Month: January 2018

Comparing current PERA legislative proposals

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Both Governor Hickenlooper’s plan and the PERA Board’s recommendation to return PERA to long-term sustainability have received attention in the news recently, even though legislation has not been introduced yet this year at the Colorado General Assembly.

While there are differences between the Governor’s proposal and that of the Board, the two plans share the goal of achieving full funding within a 30-year period. However, each proposal achieves that goal using different funding and savings mechanisms.

  • Both proposals would increase contributions. The Board’s proposal includes contribution increases from current members and working retirees, new and future members, and employers. The Governor’s proposal does not increase contributions from employers.
  • Both proposals would limit annual increases. The Board’s proposal would lower annual increases to a cap of 1.5 percent, while the Governor’s proposal would lower the cap to 1.25 percent. Both proposals would also increase future hires’ age and service requirements for retirement benefits.
  • Both proposals would also improve the alignment of contributions with benefits and include automatic adjustment provisions to keep PERA on a path to full funding within 30 years.

Review a comparison chart of the two proposals.

Since the Board’s legislative recommendation was released in September 2017, PERA has received a number of questions about the necessity of a proposal, given the strength of the U.S. stock market. During the Board’s most recent assessment of the economic and demographic conditions that influence the plan’s funded status (performed in November 2016), the Board heard from investment and actuarial experts and subsequently lowered the rate of return assumption due to a less optimistic view of the future. This change to an important economic assumption, alongside the adoption of new mortality tables, extended the timeframe in which the trusts were projected to reach full funding beyond the 30-year goal set forth in the Board’s funding policy adopted in March 2015 and revised January 19, 2018.

We will continue to monitor the legislative landscape at the State Capitol and inform PERA on the Issues readers of any PERA-related legislation that is introduced.

Retirement Roundup: Colorado a top retirement state

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A digest of timely information and insight about finance, investing, and retirement.

Colorado moves up on ‘best states to retire’ list | Denver Business Journal

In the past year, Colorado has moved up a few notches on an annual list of “best states to retire.” According to WalletHub, Colorado now ranks as the second-best state in the country to retire, behind only Florida. A year go, Colorado was ranked fifth. The criteria included affordability, quality of life, and health care.

Those close to and in retirement still feeling unprepared | PlanSponsor

The ninth biennial Risks and Process of Retirement Survey from the Society of Actuaries (SOA) identified an overall increase in consumer concern for their finances both prior to and during retirement in 2017. A significant number of retirees and pre-retirees report that they feel unprepared to navigate financial shocks and unexpected expenses – 61 percent of pre-retirees and 47 percent of retirees feel unprepared for expenses in retirement that could deplete their assets.

What raising Social Security’s retirement age really means | The Motley Fool

Social Security faces a long-term financial crisis. The demographic bump of baby boomers will continue to flow into the Social Security system for many years to come, and the outflow of Social Security benefits will not only use up all available payroll tax revenue but also eat into Social Security trust fund reserves, with projections suggesting a shortfall that leaves roughly a quarter of scheduled benefits unfunded. Many lawmakers see raising the full retirement age for Social Security benefits as a potential solution to the program’s financial woes. Yet, when lawmakers advocate for higher retirement ages without making similar changes to the age for collecting early benefits, the net impact is simply to cut monthly benefits to retirees.

Half of boomers Social Security eligible | Squared Away Blog

About half of baby boomers are now over age 62 and can claim their Social Security benefits. The year 1955 was the midpoint for the post-World War II population explosion – and those boomers born in 1955 will turn 63 sometime this year.

Kentucky’s budget puzzle is missing a huge piece: pension reform | Louisville Courier-Journal

A major missing piece in Kentucky’s lean 2018-20 state budget proposed by its governor, Matt Bevin, is the impact of a pension reform bill that legislative leaders are secretly writing. While the reform plan is being finalized, the governor and Republican leaders in the Kentucky legislature have endorsed a new approach to funding pensions that would require $392 million more in annual funding for the Teachers’ Retirement System.

For elder health, trips to the ER are often a tipping point | Kaiser Health News

An older person’s trip to the ER often signals a serious health challenge and should serve as a wake-up call for caregivers and relatives. Illnesses or injuries that lead to ER visits can initiate a fairly vulnerable period of time for older persons, and risks increase for seniors to acquire a disability within six months of an ER visit.

2018 proposed legislation status

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A summary of proposed legislation affecting Colorado PERA. Check back often for new bills and updated status reports. Last updated: May 21, 2018.

Active Bills

Senate Bill 18-200

(Note: the summary below reflects the bill as it was passed out of the House on May 2, 2018, and does not reflect the changes made to the bill by the conference committee and approved by the House and Senate on May 9, 2018. An updated summary and a comparison between the final version and previous versions, along with the Board’s proposal, will be available soon.)

Modifications To PERA To Eliminate Unfunded Liability

Summary (applies to the reengrossed version of this bill as introduced in the second house): The public employees’ retirement association (PERA) provides retirement and other benefits to employees of the school districts, state, local governments, and other public entities across the state. The bill makes changes to the hybrid defined benefit plan administered by PERA with the goal of eliminating, with a high probability, the unfunded actuarial accrued liability of each of PERA’s divisions and thereby reach a 100% funded ratio for each division within the next 30 years. The bill modifies benefits, ensures alignment of contributions and benefits, and makes other modifications as follows:

Highest Average Salary (HAS): Currently, for a PERA member who is not in the judicial division of PERA, the member’s HAS is based on an average of the highest annual salaries associated with 3 periods of 12 consecutive months of service with a base year. For a PERA member who is in the judicial division of PERA, the member’s HAS is based on an average of the highest annual salaries associated with 12 consecutive months of service. For all new PERA members hired on or after January 1, 2020, who are not in the judicial division, and for all existing PERA members who do not have 5 years of service credit as of January 1, 2020, who are not in the judicial division, the bill modifies the HAS calculation to be based on an average of the highest annual salaries associated with 5 periods of 12 consecutive months of service with a base year. For all new PERA members hired on or after January 1, 2020, who are in the judicial division, and for all existing PERA members in the judicial division who do not have 5 years of service credit as of January 1, 2020, the bill modifies the HAS calculation to be based on an average of the highest annual salaries associated with 3 periods of 12 consecutive months of service with a base year.

Definition of salary: The bill modifies the definition of salary for new hires as of July 1, 2019, by including amounts deducted from pay pursuant to a cafeteria plan or a qualified transportation plan in the definition of salary. In addition, the bill includes unused sick leave converted to cash payments in the definition of salary for all members.

Contribution increases: The bill increases the employee contribution rate by 2.0%, phased-in over three years. Beginning July 1, 2019, the bill will increase employee contributions by 0.75%, followed by another 0.75% increase on July 1, 2020, and finally a 0.50% increase on July 1, 2021. The bill also increases the employer contribution rate by 0.25% beginning on July 1, 2019, except for the Local Government employers.

Termination of affiliation: Employers assigned to the PERA local government division may terminate affiliation with PERA upon application to the PERA board. The bill clarifies that any employer that ceases operations or ceases to participate in PERA for any reason is deemed to have terminated its affiliation with PERA and is required to fully fund its share of the unfunded liability. The bill further clarifies that the PERA board will determine the amount of such payments and that such determinations are appealable through PERA’s administrative review process. Additionally, employees with less than five years of service credit will now be able to keep an account at PERA, rather than having their accounts automatically moved to a replacement plan.

Direct distribution: The bill modifies current statute to allow for a direct distribution from the state treasury to PERA of $225 million annually.

Expands state trooper definition to include certain other public safety officers: This bill adds certain public safety officers (such as sheriffs, detention officers, and corrections officers) who become members of PERA on or after January 1, 2020 to the definition of “state trooper,” applying the higher state trooper contribution rate, lower age and service credit retirement eligibility, and immediate disability eligibility for on-the-job injuries to these other public safety officers.

Automatic contribution and annual increase amount changes: The bill specifies the circumstances under which the member and employer contribution rates, the direct distribution  and the annual increase percentage for retirement benefits can be adjusted so the fund remains within the target of paying off the unfunded liability within 30 years. The bill specifies that the yearly adjustments can be up to one-quarter of one percent on the annual increase percentage, one-half of one percent on the employee and employer contribution percentages and the direct distribution may increase by $25 million or decrease by $20 million. The bill places limits on how much the annual increase,contribution rates and the direct distribution can be adjusted. Automatic adjustments could begin as early as July 1, 2020.

Service retirement eligibility for new members: For non-state trooper members who begin employment on or after January 1, 2020, the bill increases the age and service requirements for full-service retirement benefits to age 64 with a minimum of 30 years of service, age 65 with a minimum of 5 years of service, and any age with a minimum of 35 years of service. For non-state trooper members who begin employment on or after January 1, 2020, the bill increases the age and service requirements for reduced service retirement to age 55 with a minimum of 25 years of service and age 60 with a minimum of 5 years. For new state trooper members who begin employment on or after January 1, 2020, the bill increases the age and service requirements for full-service retirement benefits to age 55 with 25 years of service, age 65 with 5 years of service, or any age with 35 years of service. For new state trooper members who begin employment on or after January 1, 2020, the bill increases the age and service requirements for reduced service retirement to age 50 with 20 years of service.

Cost of living adjustment (COLA) for all retirees, members, and inactive members: Currently, the annual COLA for benefit recipients who began membership prior to January 1, 2007, is 2%. For the years 2018 and 2019, the bill reduces the COLA to 0%. For each year thereafter, the bill changes the COLA to 1.50%, unless it is adjusted pursuant to the automatic adjustment provisions explained above. In addition, the bill requires benefit recipients to wait 36 months or three years (depending on when they became members) after benefits commence before receiving their first COLA if they had not received a COLA on or before May 1, 2018.

Defined Contribution (DC) choice expansion: New members in the Local Government Division and certain classified employees of state colleges and universities in the State Division on or after January 1, 2019 will have a choice between joining the PERA Hybrid Defined Benefit plan or the PERAChoice DC plan.

Defined Contribution (DC) supplement: Employers whose employees choose to participate in the DC plan will pay the DC supplement in order to offset any increases in PERA liabilities created by members who would otherwise have participated in the Hybrid Defined Benefit plan.

Public pension legislative oversight committee: Expands the existing Police Officers’ and Firefighters’ Pension Reform Commission to include oversight of PERA and creates a subcommittee exclusively focused on PERA. The 14-member subcommittee will include four legislators appointed from the Commission and 10 appointed external experts from relevant industries.

Investment program oversight: PERA may share private equity and real estate investment details in an executive session of the legislative members of the Subcommittee unless confidentiality provisions of contracts prohibits such disclosure.

Sponsors: Sen. Jack Tate, Sen. Kevin Priola, and Sen. Cheri Jahn | Majority Leader KC Becker and Rep. Dan Pabon

Status: Awaiting action from the Governor. (Passed conference committee and re-passed by the House and Senate on May 9, 2018.)

Inactive Bills

House Bill 18-1111

Modifications To PERA Board Of Trustees

Summary: Reconfigure the PERA Board of Trustees and allow Trustees access to member and retiree information.

This bill would change the existing 16-member Board of Trustees as follows:

  • Eliminate four member-elected positions;
    • Eliminate one elected Trustee from the State Division (lowering from three to two Trustees in this Division, one of whom is from Higher Ed);
    • Eliminate three elected Trustees from the School Division (lowering from four to one Trustee in this Division);
  • Require the member-elected positions to be at least 20 years from retirement eligibility (the DPS seat would not be modified to have this requirement);
  • Replace the eliminated positions with four Trustees appointed by the Governor, with Senate confirmation, bringing the total of Governor-appointed Trustees to seven. These appointees may not be PERA members or retirees. Of the seven appointees, no more than four shall be from the same political party.
  • Eventually, the seven appointed Trustees must be comprised of professionals with ten years of experience in the following fields:
    • One professional in investment fund management,
    • One professional in accounting and a CPA,
    • One professional in securities law and a licensed attorney in Colorado,
    • One professional in tax law and a licensed attorney in Colorado,
    • One professional in pension management,
    • One professional in actuarial analysis and a certified actuary, and
    • One professional who is a certified financial planner accredited by a nationally recognized accreditation agency.

In addition to composition changes, the bill would also authorize a Trustee to review all records or information within the custody and control of PERA.

The bill defines information requests to include: “salary and benefit information that is contained in records of members, former members, inactive members, DPS members, DPS retirees, benefit recipients, and their dependents; except that, in fulfilling a request for records or information by a trustee pursuant to this section, the executive director of the association and the board shall not provide any other information that is designated as confidential pursuant to Section 24-51-213.”

Sponsors: Rep. Justin Everett | Sen. Tim Neville

Status: Postponed indefinitely (House State, Veterans, and Military Affairs 2/14/18)

PERA Board Position: Opposed.

PERAtour resources

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PERAtour, the statewide community outreach effort that took place throughout 2017 to address PERA’s current funded status and risk profile, concluded its final phase of community meetings and programming in late 2017.

PERA is now working with legislators from both parties to develop a bill that reflects the PERA Board of Trustees’ proposed reforms to the plan. The legislation will be introduced to the Colorado General Assembly during the 2018 session.

To remain up-to-date as this critical bill makes its way through the legislative process, visit the “Legislation” section of PERA on the Issues regularly and sign up to receive our bi-weekly newsletter.

If you wish to learn more about PERAtour, the PERA Board’s recommended package of reforms, and PERA’s financial health, we invite you to explore the resource library below.

VIDEOS

LEADING CHANGE, LASTING SECURITY

A video shared at community meetings during the second phase of PERAtour that looks at the proactive steps PERA is taking to address the long-term sustainability of the plan for the hundreds of thousands of Coloradans who depend on it for their retirement security.

A BRIEF HISTORY…WITH PERA

A video shared at community meetings during the first phase of PERAtour that takes an animated look back at PERA’s history from 1998 to the present.

PRESENTATIONS

PERATOUR: A STATEWIDE CONVERSATION

A presentation shared at community meetings during the second phase of PERAtour that reviews the principles, priorities, and process followed by the PERA Board and provides an overview of the Board’s recommended package of reforms designed to address PERA’s financial health and funded status.

MATERIALS

PERA BOARD’S RECOMMENDED PACKAGE TO PROTECT PERA’S LONG–TERM HEALTH

An outline of the PERA Board’s recommended package of reforms that will impact all PERA membership if passed by the State Legislature.

POLLING RESPONSES TO CORE PRINCIPLES

A synopsis of the feedback received from participants during the first phase of PERAtour community meetings across the state when asked to weigh in on core principles that should guide the PERA Board’s consideration of reforms to the plan.

2018 PERA on the Issues legislative preview

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This is shaping up to be a big year with the Legislature. Elected officials at the state and federal levels are pledging to address everything from pensions to Medicare to Social Security. It’s never been more important to pay close attention to what’s going on in the State Legislature and Congress. Here are just a few things that will be discussed.

Colorado General Assembly
The second session of the 71st Colorado General Assembly began on January 10. Because of the PERA Board’s recommendation to lower the fund’s risk profile and ensure its long-term sustainability, PERA will be a major issue at the Capitol. Many Coloradans have just heard about the Board’s proposal from recent news coverage. But regular readers of PERA on the Issues know that PERA has been working for more than a year to address the impact on PERA’s funded status of a less optimistic global economic outlook and the longer lives of PERA retirees. In addition to the Board’s recommended package, Gov. John Hickenlooper has also included PERA reform as part of his budget.

While there are differences between the Governor’s proposal and that of the Board, the two plans share the goal of achieving 100 percent full funding within a 30-year period. The differences lie in how that goal is achieved. Comparing the two proposals, there are a few key differences, including employer contributions and the annual increase. The Board’s proposal calls for a shared sacrifice approach similar to the Senate Bill 10-001 reforms. The Governor has opted for a path that asks retirees and active members to shoulder most of the burden. A bipartisan group of legislators has been working to address the issue of PERA reform, and at least one bill is expected to be introduced in the first half of the session. Of course, this proposal and all other PERA-related legislation will be here on PERA on the Issues.

Another retirement issue state legislators are expected to tackle is a proposal to create a state retirement savings plan for private-sector workers who do not currently have access to a plan. Previous attempts at creating this type of “auto-IRA” system, or even studying the creation of one, have died on party lines.

Beyond retirement, issues legislators expect to address in 2018 include transportation, health care, education spending, and broadband.

Federal legislation
Despite initial concerns that the sweeping overhaul of the federal tax code might dramatically alter public retirement systems, the law signed by President Trump on December 22, 2017, has little impact on those plans. The few changes generally impacting retirement plans include the following:

  • Roth IRA Re-Characterizations. IRA participants are permitted to move amounts previously contributed to a Traditional IRA to a Roth IRA, and participants would be taxed at the time of that conversion. Previously, these conversions could be undone, or “re-characterized,” back to a Traditional IRA to avoid tax. Under the new law, a conversion to a Roth fund is permanent—it cannot be re-characterized after it is completed.
  • Retirement Plan Loans. Plan participants with outstanding loan balances are given more time to repay them at termination of employment. Previously, the participant had 60 days to repay the loan or roll over the loan to a different plan after termination, or a taxable distribution of the outstanding loan amount was deemed to occur. Now, participants have until the deadline for filing their federal income tax returns (including extensions) to roll over such loans.
  • Disaster Distribution Relief. Generally, if a plan participant takes money from a qualified retirement plan, a 403(b) plan, or an IRA, and the participant is under age 59½, the distribution is subject to a 10 percent additional early withdrawal tax. The new tax law provides an exemption from this additional tax for amounts taken due to a disaster that occurred in 2016, as long as the individual’s loss was caused by the disaster and the individual’s principal residence is in the disaster area.  
  • Length of Service Awards for Public Safety Volunteers. Plans may solely provide for length of service awards for public safety volunteers. Such amounts are not considered deferred compensation as long as the amount is paid on behalf of a volunteer performing qualified service and is under the limit. The tax bill increases that limit from $3,000 to $6,000 in 2018, with cost-of-living adjustments thereafter.

On the other hand, many of the provisions affecting retirement plans that initially appeared in the House or Senate versions of the tax bill are not included in the final law. These include:

  • Unrelated Business Income Tax. This was a primary concern for governmental plans. Unrelated Business Income Tax (UBIT) is a tax on investment income that governmental plans have been exempt from since the UBIT first went into effect.
  • Hardship Withdrawals from 401(k) Plans. 401(k) plans may allow a participant to take a distribution of elective deferrals while still employed if the participant is affected by one of the defined hardship events. The proposed bill would have permitted employers to allow hardship distributions from amounts other than elective deferrals – in other words, a participant would have been able to take hardship distributions from account earnings and employer contributions.
  • Aggregation of Retirement Plan Limits. Currently, 457(b) plans have an elective deferral limit ($18,500) separate from the 401(k)/403(b) limit ($18,500 aggregated), plus special catch-up contribution limits. The proposal would have repealed special rules allowing additional elective deferral limits under 457(b) plans, and catch-up contributions under section 403(b) plans and governmental section 457(b) plans.

One of the biggest reverberations policymakers will be feeling from the tax reform bill will be the large increase in the budget deficit. While some proponents say the bill will end up paying for itself through higher tax revenues from economic growth in the coming years, the Congressional Budget Office found the reform bill will increase the deficit by $1.5-1.8 trillion over the next decade.

In order to address the looming increase in budget deficits, some lawmakers like House Speaker Paul Ryan have suggested addressing the long-ignored issue of reforming Social Security and health care programs like Medicare and Medicaid. According to the non-partisan Center on Budget and Policy Priorities, Social Security and health care programs currently account for about 50 percent of federal spending. Policy proposals to address lowering these costs include increasing retirement eligibility ages for both Social Security and Medicare and cutting benefits. Increases in the current 12.4 percent Social Security tax and 2.9 percent Medicare tax (both split evenly between employees and employers) are also possible. Currently, if lawmakers do not address the funding shortfall faced by Social Security, it is projected that future retirees would receive 75 percent of promised benefits beginning in 2033.

If lawmakers do decide to take up Social Security reform, it’s possible they will choose to address reforming the Windfall Elimination Provision (WEP), which the powerful House Ways and Means Committee Chairman Kevin Brady (R-TX) recently described as “…something we must do for our teachers, firefighters, police, and other public servants.” Bills that would have repealed WEP and the Government Pension Offset (GPO) were introduced last year, but did not receive hearings.

With 2018 just starting, it’s clear there is a potential for big changes to retirement policy. Make PERA on the Issues your go-to source for up-to-date information on all things legislative.

ICYMI: Colorado PERA Board Chairman outlines path to lowering PERA’s risk profile

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Colorado taxpayers, along with PERA members and retirees, need to have accurate information about PERA’s current funded status and a path forward. That’s the message from PERA Board of Trustees Chairman Timothy M. O’Brien in his guest commentary published in The Denver Post on Sunday, January 7. O’Brien outlined five things to keep in mind as the General Assembly begins its 2018 session and considers the Board’s legislative recommendation.

While the messenger may have changed, the Board’s fiduciary responsibility to PERA members has not. After months of stakeholder outreach, more than 80 percent of those who attended a PERAtour meeting agreed that the time to act is now. Shared responsibility is a sound principle on which the Board’s recommendation is based, but there are no easy fixes and real lives will be impacted by any decisions made. Finally, these recommendations were not made lightly. It is time to ensure the security of the retirements earned by Colorado’s current and former public employees.

Read the commentary here.

Retirement Roundup: a future without pensions

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A digest of timely information and insight about finance, investing, and retirement.

A preview of the U.S. without pensions | The Washington PostThe way major U.S. companies provide for retiring workers has been shifting for about three decades, with more dropping traditional pensions every year. The first full generation of workers to retire since this turn offers a sobering preview of a labor force more and more dependent on their own savings for retirement.

A secure retirement may be in jeopardy for millions of Americans |MSN MoneyIn an opinion piece from Dec. 10 on retirement issues, Andrew Biggs, a resident scholar at the American Enterprise Institute, criticized two reports from the U.S. Government Accountability Office (GAO) and argued that there is no impending retirement crisis. The GAO authors stand by their findings in the two reports – one issued in 2015 on the potential retirement security of near retirees and the other issued in 2017 on the status of the nation’s retirement system.

Projected Retirement Health Expenses Rise – Again |National Association of Plan AdvisorsA year ago, the nonpartisan Employee Benefit Research Institute (EBRI) estimated that individuals might need as much as $350,000 to cover health expenses in retirement. Readers might want to sit down for the update. The headline in a new report from EBRI says that when it comes to health expenses in retirement, “Some Couples Could Need as Much as $370,000, Up from $350,000 in 2016.” But the real answer depends on some key assumptions and variables, not the least of which is how sure retirees want to be of covering those expenses.

New Yorker Cartoon Considers 401(k)s |Squared Away Blog
A New Yorker cartoon by Trevor Spaulding is cute, but – spoiler alert – it’s not quite right. A company offering a 401(k) retirement savings plan to its workers is a good thing, but it’s no “favor,” according to Steve Sass, an economist with a hawk eye for inaccurate retirement information. Setting up and funding a 401(k) is a big expense for employers. But many think it is worthwhile, because 401(k)s – and, more so, employers’ matching contributions – help them attract and retain the sharpest, most productive, or most-skilled workers.

Four ways to change 401(k) plans for the better |MarketWatchOver the past few months, 401(k) plans have been in the news a lot. At one point, Republicans floated the idea of drastically lowering the maximum that employees could contribute. And this week, President Trump asked once again how everyone’s 401(k) plans are doing as a result of the rising stock market. But what these plans need even more than a bull market is a way to get more people to participate in them, some experts suggest. Yes – 401(k) account balances and stock market performance are tied to one another, but not everyone has access to these defined contribution plans, and few who do invest in them.

A Kentucky pension bill has yet to be filed, but there are a few hints on its contents | Louisville Courier-Journal
A month ago as it became apparent that Gov. Matt Bevin’s plan to pass pension reforms at a special session in 2017 would not be possible, legislative leaders aimed to pass a pension bill during the first two weeks of this year’s regular session. But with the first week of the session now over and no pension bill filed, it’s apparent that will not happen.