Recommended changes designed to shorten the length of time it will take the plan to reach full funding, include benefit reductions for current and future members and retirees, as well as contribution increases for members and employers.
The Colorado PERA Board of Trustees today voted 14-1 to endorse a comprehensive package of reforms designed to reduce the overall risk profile of the plan and improve PERA’s funded status. The Board further directed staff to educate members, retirees and stakeholders regarding the proposed package. This endorsement follows extensive analysis by the PERA Board and a statewide outreach effort with a range of stakeholders.
“The recommendations from the PERA Board reflect our commitment to ensuring the long-term health of the fund,” said Timothy M. O’Brien, Chairman of the PERA Board of Trustees. “We understand that these recommended changes will not be easy, but we believe shared impact across the membership and with employers are absolutely necessary.”
After taking into account assumption changes made in 2016, each of PERA’s five divisions reached a point where reporting standards applicable to PERA called for the Board to develop a plan to reduce the amount of time it will take PERA to be fully funded. The Board’s package, which must be approved by the General Assembly, includes recommendations that will significantly change the benefit provisions and contribution structure of the plan. If passed by the Legislature, the Board’s proposal would fortify the fund by making three major changes:
1. Modify the benefits of current retirees, members, and future members.
- Increase the number of years used to calculate Highest Average Salary from three years to five for most divisions. The exception is the Judicial Division, which currently uses a one-year HAS and will now use a three-year calculation. For new hires starting in 2020 and for members with less than five years of service credit as of January 1, 2020, more years of salary will be considered to calculate an average salary used to determine the total retirement benefit.
- Change the age of eligibility for full service retirement benefits to 65 for new hires starting in 2020. For State Troopers, the minimum age for full service retirement eligibility will be raised to age 55. This change aligns PERA with national trends, including Social Security and peer defined benefit plans across the country.
- Reduce the Annual Increase (commonly called the Cost of Living Adjustment or COLA) provided to current and future retirees. Most current retirees receive a 2 percent Annual Increase and that will be lowered to 1.5 percent. Those who became members after 2006 currently do or will receive an Annual Increase based on the CPI with a limit up to 2 percent. This Annual Increase would also be capped at 1.5 percent. This change will go into effect on the date legislation is passed.
- Suspend the Annual Increase for two years for current benefit recipients. Under existing law, current benefit recipients have experienced a one-year waiting period upon retirement to receive an increase. Future retirees would have a three-year waiting period before their Annual Increase begins. This change will go into effect on the date legislation is passed.
2. Increase contributions into the fund.
- Increase employee contributions for members hired before 1/1/2020 by an additional 3 percent above current contribution rates. This increase would impact all active PERA members and retirees working after retirement.
- Increase employee contributions for members hired on or after 1/1/2020 by an additional 2 percent.
- Increase employer contributions by an additional 2 percent.
3. Ensure the equitable alignment of “input” or contributions and service credit, with “output” of benefits paid out.
- Change the definition of PERA-includable salary to require PERA to collect contributions on salary that includes Internal Revenue Code Section 125 and 132 deductions. In other words, PERA contributions would be made on gross pay rather than net pay. These changes would impact current and future members as well as employers.
- Change the definition of full-time service accrual. Under the Board’s proposal, PERA future members will earn service credit for part-time work based on the percentage of full-time employment they are actually working.
The Board also came forward with an innovative solution that will respond to future economic and demographic changes by instituting an automatic mechanism by which employer and employee contributions as well as Annual Increase amounts will adjust based on the financial condition of the fund. View more details on the Board’s proposal.
“PERA will be working with members of the General Assembly to ensure the Board’s proposal receives serious consideration in the 2018 legislative session,” said PERA Executive Director Gregory W. Smith. “The recommendation from the Board provides meaningful and comprehensive changes that will lower costs and raise necessary funds to ensure PERA’s long-term strength. These changes impact every member, whether they are still working or retired, and will require difficult sacrifices. These modifications represent the ability of the plan to adapt to our changing environment while retaining the overall value of PERA for our membership, our employers, and Colorado,” he concluded.
A nearly year-long process preceding this recommendation involved input from a variety of stakeholders. The vast majority – from 80 to over 90 percent – of those who provided input agreed with core principles: “PERA should be a retirement plan that…”
- Calculates retirement benefits in line with career paths and contributions,
- Allows retirees to maintain their standard of living throughout their lifetime,
- Is fair and attractive to future public employees,
- Serves as a tool for employers to recruit and retain top quality talent,
- Requires shared responsibility among members, retirees, and employers.
By State law, the Colorado General Assembly sets contribution rates and benefit levels and the PERA Board of Trustees has oversight of investments and benefit administration. View more information on the Board of Trustees.