Anyone who receives, or expects to receive, retirement benefits from the Colorado Public Employees' Retirement Association should share a sigh of relief, thanks to retired Colorado District Court Judge Harlan Bockman.
In a decision handed down last week, Bockman decisively rebuffed efforts by the city of Colorado Springs and Memorial Hospital to exit from PERA without complying with state statutes governing such actions.
When the city leased Memorial Health System to University of Colorado Health in 2012, Colorado Springs received a payment of $259 million, including $185 million to cover potential liabilities to PERA. The city has yet to pay PERA a dime, hoping to use UCH's payment for other purposes.
"The issue to be determined," Bockman wrote, "is whether MHS is required by statute to pay into PERA a reserve to fund retirement benefits for vested ... and former employees who are presently or in the future will receive retirement benefits from PERA."
The city failed to comply with the statutes, making arguments that a prominent Colorado Springs attorney privately characterized as "an example of brazen self-righteousness by the relevant decision-makers."
In a remarkably short opinion, Bockman peremptorily dismissed the city's claims. Citing statutes, he noted that the city's interpretation would "render them meaningless." PERA has calculated that the city now owes the system more than $200 million, with interest continuing to accrue at a compounded rate of 7.5 percent.
Had the city prevailed, the already somewhat shaky finances of PERA might have been severely damaged. Other public employers might have seized the opportunity to leave the system, triggering a cascade of departures and dropping PERA's funded ratio to a critically low level.
PERA was designed to take the place of Social Security. By statute, retirees and their local government employers don't contribute to the federal retirement system. PERA's benefit structure compensates in part for low salaries, particularly for public-school teachers. PERA's average monthly benefit is around $3,000, with an average age at retirement of 58.2. With Colorado life expectancy now about 80, that means the system will have to pay average lifetime benefits of about $800,000 to each retiree.
As the number of retirees inexorably increases, the arithmetic becomes daunting. During 2012, PERA paid out $3.5 billion to retirees, while bringing in slightly less than $2 billion in employer/employee contributions. That's unsustainable, unless investment returns from PERA's portfolio are robust enough to make up the difference. On Dec. 31, 2012, PERA's portfolio was valued at $40.1 billion, while actuarial accrued liabilities were pegged at $63.6 billion, giving a funded ratio of 63.1 percent.
It would be much better, had a feckless Colorado Legislature not agreed to increase retiree benefits and decrease employer/employee contributions 15 years ago when PERA's funded ratio was more than 100 percent. The lawmakers weren't expecting war, recession and the gray-haired tsunami. A popular investment guide in 1999 was titled Dow 36,000. The authors, afflicted by Clinton-era naïve optimism, predicted the index would hit that level by 2008.
The Legislature has tried several fixes, but the damage was already done.
PERA's problems aren't the product of bad investment decisions. Its managers have achieved annual returns of 8.4 percent over the past decade, but time is not on their side as the beneficiary/contributor ratio widens.
There are no easy answers. Do you shortchange current beneficiaries, put the screws on contributors, move to a defined-contribution system, tap taxpayers or hope that the feds take over every troubled state pension system?
For the moment, PERA is fine. Its unfunded liabilities are daunting, but so are those of other local government entities. Think of our fair city — we need to spend billions on roads, bridges, flood control and wildfire mitigation. Our municipal utility owes various moneylenders a couple of billion, and Mayor Steve Bach says the city will be insolvent by 2017.
But why worry? Remember the mantra of the investment bankers who brought down the world financial system a few years ago: IBG, YBG. I'll be gone, you'll be gone, and someone else can worry about it.
See those carefree students streaming out of Palmer High School on an unseasonably warm February afternoon? Yoo-hoo, kids, want a summer job that lasts a lifetime? You're the someone else.