Today, the State Senate is scheduled to debate SB18-200, the PERA reform bill, on the floor.  As befits a big, complicated problem, it’s a big, complicated bill.  As with any big, complicated bill it’s a mix of good and bad.  In this case, there are also elements that are missing that would vastly improve the bill’s effectiveness and fairness.

And as with any bill, especially one in a divided legislature, there are political considerations.  The bill is the result of several months of bipartisan effort, led by Republican Sen. Jack Tate and Democratic Rep. K.C. Becker, but also with the contributions of several Democratic senators and Republican representatives.

The Good

Photo Credit: Todd Shepherd

The Good in SB200 can be broken down into three parts. First, there’s the usual dial-turning and knob-twisting, but in this case, there’s also some screw-tightening and refitting.  Second, there will be expanded legislative oversight. Third, there will be an expansion of the Defined Contribution plan.  Let’s take each of these in turn.

The Dials and Knobs

The bill will increase contributions and decrease benefits in a number of ways:

• Employee contributions will step up another 3%
• Contributions will be calculated on gross, rather than net salary, reducing the incentive to game the system through deductions and spiking
• The Highest Average Salary will be calculated on 7 years, rather than the current 3 years
• COLAs will take a 2-year break, and then will max out at 1.25% per year
• The retirement age will increase to 65 for new and younger employees
• If needed to keep the plan on track, employee contributions and COLAs will be adjusted automatically

The retirement age increase and the COLA limits have been the main targets of PERA members, for obvious reasons.  COLA limitations put almost all the inflation risk on retirees.  Adjusting the retirement age for new employees is relatively uncontroversial – there is no group less organized than those who have not yet decided to sign an employment contract.  But adjusting the retirement age for existing employees, even younger employees who have time to adjust, will have to be tested in the courts to see whether that’s considered enough of a “core” benefit to resist change.

Increased Oversight

The bill also calls for the creation of a new joint legislative committee, composed of six House and six Senate members, three from each of the caucuses, specifically to oversee PERA.  The committee would also have four non-voting outside experts appointed by the Treasurer.  Creation of this committee would create an in-house body of expertise, much like we have with the Joint Budget Committee, and which is lacking the legislature now.  It would also allow outside experts to grill the Board publicly and hold it accountable – at least in words – for the effects of its decisions and recommendations.

Defined Contribution

Currently, State employees – but not teachers or other PERA members – have the option to choose the Defined Contribution plan when they join PERA.  This bill would extend that option to all new PERA members, and it is one of the most reviled parts of the bill as far as PERA and the unions are concerned.  They believe that it will work to undermine the DB plan, but they say that as though it were a bad thing.

The Bad

The bad was the increase in the employer (read: taxpayer) contribution.  The original bill would have increased that by 2%, when employers are already putting in 20.15% of salary.  For school districts who are already paying upwards of 1/8 of their operating expenses into PERA, this would tighten budgets even further.  Small governments and municipalities would also be looking a 23-25% of salary going into PERA.  Fortunately, this was amended out of the bill in the Finance Committee on a party-line vote.

So, if there’s only good, and not much bad, why isn’t the Independence Institute full-throatedly behind the bill?  Because of…

The Missing

We believe that, as it stands, the bill can do some good, but represents a potentially substantial missed opportunity to do more to solve the problem over the long term.

Obviously, our preferred DC/DB mix would be to get rid of the DB option for all new employees to keep from perpetuating the problem into the future.  That would still leave the unfunded liability of $50 billion to be dealt with.  We would also like to see an option for current PERA members to change their choice and go to the DC plan.  This could be done in a cost-neutral way, where members only take their own contributions and the actuarial value of their vested benefits with them, and PERA would be able to set the price.

Barring that, we would have preferred an entirely new, more conservative DB plan with no employee contribution above the normal cost, and separate accounting for employer contributions going to the normal cost and the unfunded liability.

The bill implements neither of those.  At a minimum, therefore, the defined contribution should be the default option, rather than the defined benefit.  In the first place, the default option tends to be “sticky,” meaning that people tend to stick with what they’re put into as a default.  Leaving the DB as the default will tend to minimize DC participation.  That leads to a potential political problem down the road, where low DC participation is cited as a reason to yank the option altogether.

Second, the new oversight committee is the minimum of governance reform.  But it isn’t Board reform, nor does it prevent the Board from using public money to lobby the legislature for or (mostly) against additional proposed reforms.  Allowing the Board to lobby against additional reforms raises the stakes for this bill, which is bad, but also increases the likelihood that we’ll end up back in the same place in a few years.

Last, PERA needs to take some accounting measures to keep itself on track.  Namely, it should seek more outside advice than just its actuaries when estimating its expected rate of return.  It should ask multiple investment firms to provide estimates of how well its current portfolio will do.  It should also decouple its discount rate from its rate of return, using something like the Muni 20 Index.  It will only do these things if required by law.  For those who dismiss these requirements as details, we should remember that the current crisis was initiated when PERA lowered its expected rate of return from 7.5% to 7.25%.  And for the knobs and dials to mean anything, the discount rate and rate of return need to reflect reality as well as they can.

We doubt that if a fix is passed, there will be any appetite in the short-term to pass additional reforms.  PERA and its allies will reprise their call to let the current reforms work, as their did with SB-1 for the last 7 years.  This bill is the chance to get things right, so let’s do that.

UPDATE: The Senate fought back floor amendments to raise the COLA cap and to restore the employer contribution.  When the Senate adjourned, it was considering a “strike-through” from Sen. Kagan that would have replaced the proposed reform plan with one essentially written by the unions.  That amendment would restore the employer contributions, raise the COLA cap, lower the employee contribution increase, retain the current retirement age, and eliminate the DC expansion.  It will resume consideration of the bill and the amendment on Monday.

While it is likely that this amendment, along with all others to weaken the bill, will fail in the Senate, they also provide a preview of amendments that will be offered in the House, both in the Finance Committee and on the floor.  Whether those amendments pass and force the bill to a Conference Committee will be the result of the efforts to defend against them by Reps. Pabon and Becker, and the level of commitment by Speaker Crisanta Duran to the bill’s integrity.