Colorado Officials Battle over DC, DB Plans

Governor Bill Owens has told the Colorado Public Employees’ Retirement Association (PERA) that state workers should be able to choose between the DB plan and a K-plan style DC program, the Rocky Mountain News reported. At the same time, PERA is battling state Treasurer and PERA board member Mike Coffman who thinks the DB plan is so drastically underfunded that changes need to be made to members’ benefits.

The intense rhetoric has gotten to the point that one PERA board member, Colorado Springs teacher Scott Noller, complained that he feels as if PERA is a “ping pong ball” between Owens and Coffman.

Owens and his staff insist they’re only trying to be fair and to provide a retirement alternative particularly tailored for shorter-term employees who might work for the state for fewer than five years. “We are not looking to damage PERA in any way,” Mary Woodard, a senior policy adviser in the governor’s Office of Policy & Initiatives, told the News. “We firmly believe an expansion of the defined-contribution plan will not damage PERA in the future.”

For its part, the PERA board isn’t ready to embrace Owen’s notion – nervous that a DC option might effectively drain employees and assets from the DB plan. PERA board Chairman James Casebolt told his fellow board members that they have to be political realists. “If we don’t give the governor some of what he wants, he will veto this (PERA reform legislative proposal).”We’ve got to have the governor’s signature on this legislation. From a practical standpoint, I don’t think we can say no.”

The underlying issue – the DB plan’s financial health – is not an inconsequential one. The pension plan, with 344,619 members at year-end 2003, has roughly $29 billion in assets – enough to pay benefits for the foreseeable future. Yet the fund estimates that the future benefits it owes members is $4 billion greater than its assets, as of December 31, 2002. This unfunded liability will grow indefinitely, based on PERA’s assumptions, if nothing is done.

PERA has a package of proposed changes it will send to the legislature, including a gradual increase in the employer contribution rate and future benefits changes. Yet PERA’s estimates, presented to the board February 20, show that the plan – coupled with the roughly 20% return to the PERA portfolio in 2003 – still will not pay off the unfunded liability within 40 years, as Colorado law requires.

“Here’s why,” PERA board Chairman Casebolt told Coffman at the February 20 meeting in one of many sharp exchanges. “There is a cap on contribution rates. . . . We have a legislative problem that needs to be fixed.” PERA made an attempt in the previous legislative session to increase employer-contribution rates, but Owens vetoed it.

Another issue is who exactly will provide the defined-contribution option. Woodard said the governor’s preference is that if PERA provides a DC option, multiple private-sector vendors should also be in the mix to provide more choice.

PERA’s goal is to protect its defined-benefit plan as it is allowed to offer the defined-contribution option. To that end, PERA’s is proposing that a portion of the employer’s contributions in the PERA-provided DC plan will go toward funding the liability in the defined benefit plan.