Corporate Tax Giveaways Harm State Revenues

According to a recently released report by Good Jobs First, “for Colorado, reducing corporate subsidies can go a long way to salvage the revenue needed to meet its yearly public pension obligations and reduce the burden on both employees and employers.”

The report, Putting State Pension Costs in Context, looked at 12 states where public employee pensions are being debated and found that those states continue to give high tax breaks and other subsidies to corporations. Such subsidies often exceed the amount a state owes to maintain its pension obligations.

In Colorado report, Good Jobs First found corporate giveaways were double the cost of pension obligations:

  • 2018 Colorado Public Employee Pension Obligations $378,203,901
  • 2018 Cost of Colorado Subsidies and Corporate Tax Breaks $757,983,403

The report includes the full list of these corporate giveaways. As the state is balancing its budget and plugging the hole caused by the COVID-19 crisis, its time for lawmakers to seriously look at this list.

PERA Generates $6.5 B for Colorado

A new study by Pacey Economics found that PERA generates $6.5 Billion in economic output.  Over $4.1 billion in benefits is paid out to PERA retirees annually and 87 percent of PERA retirees stay in Colorado and spend their retirement income in every county in Colorado, providing a steady stream of income to businesses in Colorado.

Retirees spend those benefit payments in every community in our state.  These payments are a critical source of reliable, predictable income and proved an “automatic stabilizing effect” on State and local economies, especially in economic downturns as these monies provide important stimulus.  These steady monthly benefit payments are especially vital to small communities.  Households with stable incomes can be counted on to spend on basic needs and other purchases as well as pay taxes and fees generating revenue for State and local governments.

The impact of the PERA payments reaches well beyond those who receive the initial payments because they spend money in their local grocery stores, restaurants and gas stations.  This creates the “multiplier” effect.  Here’s how it works:

  • PERA makes monthly payments to recipients.
  • PERA recipients spend the monthly monies on household needs such as food, gasoline and utilities and pay taxes and fees.
  • Businesses and/or governments providing those needs use their existing inventory or purchase new inventory and may also be required to hire labor to sell or produce their products or provide their services.
  • Business owners, as well as their employees, get income from these purchases and they too then go out and buy goods and services
  • Which, in turn, generates more demand for local goods and services—and the cycle repeats itself.

So, you see when a household receives PERA payments, it represents an infusion of income into the local economy that creates a chain of economic activities whose total impact is greater than the initial benefit payments.  That is, these payments have substantial “multiplier” effects where one recipient’s spending becomes someone else’s income.  In all, spending by PERA retirees generates 35,031  Colorado jobs and $343 million in Colorado state and local tax revenue.

PERA has a large economic footprint on the State and local economies.  These payments are a critical source of reliable, predictable income and provide and “automatic stabilizing effect” on State, regional and local economies, especially in economic downturns as these monies provide important stimulus to local and State market activity.

For more information on the impact these payments make click here.

To read PERA’s entire economic study click here.

PERA: Best Bang For Your Buck

This week we got some good news. PERA is more efficient and costs less than other retirement plans! The Colorado State Auditor’s Office released an independent report that examined Colorado PERA’s retirement plan design and compared it to alternative public and private sector retirement savings options. The Auditor’s office teamed up with Gabriel, Roeder, Smith & Company (GRS), an independent, national actuarial firm to conduct its analysis. You can read the entire report here.

Below are the key findings from the executive summary of the study:

  • Retirement income as a percent of final income, or replacement ratio, is a common metric used to compare one retirement plan to another. Target adequacy replacement ratios range from 77% to 85% of pre-retirement final pay.
  • Alternative plans implemented for new hires require greater contributions in order to replace the same retirement income than the current PERA Hybrid Plan. If contributions are kept the same, alternative plans will provide a lower retirement benefit/replacement ratio. Alternative plans studied included defined contribution, cash balance, a combination of defined benefit and defined contribution, plus Social Security private sector model plans.
  • Transition costs for moving new hires to an alternative plan would emerge in three main pieces: (1) the acceleration of the payoff of the unfunded accrued liability, (2) the higher cost of the new plan, and (3) the changing risk profile and investment earnings of the trust.

It is important to note that the State cannot eliminate the unfunded liability by moving new hires to an alternative plan and could cost the State anywhere between $8 billion and nearly $16 billion to convert to one of the other plans this study analyzed. The study demonstrates the advantages of PERA for employees including teachers who leave the system after just a few years, but allow their funds to remain within PERA to grow and be taken out upon retirement.

This study validates what we already knew. The independent firm could not find any plan that provides a more effective level of benefits than Colorado PERA proving that it is the best bang for the buck when it comes to retirement plans.

Fordham Institute Report Gets It Wrong

A recent report by the Thomas B. Fordham Institute looked at pension plans across the country and made some critical pronouncements.  In the case of Colorado, however, they made a fatal flaw in one of their assumptions, negating the validity of their arguments regarding Colorado PERA.

Namely, CO PERA is a hybrid defined benefit retirement plan. This is important because it differentiates CO PERA from other defined benefit plans. Put simply, for PERA members, the benefits paid out always exceed the contributions they put in, regardless of how long they stay in their position and in the pension system.

Here is how this works.  A PERA member may refund or rollover their contributions, plus interest, at any point after they leave PERA.  That might be after a couple of months or multiple years.  Every PERA member is eligible for:

  • Years 1 – 4 — a refund/rollover of their contributions plus interest at any point (currently 3% interest compounded annually); or
  • After Year 5 (Vested) — all of their employee contributions with interest plus a 50% match on employer contributions and interest; or
  • Retirement Eligible — a 100% match on all contributions plus interest or a lifetime monthly benefit

It’s no surprise really that an education reform policy think tank in Washington, D.C. didn’t understand how we operate in Colorado. If you’re looking for more (accurate) information on CO PERA and the benefits it offers compared to a 401(k) style plan, for example, don’t look to D.C., look right here in Colorado at the study commissioned in 2015 by the Colorado General Assembly.  That study, conducted by the independent actuarial firm Gabriel, Roeder, Smith & Company, found that regardless of age or length of service, no plan “provides a more effective level of benefits than the PERA Hybrid plan.” Read more about this study here.

PERA Signal Light Study Update

The Legislative Audit Committee received an update from Cavanaugh Macdonald on the funded status of PERA and an update to the Signal Light Study originally authorized under Senate Bill 14-214. We at Secure PERA wanted to take some time to look back at where we were and where we have come using the Signal Light Study. We created a one pager for the Audit committee members to demonstrate how pre-SB1 PERA was in the red and SB1 was able to bring us back to the green levels. After last year’s disappointing 1.5% rate of return the State & School divisions have slipped back to yellow. But, it is important to look at the second part of what the study showed us – what probability PERA had of improving. You can see the entire updated results from CavMac by clicking here. Or review our Signal Light Study Summary below (you can click here for the one pager version to print)

The History

A sensitivity study of PERA was commissioned by the State Legislature in Senate Bill 14-214 and completed by Pension Trustee Advisors (PTA), an independent actuarial firm. The study recommended the signal light status be updated each year during the annual valuation process. The update was done this summer by Cavanaugh Macdonald (CavMac) based on the 2015 year-end valuations and using the framework and signal position definitions developed by PTA.

The study looks at how investment returns, PERA population growth, mortality and other actuarial assumptions impact the time line for full funding of PERA’s divisions.

The Summary

All of PERA’s Divisions are solvent and on a path to full funding. PTA stated in their original Sensitivity Study that, “Investment return has the widest range of variability and has the biggest impact on the full funding date.” In the summary chart, we summarize the findings of both the PTA study and the CavMac update.

We use the investment return assumption data they provided as we agree that investment returns will have the greatest impact on PERA’s stability.

Secure PERA’s Position

As demonstrated by the PTA study and CavMac update, the sacrifices made in Senate Bill 1 are working and we have to continue to let them work, the SB1 mandated employee and employer contribution increases aren’t scheduled to be fully implemented until 2017 & 2018. Senate Bill 1 was designed as a long-term fix and it needs time to truly be effective.

A defined benefit plan is the most cost-effective for Colorado taxpayers and provides the best retirement security for current and future PERA members. The Legislature’s study authorized in SB 12-214 and conducted by Gabriel, Roeder, Smith & Company (GRS) compared different retirement plan designs and found that the cost to fund PERA benefits is lower than the cost of other plans in the public and private sector – meaning more money stays in our member’s pockets instead of Wall Street’s. They also stated that when costs are held constant, PERA’s plan delivers the highest percentage of salary replacement income in retirement for both short-term and career public employees.

PREVIOUS SIGNAL LIGHT STUDY POST

This week, the Colorado Office of the State Auditor and the Legislative Audit Committee released a report written by Pension Trustee Advisors (PTA). The study explored the role and variability of actuarial assumptions in projecting the most likely future funded status of the PERA Hybrid Defined Benefit Plans. The goal of any retirement system is to accumulate sufficient assets to fully fund all of its current obligations. The report concluded that the Defined Benefit Plan is currently on track to be fully funded.

Additionally, PTA developed a simplified signal light reporting system that will help policymakers assess the current full funding date of each Division and the likelihood of future changes due to investment returns and other metrics. PERA was awarded “green lights” to four of PERA”s five division trust funds: state, school, local government, and Denver Public Schools, and a “yellow light” to the Judicial Division.

“PTA’s independent analysis of the Colorado PERA retirement plan, conducted with oversight of the Office of the State Auditor, provides policymakers with a new framework for assessing future predictions and assumptions used to determine PERA’s financial health,” said PERA Executive Director Gregory W. Smith. “We are receptive to having another tool to provide information about the sustainability of PERA. It provides more transparency to a complicated topic,” he continued.

The PTA report included three recommendations related to the use of the signal-light methodology. They are:

  1. PERA should utilize the proposed signal light reporting annually to give policymakers an assessment of the current projected full funding dates compared to the objective. The investment return required (and the likelihood) of maintaining, improving, or declining from the current signal should also be determined periodically and whenever significant changes have occurred. Other metrics should also be considered.
  2. PERA should expand its annual reporting to include the causes for any changes in the expected full funding dates.
  3. PERA should ensure that future actuarial audits include a confirmation of the multi-year actuarial projections currently used to determine the full funding date.

PERA has agreed to introduce all three recommendations.

You can read the entire report by clicking here.

PERA Releases 2015 Annual Financial Report

The PERA Board of Trustees released the Comprehensive Annual Financial Report or CAFR for short. This annual report let’s us know how all of the divisions of PERA did over the last year.  This year the release of the CAFR came with the news that PERA had gotten a 1.5% rate of return on their investments. While this is lower than the 30 year projected rate of return of 7.5% it is important to remember PERA is a long term investor and over 35 years they have a rate of return of 9.5%.

You can view the CAFR summary by clicking here. And, you can view the entire CAFR by clicking here.


PERA Release Senate Bill 1 Five Year Review Study

As part of the changes implemented in SB 1, PERA is required to report to the General Assembly every five years “regarding the economic impact of the 2010 legislative session changes to the annual increase provisions on the retirees and benefit recipients as compared to the actual rate of inflation and the progress made toward eliminating the unfunded liabilities.”

Key Findings:

  • As a result of the SB 1 reforms, PERA is sustainable.
  • Over the past five years, SB 1 reforms saved PERA approximately $15 billion in unfunded liability.
  • The SB 1 reform with the most significant impact over the last five years is the reduction in Annual Increase provisions which accounts for over 90 percent of the $15 billion in savings to date.
  • Even recognizing the SB 1 reforms which changed the Annual Increase provisions, PERA benefit recipients kept up with U.S. inflation over the last five-year period.
  • The funded ratios of the two largest Divisions of PERA (State and School) are slightly ahead of the original projections developed at the time SB 1 was implemented in 2010.

You can read the report for yourself by clicking here.

PERA Puts $3.5 Billion Directly into Colorado’s Economy

A new report was released in June by Colorado PERA, “Colorado PERA Economic and Fiscal Impacts”. The report, which was prepared by the economic and business analysis firm Pacey Economics, shows that distributions from Colorado PERA translate to $5.2 billion in economic output. This helps support more than 29,000 Colorado jobs annually.

The report shows that $3.5 billion in annual PERA distributions to more than 90,000 Colorado residents drives the following:

  • $5.2 billion in economic output, which includes all local shopping at grocery stores, restaurants, and more
  •  $1.46 billion in labor income
  • 29,357 jobs

Every party of the state is touched by the benefit of these distributions. They create “an infusion of income into the local economy that creates a chain of economic activities whose total impact is greater than the initial retirement distribution payment. The impact of the PERA retirement distributions reaches well beyond those who receive the initial retirement distributions,” according to the report.

Additionally, the report notes that the economic impact of the distributions has increased nearly $2 billion since 2009. You can read the entire report by Pacey here. Also, check out the infographic  from PERA below that shows just how far its distributions go:

PERA Releases 2014 CAFR Report

On June 23 PERA released their Comprehensive Annual Financial Report, also known as the CAFR. The defined benefit plan has the most money it has ever had at $44.2 billion. In 2014, PERA distributed $3.9 billion to former public employees. Of that $3.9 billon, $3.5 billion went to Colorado retirees who spend those dollars here in Colorado helping to keep Colorado’s economy strong.

PERA earned a 5.7% rate of return so retirees will be receiving a COLA (cost of living adjustment) this year. Making PERA’s 30-year rate of return 9.4% – you may remember PERA lowered its 30 year expected rate of return to 7.5% over a year ago, and they continue to remain above that!

Below is the infographic that PERA released in light of the CAFR release and the Pacey study of how PERA contributes more than $5 billion into Colorado’s economy, helping to sustain over 29 thousand jobs.

You can view the CAFR here and the Pacey study here.

Please copy the infographic below highlighting how Secure PERA is as an economic generator for Colorado and share it with your network.

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