Those of us who have been around a while might remember the 1970s-era bumper-sticker from one of the earlier great in-migrations: Don’t Californicate Colorado.
Now a scarier scenario is rearing it’s head: We could eventually Illinoisify Colorado, thanks to how laws governing PERA funding are written.
CBS News posted an alarming story earlier this week about the possibility of the State of Illinois filing for bankruptcy. No state has ever done that, but a toxic combination of political deadlock and cowardice, and decades of malfeasance and corruption have left the state in dire straits.
Colorado looks squeaky-clean politically when compared to Illinois. But in one area, the Centennial State seems poised to follow the Land of Lincoln down the path to disaster. You guessed it: public sector pensions.
There are more reasons than we can enumerate here why Illinois (and separately Chicago) pension plans are in such deep trouble. But at a basic level, the state fails to make contributions that keep pace with costs. Pension plans live and die on investment returns combined with contributions made by members and employers (aka taxpayers).
States with forward-thinking policies make annual adjustments to contributions to compensate for low investment returns, or, in good years, to benefit from high returns. If you examine state-by-state charts, you’ll see that some states (roughly a third of the 50) with smart laws or policies routinely make 100 percent of their actuarial required contribution (ARC). The ARC is what plan actuaries recommend be set aside in a given year to fund retirement benefits.
Colorado, like Illinois, sets employer and employee contribution rates by law and leaves them in place until policymakers get around to changing them. Colorado at least has two additional payments (AED and SAED) required of employers to help pay down PERA’s unfunded liabilities, and these amounts fluctuate somewhat depending on fund performance.
Despite this, however, Colorado over the past few years has fared about on par with Illinois in terms of percentage of ARC paid, according to the aforementioned charts compiled by the Pew Charitable Trusts. In 2011, 2012, and 2013, the most recent years calculated by Pew, PERA paid just 87 percent, 85 percent, and 79 percent of ARC respectively.
Illinois, by contrast, paid 80, 76, and 84 percent over that same period. And yet Illinois finds itself teetering on the edge of the abyss. Why? here’s the CBS take:
Critics say some of those pensions carried overly optimistic assumptions, especially given periods of market turmoil like the global financial crisis, which ate into investment returns. The state’s general assembly wasn’t required to fully fund pensions, which meant tax money was spent on other priorities such as schools or infrastructure.
The result? Growing unfunded liabilities, or money promised to workers in their pensions when they retire that the state doesn’t have.
To borrow from that old bumper sticker, let’s hope PERA doesn’t Illinoisify Colorado.