PERA Board’s Recommended Package

October 16, 2017

At its September meeting, the Colorado PERA Board of Trustees endorsed a package of reforms designed to reduce the overall risk profile of the plan and improve PERA’s funded status. This endorsement follows extensive analysis by the PERA Board and a statewide outreach effort with a range of stakeholders.

The Board’s package, which must be approved by the General Assembly before becoming law, includes recommendations that will significantly change the benefit provisions and contribution structure of the plan. If passed by the Legislature and the Governor, 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 (HAS) from three years to five. (The exception is for members of 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, these two additional years of salary will be included in the calculation of 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 and peer defined benefit plans across the country.
  • Reduce the Annual Increase (AI) provided to current and future retirees. Anyone who was a member, inactive member, or retiree on December 31, 2006, (including most current retirees) receives a 2 percent AI that will be lowered to 1.5 percent. Those who became members after 2006 currently do or will receive an AI based on the Consumer Price Index (CPI-W) with a limit up to 2 percent. This AI would also be capped at 1.5 percent. This change will go into effect on the date legislation is passed. 
  • Suspend the AI for two years for current benefit recipients and for future benefit recipients extend the waiting period for an AI from one year to three years. This change will go into effect on the date legislation is passed.

2. Increase contributions into the fund.

  • Increase employee contributions by an additional 3 percent of pay above current contribution rates to 11 percent, for members hired before January 1, 2020. This increase would impact all active PERA members and retirees working after retirement for PERA employers.
  • Increase employee contributions by an additional 2 percent of pay to 10 percent, for members hired on or after January 1, 2020. 
  • Increase employer contributions by an additional 2 percent. 

3. Ensure the equitable alignment of “input” or contributions and service credit, with “output” or benefits paid out.

  • Change the definition of PERA-includable salary to include 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 so that future PERA members will earn service credit for part-time work based on the percentage of full-time employment they are actually working.

Finally, in an effort to set the course for long-term shared responsibility that’s responsive to good times or bad, the package includes an automatic adjustment provision. This provision would adjust contributions and the AI to keep the plan on a path to pay off the unfunded liabilities over 30 years. In other words, if PERA has investment or demographic experience that pushes it off the 30-year payment schedule, member and employer contributions and the AI would change in a predefined way to return to the funding schedule.

If future experience is more positive than expected, the AI could return to 2 percent and contributions could return to lower levels, and a negative experience could lead to contribution increases of 2 percent for each and the AI could be reduced to as low as 0.5 percent. This automatic adjustment provision sets a long-term path that responds to changing conditions while eliminating the unfunded liabilities.

“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.”  

To learn more or to send us your comments, visit www.peratour.org, or attend a meeting.