This is an extended version of the OpEd that appeared in the Greeley Tribune<\/a>.<\/em><\/p>\n

Last week, Colorado legislators considered \u2013 and rejected \u2013 a plan of dubious legality to shore up the state\u2019s public pensions.<\/p>\n

The result of a difficult three-way negotiation among Governor Hickenlooper, Treasurer Stapleton, and PERA, the plan would have circumvented the state Constitution\u2019s limits against issuing general obligation debt without a vote of the people, for gains that would have been largely illusory.<\/p>\n

Worse, the changes could have encouraged future legislatures to repeat mistakes that put teachers\u2019 and state employees\u2019 retirements at risk in the first place, while making real reforms more difficult.<\/p>\n

HB15-1388 would have authorized the State Treasurer to direct the Colorado Housing and Finance Authority (CHFA) to issue up to $10 billion in bonds on the state\u2019s credit. The proceeds would have been deposited into PERA\u2019s State and School funds, and invested with the rest of PERA\u2019s assets. The investment returns theoretically would shorten PERA\u2019s time to full funding.<\/p>\n

The bonds\u2019 interest was to be funded by the supplemental payments that the state and school districts pay into PERA (the AED and SAED), with PERA paying back the principal when the bonds matured.\u00a0 The AED and SAED payments are taxpayer contributions established in 2004 and 2006 to stabilize PERA\u2019s finances.\u00a0 They are escalating percentages of employee salaries.<\/p>\n

The complex web of relationships was needed to avoid state constitutional limits on issuing debt. The bill\u2019s language laid out the legal arguments for why the restrictions didn\u2019t apply. Supporters claimed they were revenue bonds that would not obligate general tax dollars, and purported that CHFA is not a state agency.<\/p>\n

Passing the buck to the courts, HB 1388 would have required a binding judicial ruling certifying the scheme\u2019s legality before the bonds could have been issued.<\/p>\n

Make no mistake: The debt would have been on the state\u2019s credit, and shown up on the state\u2019s balance sheet. These are not revenue bonds; they would have been funded only by general tax revenue.<\/p>\n

Whether or not the game of hide-the-pea satisfied the courts, it violated the spirit and purpose of constitutional provisions designed to prevent the legislature from indebting citizens into a long-term fiscal bind. The many state bankruptcies of the 1840s were still fresh in the people\u2019s minds in 1876, when the Constitution was drafted. Those concerns are no less valid now.<\/p>\n

The bonds wouldn\u2019t<\/em> have shown up in PERA\u2019s financial report, except in the footnotes. With no single, authoritative document laying out the full financial picture associated with funding the state\u2019s public pensions, PERA would look better-funded than it was.<\/p>\n

Risk-averse legislators could have justified avoiding the difficult decisions needed to provide real retirement security for Colorado\u2019s teachers and state employees. Future legislatures might have been tempted to repeat the mistakes that put that security at risk in the first place. While a full legal analysis awaits, tying the AED and the SAED explicitly to a bonded debt might have complicated any attempts at more sustainable reform.<\/p>\n

A comprehensive study by the Center for Retirement Research found that the misuse and mistiming of pension obligation bonds have punished numerous states and municipalities over the last 20 years. The Government Finance Officers Association recommends against their use.<\/p>\n

To their credit, the bill\u2019s architects studied past failures and tried to mitigate the risks to Colorado and its schools. The annual interest on the bonds could have been no larger than two-thirds of each year\u2019s anticipated AED and SAED, with a minimum 2 percent spread between the bond interest rate and PERA\u2019s anticipated rate of return. Statutory contributions to PERA \u2013 inadequate though they are \u2013 would have remained intact, and bond proceeds would have been unavailable for diversion to other spending.<\/p>\n

Still, the deal entailed significant risk. Proponents misleadingly argued that it refinanced 7.5 percent debt at 4.5 percent. In an actual refinance, the original obligation is paid off. Here, the pension obligation would have remained, with Colorado taking on additional debt.<\/p>\n

Even PERA\u2019s claim that its current debt should be discounted at 7.5 percent is based on an accounting gimmick only available to US public pensions \u2013 and no other pensions in the world.\u00a0 (Not coincidentally, without the discipline of correct accounting, US public pensions are also the worst-funded public pensions in the world.)<\/p>\n

As contractual promises, they should be discounted at the same interest rate as the bonds.\u00a0 PERA would just be adding 4.5 percent debt to the true 4.5 percent debt of its current contractual obligations, improving its situation only marginally.<\/p>\n

The proposal\u2019s safeguards would not have changed the fact that proponents were seeking to close the funding gap by taking on additional debt and risk.<\/p>\n

While the governor and the treasurer are to be credited for taking PERA\u2019s underfunding seriously, HB 1388 was the wrong answer to the problem.
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