MONEY COME FROM? 20% comes from Employee Contributions 20% comes from Employer Contributions 60% comes from Investment Income 8

STOCK MARKET 64% of the dollars in PERA come from investment gains. The stock market has had two large down swings in the last 20 years 2001 & 2002 and again in 2008.

9 STOCK MARKET 64% of the dollars in PERA come from investment gains. The stock market has had two large down swings in the last 20 years 2001 & 2002 and again in In 2008 the PERA portfolio lost 26% or $11 billion. PERA still weathered the downswing better than most other pensions plans averaged % and 401(k)s averaged 27% decline 9

10 ARC CONTRIBUTIONS The State and the School Districts aren t paying the full amount necessary known as the ARC Annual Required Contribution. Before % of the ARC was paid each year State paid average of 66% Schools paid average of 69% 2012 State 83% Schools 84% Since 2005 that is over $1.8 billion the State and $3.5 billion that Schools haven t paid PERA When all of SB1 changes are done being implemented the State and Schools divisions will be fully funding the ARC again. 10

11 BUT WE TOOK DRASTIC STEPS TO FIX PERA IN

12 CHANGES MADE IN 2010 BY SENATE BILL 1 In 2010 PERA retirees, members, legislators and the PERA board all came together to find a way to make sure PERA would remain fiscally viable for future generations. Because of the stock market crash of 2008 PERA was facing a growing unfunded liability and would eventually run out of money if reform wasn t agreed to. As a result of decisive and comprehensive action in 2010, Colorado PERA s unfunded liabilities were reduced by over $9 billion overnight and the costs of future pensions were substantially reduced making PERA fully funded within 30 years. These changes included contribution increases for both employers and employees that phase in over time, a decrease in the Cost of Living Adjustment (COLA) paid to all members including existing retirees, requirements that members work longer before reaching eligibility to retire with full benefits, and a reduction in the benefits for members who retire early in the future, among other cost-saving changes. Many pension plans across the country have chosen to reduce benefits or increase employee contributions. Very few plans have chosen to do both like Colorado did in

13 INCREASING CONTRIBUTION RATES Employees pay 8% to PERA (Troopers pay 10%) Employers pay 10.15% (1.02% goes to the health care fund) When increases needed to be made in Senate Bill 1 we increased the AED and the SAED contribution rates. The AED is an employer contribution and the SAED is to come from the pool of money that would have been given to an employee as raises making this contribution an employee increase. In 2013 State and School employees will pay 11% and the employer will pay 13.55% 13

14 STATE DIVISION CONTRIBUTION RATES Start Date Statutory Employer Contribution (Plus 1.02% to HCTF) AED Total Employer Contribution % for Year Statutory Employee Contribution SAED Total Employee Contribution % for Year Jan % 3.40% 12.53% 8% 3.00% 11% Jan % 3.80% 12.93% 8% 3.50% 11.5% Jan % 4.20% 13.33% 8% 4.00% 12% Jan % 4.60% 13.73% 8% 4.50% 12.5% Jan % 5.00% 14.13% 8% 5.00% 13% Jan % 5.00% 14.13% 8% 5.50% 13.5% 14

15 SCHOOL DIVISION CONTRIBUTION RATES Start Date Statutory Employer Contribution (Plus 1.02% to HCTF) AED Total Employer Contribution % for Year Statutory Employee Contribution SAED Total Employee Contribution % for Year Jan % 3.40% 12.53% 8% 3.00% 11% Jan % 3.80% 12.93% 8% 3.50% 11.5% Jan % 4.20% 13.33% 8% 4.00% 12% Jan % 4.50% 13.63% 8% 4.50% 12.5% Jan % 4.50% 13.63% 8% 5.00% 13% Jan % 4.50% 13.63% 8% 5.50% 13.5% 15

16 PENDING LAWSUIT ON SB1 Senate Bill 1 Lawsuit (Justus, et al. v. State of Colorado, et al.) Lawsuit brought by retirees claiming SB1 is unconstitutional They believe the change to the COLA was a breach of contract June 29, 2011 Denver District Court ruled in favor of PERA Ruled there isn t a contractual right to a specific annual COLA October 2012 the Court of Appeals remanded the case to the District Court for further review. The Court of Appeals set forth the legal lest for when benefits can be reduced and determined the plaintiffs are not entitled to a fixed annual increase formula for life without change. The Court also determined the annual increase is a vested contractual right but can be reduced in certain circumstances. August 5, 2013 the Colorado Supreme Court agreed to hear the case For more details on the appeal click here 16

17 ADDITIONAL LAWSUITS Stapleton v PERA On August 1, 2013 the Colorado State of Appeals court affirmed a ruling by the Denver District Court in April 2012 that Colorado State Treasurer Walker Stapleton is not entitled to unfettered access to the PERA records he requested We do not yet know if Stapleton will appeal to the Supreme Court Memorial Health System October 1, 2012 Memorial Health System in Colorado Springs terminated its affiliation with PERA. At issue is if and how much Memorial owes to PERA to cover the costs of retirement benefits already earned by former Memorial employees and retirees 17

18 SOME STILL HAVE QUESTIONS 18

19 8% EXPECTED RATE OF RETURN 2012 Rate of Return = 12.9% 30.00% 3 Year Average = 9.4% 20.00% 10 Year Average = 8.4% 30Year Average = 9.4% Since 1991 (22 years) only 7 years have fallen below 8% 10.00% 0.00% % % Assumed Rate Actual Rate % 19

20 CORPORATE EXPECTED RATES OF RETURN Corporate plans average an expected 8% rate of return JP Morgan Chase 7.50% Kellogg 8.90% Xcel Energy 7.79% General Mills 9.55% Wells Fargo 8.25% PepsiCo 7.80% FedEx 8.00% UPS 8.75% CBS 6.9% HP 8.00% Sears 8.00% Chevron 7.80% Motorola 8.25% Disney 7.75% Verizon 8.50% AT&T 8.50% 20

21 UNFUNDED LIABILITY % % % 80.00% 60.00% 40.00% 20.00% 0.00% Acturarial Value % Market Value % PERA is currently 63.1% funded. The unfunded liability is $ billion That is up from 61.2% funded in The State Division is expected to be 100% funded in 36 years The School Division is expected to be 100% funded in 34 years $9 Billion in liabilities have been eliminated since the passage of Senate Bill 1 90% of that burden was shouldered by employees and retirees, not taxpayers! With Senate Bill 1 in effect we will have eliminated a $30 billion unfunded liability over 30 years. 21

22 NEW PLAYERS 22

23 COLORADO SUCCEEDS July 1, 2013 Colorado Succeeds released a report entitled Saving For Our Future, Evaluating Colorado s Public Retirement System The group consisted of 28 business individuals that met without any representation from stakeholders. They did have Greg Smith, Ron Kirk and Henry Sobanet come in and present but they were not part of the group. Their charge was to study Colorado s public pension system and assess the need for further action to improve it. After examining all aspects of the system with input from outside interests, 88% of the group supported or strongly supported the need to take further action on a broader scale to improve the public retirement system in Colorado. They agreed on four guiding principles that must be balanced in the design of their more ideal public retirement system 1. Be fiscally prudent and financially sustainable 2. Promote a high-quality workforce 3. Provide adequate retirement income opportunity for public employees 4. Be transparent and adaptable to change over time 23

NEW PLAYERS Pew Research Center generally has a solid reputation as an unbiased resource, their standing should not be confused with that of Pew s Public Sector Retirement Group The Arnold Foundation

24 NEW PLAYERS Pew Research Center generally has a solid reputation as an unbiased resource, their standing should not be confused with that of Pew s Public Sector Retirement Group The Arnold Foundation is led by former Enron trader and Texas billionaire John Arnold Josh McGee from the Arnold Foundation has been visiting with Colorado business leaders and education reform folks These two groups sell a one size fits all plan and don t evaluate the unique attributes of Colorado when designing their solution a cash balance plan 24

25 CASH BALANCE PLAN Cash balance plans are a hybrid pension and 401(k) style plan that is being touted by Pew and the Arnold Foundation Cash balance plans increase costs and reduce benefits, all the while doing nothing to help pay off unfunded liabilities The benefits paid at retirement under a cash balance plan are typically far less (up to 40-50%) than the benefits paid under a traditional defined benefit plan Cash balance plans do nothing to address existing unfunded liabilities Earlier this year Kentucky approved SB2 which made all new employees enter a cash balance plan Pew and the Arnold Foundation played a heavy role in creating the legislation Kentucky legislators are now regretting that decision and are warning other states not to trust Pew and Arnold (Read a letter from KY Legislators) 25

26 ED REFORM ARGUMENTS Because of low starting pay we are only getting the bottom 1/3 of college graduates to become teachers we need to shift back end pay to the front end to recruit better teachers. We all want the best teachers in our classrooms but getting rid of pensions to create more upfront pay isn t going to help with recruiting the best and the brightest. Let s take the average teacher who is making $49,118 a year (2012 salary rate) That teacher is investing $5,403 a year into PERA (8% plus 2013 SAED of 3%) The teacher s school district is investing $6,154 on behalf of that teacher (9.13% and 2013 AED of 3.4%) For a total investment in the teacher s retirement of $11,557 If all of those dollars were invested up front in the teacher s salary the new salary would be $60,675. But, the employer and employee would now have to pay social security 12.4% or $7, Leaving you with a new salary of $53,151 So, an employee could make $4,000 more a year but they would lose their retirement benefit that pays them just under $3,000 a month after they retire. There are other solutions that must be pursued for recruiting and retaining teachers that will have an impact than taking away the retirement security of our public employees. If educators no longer have retirement security from a pension we will see larger state expenses for medicare, medicaid, food stamps, welfare and other assistance programs. 26

27 ED REFORM ARGUMENTS Younger employees want to be able to switch jobs more frequently and pensions prevent them from doing that. We haven t seen any evidence that this is the case. An employee decides to leave before they received a full retirement which for a teacher hired today is age 58 and 30 years of service Modified Rule of 88. If the teacher left before completing 5 years of service they would not be vested so they would leave with the money they invested (8% of their salary) plus 3% interest earned on their account. This interest amount is set by the PERA Board of Trustees. If the teacher left after completing 5 years of service but before reaching a full retirement at the age of 58 and 30 years of service they would get the money they invested plus 50% of the money their employer invested on their behalf along with interest accrual. If the teacher wants to retire before reaching the modified Rule of 88 their annual benefit would be reduced based on an actuarial calculation of their life longevity and unpaid years of service. All of these options allow employees to move jobs and take their money with them or leave it invested in PERA which sees returns better than 401(k)s. 27

28 ED REFORM ARGUMENTS # Active Members 115,294 Avg Age 44.6 Avg Years of Service 8.5 Avg Annual Salary $33,125 Avg Monthly Benefit $2,939 Avg Age at Retirement 58.2 Avg Age of Current Retiree School Division 69.7 Avg Years of Service 23.7 Pensions keep teachers in the classroom longer than they should be. In 2010 the State Legislature increased the age and service requirements for a full retirement from the Rule of 85 to the Modified Rule of 88. If a teacher wants to retire before reaching the Modified Rule of 88 they will still receive a benefit, it will just be reduced accordingly. 28

29 ED REFORM ARGUMENTS Funding pensions crowds out other priorities from the state budget and forces future generations to bear an even greater burden Funding in 2013 for PERA is 1.5% of the State General Fund Budget 2013 State Budget $8 billion 2013 State Division PERA Contributions = $121 Million 29

30 THE BOTTOM LINE 30

31 SENATE BILL 1 IS WORKING We need to let all of the changes we made in Senate Bill 1 work. An employee hired today is receiving a pension worth 1/3 less than a worker who retired last year. Retirees gave up their COLA for a year and accepted a reduced COLA We required workers to give a higher contribution and to work longer Employers are having to increase their contributions to make up for their reduced ARC payments 90% of the burden on the reforms was shouldered by employees and retirees, not taxpayers! These changes are working we have reduced the unfunded liability by $9 billion already and we are looking at being 100% funded within 34 years we never see PERA run out of money, even if our expected rate of return drops to 6.5% Be very wary of one size fits all solutions, we did very specific modeling to ensure Senate Bill 1 would work Lastly, retirement security is very important for all Coloradans and without the PERA payments into many of our communities their local economies would suffer greatly 31

com You can view today s presentation at www.

32 QUESTIONS Learn more at SecurePERA.org questions to You can view today s presentation at Secure PERA Coalition Steering Committee Members 32

Presentation to the Jacksonville Pension Reform Task Force. David Draine The Pew Charitable Trusts TITLE GOES HERE.

Presentation to the Jacksonville Pension Reform Task Force David Draine The Pew Charitable Trusts TITLE GOES HERE Three Areas of Focus 1. Paying down Jacksonville s pension debt 2. Considering new plan