A potentially significant change to Colorado PERA benefits and contributions that has received limited attention is the proposal, beginning in 2020, to calculate salary based on the total amount paid to a worker rather than after deductions for flexible spending accounts for items including healthcare premiums, daycare, and transportation.
In a helpful recent post on its PERAtour website, PERA elaborates on the rationale for this change. But the post leaves a major question unanswered. We’ll get to the unanswered question in a moment. First, PERA’s explanation of the proposed change.
In essence, PERA says, an unspecified number of PERA members have been legally gaming the system, and it’s time to close the loophole that allows it:
For those members who participate in (flexible spending) plans, their salary as reported to PERA is lower than their actual total salary. Their contribution to PERA, therefore, is also lower. However, as members seek to maximize their highest average salary, many stop participating in these plans as they near retirement in order to report to PERA a higher salary —which…is in fact their actual total salary. While members may increase their contribution to PERA for a few years because of this higher reported salary, it isn’t enough to make up for all the years they reported a lower salary due to the tax-advantaged deductions.
This practice creates a disparity between how much these participants pay into the system while working, and how much of a benefit they receive in retirement. This disparity negatively impacts PERA reserves, and unfairly penalizes other members who contribute their full salaries over the duration of their careers. Further, the practice creates a disincentive for members to participate in these tax-advantaged accounts that help them pay for dependent care, health care premiums, and transportation expenses.
As part of their recommended package, the PERA Board is seeking to redefine PERA salary to include a member’s full salary, inclusive of any contributions they make to (flexible spending) plans. In doing so, members would be paying in on their entire salary and receiving a benefit based on the same amount.
This change makes sense. But it also means that PERA members will see a pretty steep increase in the amount they contribute to their retirement, and nowhere have we found a calculation of just how steep that increase will be.
Remember that one element in the package of proposed changes is an increase in employee contributions to PERA from the current 8 percent to 11 percent in 2020 (10 percent for new hires from that point forward). But the redefinition of PERA salary means the 11 percent employee contribution will be calculated based on the higher, gross salary amount.
So here’s our question: What is the real impact on employee contributions?
If state workers start paying 11 percent of the higher, gross amount, the actual contribution increase would be significantly more than the 3 percentage points advertised. PERA should tell its members what the actual percentage point increase to their contributions would be.
Again, the change PERA proposes is reasonable and necessary. But state employees deserve full transparency about how this change would affect them.