FOP Issues: Opinions
1/14/2010: Response to an email which is in “blue” below.
Thanks for your email regarding the COLA. Before I answer your email specifically, here are some thoughts on the COLA. I agree that it is not a pleasant thought to only have a 2 % COLA; if there was any other way around this, we would endorse it but we have to be practical. We have stretched the employer contributions and the employee contributions as far as they can go.
In many pension plans, there is no COLA. The 3.5% flat rate was instituted when PERA was 105% funded and there was excess money, so the legislature agree to "share the wealth" PERA had achieved by increasing the annual increase to a flat amount as well as to reduce the employer contribution, add a matchmaker program for matches to voluntary deferred compensation investments by active members, and reduce the cost to purchase service credit. All of these enhancements have succumbed to the difficult market situation except for the 3.5% increase in benefits.
Not always have we had high inflation...from 1991 to 2000, the average CPI-W rate of inflation was 2.7%; Since 2000, the average CPI-W increase has averaged 3%. Retirees have received increases averaging 3.5%, consequently, we are 7% ahead of inflation. A retiree receiving $1,000 monthly in 2000 would be receiving $1,363 today. Had the inflation rate been used for those increases, the benefit would be $1,270, about $93 per month less ($1116 per year).
Cost of living increases are one of the most expensive parts of a defined benefit plan. That is why nearly all private industry DB plans do not have a cost of living increase built into it, and why the 3.5% PERA increase is at the outer edge for public pension plans.
FOP encouraged PERA to put a provision in the bill that requires PERA to provide the Legislature with a report in five years that will complete a review of whether PERA’s funding improvement is on the projected track, as well as a comparison of CPI-W increases versus the annual benefit increase received by PERA beneficiaries. Should there be a wide variance between CPI and the ABI, the PERA Board and the Legislature could seek a remedy for retirees. There is a provision in the bill that once PERA gets to 103%, then the COLA will increase by .25% each year. Certainly, this will be some time out, but at least there is a light at the end of the tunnel.
The biggest problem with the current draft of the bill is that it cuts PERA’s annual pension increase from 3.5% to 2%. This cut ensures that retirees will lose a substantial amount of the value of their pensions to inflation by the time they reach their later retirement years. It affects current retirees and has an even greater effect on future retirees who will see inflation eat away at their pensions during their entire retirement.
For example, if inflation averages 3.75% per year as PERA's actuaries predict, pensions would lose 20% of their real value within 15 years, and would continue to decline in value every year until the retiree dies. The average monthly retirement benefit for PERA members who retired in 2008 was $2878. Assuming 3.75% average inflation and a 2% annual COLA, that benefit would be worth $1461 in real (i.e. inflation adjusted) dollars after 40 years. (This is a dramatic example; the average retiree who is age 55 has a life expectancy of 28 years.)
One way to reduce the potential impact to retirees (and future retirees) would be to limit the decrease in real (i.e. inflation adjusted) value of a retiree's pension under the new (2%) rate to a maximum of 20% (a different percentage may be negotiated). Once a retiree's pension has lost the full 20%, his or her future annual increases would revert to the 3.5% fixed annual rate which is currently in effect. (While this is a good idea, PERA can't afford it. PERA is cutting the increase because it does not have the money to pay for it and not go broke. So the 2% is the maximum it can pay if we only get an 8% return on average.)
Since this provision would probably not be triggered for about 15 years, PERA’s fund balance would have a substantial period to recover before the fund had to resume paying the 3.5% annual increase rate. Yes, PERA will be better funded in 15 years, but it does not expect to reach 100% funded for 30 years. We have argued that we don't need to be 100% funded, but this is the national standard and consequently, we are been forced to follow the standard.
I'm on your side but also understand the need to decrease the COLA....
3/26/09: Maybe Obama can bail out PERA or at the very least get the country rolling as he promised to so many DIS-GRUNTLED AMERICANS. If all was rosey the state would not be in financial need, add automobile taxes, freezing property taxes etc. If new arrangements need to be made for future hires that is one thing, but to change the rules for anyone that was hired or retired before January 1 2010 should not be allowed. FG
3/26/09: Thanks for your comments regarding the hearing...Excellent coverage of everything! By some lucky chance, we both were able to listen to the session using our computers. We just wish we could have been there. I could tell at the very beginning that Mannino was very surprised that so many people were in attendance in support of PERA and I really think that threw him off his game. He seemed nervous, or should I say, sounded nervous and seemed unable to focus. I agree that most of the time he didn't present coherently, descending into terminology that really didn't make much sense (at least to me).
We were impressed with Meredith's response to Mannino's assertions. I think he was very reasoned in his comments and did make many good points. (I laughed when he gave his "extra value meal" interpretation.) Mannino should have come away from the session pretty humbled, but may not since he'll have Poulson and the Independence Institute to prop him up again. I didn't catch the name of the legislator who made the comment about PERA not making recommendations based on what Mike Rosen says on his talk show, but thought it was a great ending to the session...very appropriate, with humor.
Question: Does this mean that there won't be legislation introduced this session. CF
(Our response: not necessarily. Someone could introduce legislation or it could be the forerunner of a ballot initiative as occurred about two years ago – the reason FOP was formed.)
Sample letter sent by an FOP member, October 31, 2007 »
From Cheryl Flagg...Oct. 17, 2007:
Don't see anything here about divestment being a shared responsibility...only California public pension funds must make the sacrifice. Also, looks as though a lot of people stand to gain monetarily from California divestment, while its pension funds lost money. Actually, it's those teachers, public school employees, firemen, policemen, and civil servants that lose money! What will it cost Colorado PERA? By the way...that's us, you and me! More...
Friday, September 28 at 2:00 PM
Cynthia Rutledge of Oak Creek writes to Rocky Mountain News:
I’m responding to the Sunday, September 16, 2007 article in SPEAKOUT
by Senators Fitz-Gerald, Gordon, McElhany and Penry.
Our state legislators are abusing their authority with repeated
attempts at manipulating the investment of Colorado PERA’s defined
benefit pension funds for an increasing list of divestment
“imperatives.” It is the PERA members and retirees who OWN these
funds, not the taxpayers at large and not the General Assembly. Our
mandated contributions and those of our employers are made subject to
contractual agreements and are in lieu of contributions to social
security. Nowhere is it stated that legislators may usurp the purpose
for which our retirement funds are invested to promote their own or
other’s version of our nation’s foreign policy, their own ideology or
to repay their own benefactors.
Two years ago PERA’s defined benefit plan was considered so fragile
the then State Treasurer felt it imperative to propose benefit
changes. Four months ago the State’s General Assembly forced
divestment from companies doing business with Sudan at an estimated
cost to the same defined benefit fund of up to $3,000,000. Rep.Victor
Mitchell considered it imperative that PERA’s defined benefit members
pay all costs of divestment out of their funds, thus bearing the total
financial burden for a social statement supposedly made for all
Coloradoans.
Now we have yet another “imperative” proposal known to be vigorously
promoted by foreign nationals and powerful lobbies to divest from
Iran. And yes, it’ll cost us.
Legislative oversight is not a mandate to pillage and plunder pension
funds for ANY purpose. Remember, while members of PERA’s defined
benefit plans are paying for a proliferation of divestment proposals
now, ALL Colorado taxpayers will end up paying for the legislated
decimation of PERA’s trust fund in the future.
This letter has not been edited.
Oct. 9, 2007: This is the comment I posted in response to "Darfur: Solution or
Diversion?" at Foreign Policy In Focus. My concern is no one ever
addresses the impact on public pension funds and its members. ( From CF)
Kevin and Steve, I found your article well balanced, presenting quandaries of divestment many of us are concerned about but rarely see in print. And I applaud you for that. However, as a member of a public pension fund, I and many others continue to be struck by the lack of coverage given to the impact Sudan and Iran divestment will have on public pension funds and its members. We are concerned that such divestment only targets the hard-earned savings, held in trust, of teachers, public school employees, policemen, firemen, and civil servants. No other individuals, entities, or institutions in the United States will be mandated to divest; therefore, divestment is not a shared responsibility as it should be in our democratic society. When South Africa divestment was accomplished, legislation mandates also included banking, financial institutions, purchasing policies, licensing, franchising, and distribution agreements. Why doesn't current Sudan and Iran divestment legislation include these same areas? Many see this is a form of discrimination.
Sudan and Iran divestment is, and will continue to take its financial toll on public pension funds. Additional staff must be hired to manage the divestment process which is very complicated and lengthy. Since the SEC no longer offers a free list of companies to divest, lists of companies doing business with Sudan and Iran must be purchased from private list making companies for thousands of dollars...and not just once, but quarterly and for how long no one seems to know. (As an aside, how would any private individual know what companies to divest since this information is not made public?) When the offending companies are divested, they continue to be listed on the stock exchange to be purchased by any one person or institution...except public pension funds. Companies who may have as little as 2% holdings in Sudan and Iran are on these divestment lists. The only persons who will bear the costs and losses from Sudan and Iran divestment are public pension fund members: teachers, public school employees, policemen, firemen, and civil servants. One final point...if any of these companies targeted for divestment leave Sudan and Iran, who will take their place in those countries? Food for thought.
Sept. 27, 2007: E-mail with infor about Iran divestments by Florida (From CF, Steamboat Springs)
Hello All, You may have seen this but if you haven't, here it is...the first financial figures on Iran divestment from Florida, the first state to pass such legislation. I keep running into folks who say they've been told that divestment won't cost PERA any losses. We need to make sure those people see this. Also I keep reminding people that banks, investment and brokerage firms, business and labor pension funds, mutual funds, defined contribution plans, private individuals and legislators are not mandated to divest...only PERA's defined benefit plan is targeted for divestment in legislation. Cheryl
- related article from Pensions & Investments
Sept. 26, 2007: Email to Sen. Fitz-Gerald & Sen. Gordon (From CR, Denver)
I thought you would like to see a letter I wrote to Senator Fitz-Gerald and the response I got back in the form of an attachment. I was a little confused and maybe so is she or the intern that responded. CR,Denver
Sept. 26, 2007: Email with info about Texas divestment action (From CF, Steamboat Springs)
Interesting situation down in Texas... Gut-check time for pension trustees
Sept. 26, 2007: E-mail about divestment editorial for Burma in WSJ (From CF, Steamboat Springs)
Hello All, As you will read here, WSJ initiates Divest Burma (Myanmar) campaign. While certainly tragic, as are so many places in the world, PERA and other public pension funds cannot carry the costs of constant divestment of their defined benefit plans. CF
Sept 23, 2007: Email on Ohio Divestment Compromise (From CF, Steamboat Springs)
Update on Ohio's massive Sudan-Iran SHB 151 possible compromise.