Every year when the Colorado legislature meets in the spring, there are typically several bills related to Colorado PERA that are proposed and sometimes passed. Sometimes those bills are very minor and sometimes very major. When they are major, they typically get a ton of attention, but when they are minor (or at least perceived to be minor) they often don’t. I wanted to take a few minutes to discuss three bills before the legislature this spring, two of which have already been passed and signed by the governor, and one that is still very much under discussion.
The two bills that have passed and have been signed both deal with working after retirement rules. HB 22-1057 temporarily waives (through July 1, 2025) the current 110 day limit on retirees who work as substitute teachers. Currently, in any calendar year, a retiree drawing a Colorado PERA pension can work up to 110 days as a substitute teacher without affecting their PERA pension but, if they go over that limit, their PERA pension starts to be reduced. As most of you know, there was already a substitute teacher shortage before the pandemic, and an extreme shortage now, so this bill is designed to help address that by allowing retired teachers to work more than 110 days.
HB 22-1101 takes an existing waiver of working after retirement rules for rural school districts that was scheduled to end on July 1, 2023 and extends it permanently. Under current law, retired teachers, bus drivers, or food service workers in rural districts of the School Division may be rehired and receive a salary without reduction to benefits under certain limitations. This was passed a few years ago due to shortages in these positions that were very hard to fill in many rural school districts. This new law (now passed) adds school nurses and paraprofessionals and eliminates the repeal date, which makes this provision permanent.
To be clear, I support the intent of both of these laws. There is a severe shortage of substitute teachers and a shortage of many positions in many rural school districts. Utilizing retirees who want to go back to work to help out makes total sense, and I think this is a good solution. The problem, as is often the case, is that the legislature is not providing any money for these new laws. The casual observer may wonder why there is a cost to these laws and, in fact, may believe these to actually be a benefit to PERA. But there is a real cost to the plan from both of these and the legislature is not providing any funding for it. And, perhaps just as bad, some of the legislators themselves don’t seem to understand that.
The reason a casual observer might think these actually benefit the funding of PERA is that retirees who go back to work for a PERA employer continue to pay a percentage of their salary (increasing to 11% in July) into PERA, and the employer (school district) also contributes (increasing to 21.4% in July). But the retiree does not earn any additional service credit for this work and therefore their PERA benefit will remain the same. At first blush, this seems like a huge positive for PERA because they are getting 32.4% of the retiree’s salary* with no additional liability. (*Actually most likely a little bit less than 32.4%, because any pre-tax deductions for health insurance, FSAs, of Dependent Care Savings Accounts come out pre-PERA, so the 32.4% contribution is likely not on their full salary.)
But the part that some folks overlook is the behavior that these changes might incentivize; specifically, that it might encourage a current school district employee to retire earlier than they would have because they can continue to work full-time and receive their PERA retirement benefit. Here’s an example (specific numbers can vary tremendously, and the effect is more pronounced the higher the salary and service credit used, but this gives you an idea).
Let’s say there’s a 55 year old teacher in a rural school district with 25 years of service credit and making $60,000 a year. With 25 years of service credit, they would be eligible for a benefit of 62.5% of their HAS, or $37,500 if their HAS is $60,000. Many folks in that position are likely to want to continue working for maybe 5 more years, to age 60, not only to continue to receive their salary and benefits for 5 more years, but to increase their eventual PERA benefit significantly (with 30 years of service credit, they would receive 75% of their now-higher HAS).
But with this law, they can now retire from PERA and receive $37,500 per year from PERA, but continue working full-time in their exact same teaching position and receive their entire full-time salary and benefits from the school district. They can continue to work for 5 more years, receiving their salary and benefits along with $37,500 each year from PERA (with a small cost-of-living increase beginning in year three). That’s a pretty good deal for the teacher, but what’s the effect on PERA?
Well, if they are making $60,000 (and have no pre-tax deductions that lower the amount they make contributions on), the combined yearly contribution from the teacher and the employer is $19,400, but PERA is paying out $37,500 each year. PERA is not “making” money in this situation, it is “losing” money. And that can continue each year for as many years as the teacher continues working.
There is a similar effect with the substitute teacher bill, only the amounts are even higher. A teacher may decide to retire one year earlier because they know they can pretty much work full-time as a substitute teacher (as opposed to the 110-day limit) and receive their PERA retirement benefit. Substitute pay varies tremendously, but with the recent shortage many districts are paying substitutes much more per day (which is a good thing). Again, just as an example, let’s use $150/day and 180 days a school year. Previously, the teacher could substitute for up to 110 days, so that’s 70 extra days they can substitute for a total of $10,500 more they could earn before the restriction was lifted. Contributions would total $3,402, versus the $37,500 that PERA is paying out. (And, since this applies to all districts, not just rural ones, many of the salaries and service credit numbers will be much higher than $60,000 and 25 years, making this difference even larger.)
At this point you might be saying to yourself, “But I thought there were ‘fiscal notes’ attached to any proposed legislation in the Colorado legislature that estimated the cost of any new bills?” Well, you would be right, there are. Now, by necessity, these fiscal notes have to be estimates because no one knows for sure how many teachers (or in the case of the rural school bills, teachers and other school employees) will decide to retire early, or what their salaries and years of service credit will be. But the fiscal notes, which are developed by legislative staffers, indicate that HB 22-1057 (substitute teachers) will increase (fiscal note) the unfunded liability of PERA’s School Division by $86.84 million and the School Division’s Health Care Trust Fund by $2.8 million. In addition, it will increase the unfunded liability in the DPS Division by $5.77 million and it’s Health Care Trust Fund by $0.25 million.
What about HB 22-1101 (the Rural Schools one)? It’s projected (fiscal note) to increase the School Division’s unfunded liability by $26.95 million, and it’s Health Care Trust Fund by $60,000. (It doesn’t effect the DPS division because DPS is not a rural school district.)
So that adds up to an estimated $122.67 million dollar increase in the unfunded liability (and it could be more). The legislature provided $0. Even worse, some legislators even denied that there would be any cost and argued it would help PERA, effectively ignoring their own staff’s estimates. But the reality is that over the next few years this will add to PERA’s unfunded status and could conceivably trigger another automatic adjustment, which will require PERA members and employers to increase contributions again, and PERA retirees to get an even lower cost of living increase (which is currently already down to 1.0% which is, umm, a bit below current inflation).
While hopefully PERA’s investment returns over time will be enough to help overcome this additional hurdle, it’s important to remember that it’s actions just like these that caused the underfunding in the first place. Back in the year 2000, PERA was “overfunded” at about 103% and the Democrat-controlled legislature (but with bipartisan support) along with a Republican Governor (Bill Owens) cut contributions, increased benefits, and had a fire sale on purchasing service credit. That’s how we got to today, and that’s what we may get again if the legislature keeps passing laws (that, again, I fully support the intent of) without providing funding for them.
Which brings us to the third piece of legislation before the legislature, which is still being discussed and has not been passed or signed into law. HB 22-1029 has been introduced to try to “make up for” the $225 million the legislature “canceled” on July 1, 2020, due to pandemic budget concerns. (Finally, an actual example of “cancel culture.”) This bill would restore (contribute) the $225 million that was skipped, and there is discussion around increasing that amount to $303.57 million to make up for lost investment returns (returns that PERA has earned since July 1, 2020, if they had had that $225 million as promised and been able to invest it).
Now, call me crazy, but I think they should make an additional contribution of $426.24 million, which is the $303.57 million “make up” plus the $122.67 million estimated cost of the newly approved and signed bills. Even if both estimates end up being high (and there’s just as much probability they will be too low), it’s still money well spent. Because the more money given to PERA now (and then invested), the less will have to be given later to make up for the unfunded liability (which, as a reminder, exists primarily because of previous poor legislative decisions).
I decided to write this for two reasons. First, just because most people don’t pay much attention to this and, with just a quick look, might assume these bills are “no big deal”. And, at heart, I’m still an educator, so I like to help educate folks. But second, and here’s the ask, I hope you (if you are a Colorado resident) will contact your state representatives and let them know your thoughts about this (perhaps you can even share the info in this blog post). The first two bills are passed and signed, but the third bill is still very much up in the air. It could not pass at all, in which case $0 would go to PERA. Or it could pass with just the $225 million, the $303.57 million, or what I would argue is the “correct” amount of $426.24 million. Only that last option is justifiable based on the numbers, as well as based on good public policy, because – one way or another – the legislature is on the hook to fully fund the unfunded liability. They can choose to proactively allocate this money now (when there is plenty of money to do it), or have to scramble (again) in the future to backfill. Which do you think is the best approach?