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Report on the March 25, 2009 Session of the Joint House/Senate Education Committee
The hearing was basically educational in nature with no public comment allowed although the Chair did invite PERA's CEO to make some reaction comments before the meeting closed. The hearing room was completely full (mostly with PERA-interested spectators) by 7:30 a.m. and Capitol staff set up a sound system in an adjoining room for some 25 other attendees who could not get into the hearing room.
The first presenters were from the Colorado School Library Assn. and had no relationship to the portion of the meeting involving PERA.
Dr. Michael Mannino, associate professor, UCD Business School, reported on his study: "Deferred Retirement Compensation for K-12 Employees: Understanding the Need for Pension Reform", which was published in the January 2009 issue of the Journal of Pension Economics & Finance.
He said his report was related to deferred compensation as associated with defined benefit
plans and that he conducted two studies: one of 278 University retirees with 25 years or more of service and another with 846 Denver Public School Retirement System retirees.
He said that some principles he wanted to measure were:
a. Are these risk adjusted benefits, i.e. does the taxpayer assume all the risk?
b. How stable are the benefits, i.e. they should not be paid on the performance of the stock market.
c. Are they comparable to the private sector? He said not many private plans are like DPSRS & PERA but he wanted to know what it would cost to purchase these benefits in the private sector.
d. What was the amount of replacement earnings including inflation adjustment?
He said:
1) The contribution rate of private employers to retirement averaged 11.85% (FICA & retirement) while employer contribution to the PERA plan was about 11.35%. (Not surprisingly, he did not mention that CU contribution to pensions for faculty is 16.2%
(FICA & defined contribution plan. Nor did he use the US Chamber of Commerce retirement contribution average rate of 14.25%.)
2) The contribution rate is not a reasonable way to look at retirement. (Why not? Don't we need to ask what it costs the taxpayer?)
3) Public employees should not have better benefits than private employees.
4) The pay structure for K-12 and University staff is poorly designed which results in loss of
employees in peak years and pension spiking, although this activity is a "rational" action.
5) Using an employer contribution is a poor measure.
6) His study does not reflect current state of the PERA portfolio.
He then talked about some other areas, e.g. discount rate, account balance, and the difference between present value and the account balance, lump sum deferred compensation, supplemental contribution rates, pension value, mortality tables, and what would it cost to purchase an annuity with and without inflation built in.
Finally, he presented some recommendations:
a) The choice of DB vs. DC plan should be given to all employees.
b) School administrators need to be moved to a DC plan because they cost more than other employees and are able to arrange pension spiking more easily.
c) Retirement benefits should be restructured so as to reduce the retirement subsidy of one group to the next, e.g. Early retirement should be deleted.
d) Pension spiking should be looked at.
Only three questions were asked by the Committee of the presenter.
Meredith Williams, PERA CEO, was invited to come forward and comment. He said he had been on the editorial board of the Journal of Government Financial Management for 15 years and read many reports but the logic of this one "fails me---tried to go from A to B to C to D and I can't get there."". He said he PERA economist will review the report and make formal written comments to the Committee. The report seemed to contain a lot of "unsubstantiated opinions," that he has been around the pension industry for many years and had never heard some of the terms used by Dr. Mannino such as Lump Sum Deferred Compensation, Extra Value, etc.,
that we should remember that the University faculty and the private sector have Social Security as a foundation while PERA members do not , that in private industry pension benefits include
Social Security, defined benefit plans, 401k plan, profit sharing, stock options and ESOPs, that a single premium annuity is a risky venture..."just ask those with annuities in Long Term Capital Management and AIG". He added that the Board and staff will take a comprehensive review of PERA's status and the benefits and may have to propose difficult changes for next year. He said that the issue of employers having all the investment risk is certainly one that may have to be reviewed and changed.
The meeting concluded at about 9:05 a.m.
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