The Colorado Sun recently published an article on a lawsuit filed by several school districts as well as private contractors against Colorado PERA. While the article does a decent job of laying out the concerns from the school districts, it does not lay out PERA’s reasoning. This is often the case in these situations because PERA cannot comment on pending legislation, although I feel like the reporters still could’ve provided more context. I know in the past that the Colorado Sun has sent reporters to PERA’s Board Meetings, and in open meetings over the last year or so this topic has been discussed in-depth multiple times, but perhaps the Sun no longer sends reporters to these meetings.
So I’m going to attempt to provide the context in this blog post. To be perfectly clear, I am not speaking for PERA and I may not get all of the nuances correct. But I’m going to share the information I know from attending PERA’s Board Meetings as well as my general knowledge of PERA rules and PERA’s funding status. Any mistakes below are definitely mine.
What’s The Issue?
As the article lays out, multiple employers (school districts) have turned to third-party contractors to hire for certain positions. While the article focuses on substitute teachers, it also includes other “hard to fill” positions including Occupational Therapists and Speech Language Pathologists (among others). The employers (school districts) claim that they can’t staff these positions without turning to outside parties who then hire these folks as “independent contractors.” As a result, the employers (school districts) want these employees to not be classified as school district employees and PERA members but rather as private employees and independent contractors.
PERA’s position is that these employees are PERA members. A very important piece to note is that PERA is bound by state law and is required to collect contributions from employees and employers who are PERA members. PERA has no latitude here and is required to interpret and implement state law, which is what they are doing.
The article falsely claims that this is a “new” policy with a “lack of transparency from the state retirement system in rolling out its new policy that categorizes subs as district employees and PERA members”, but substitute teachers have always been treated as PERA members and have contributed to PERA. (In fact, there have been multiple pieces of legislation passed by the Colorado Legislature over the past few years directly related to this, which the Sun has reported on, so I’m not sure how this statement made it into the article.) What is “new” is that many more employers are now turning to third parties to fill positions, particularly substitute teachers. So when Aurora says it could “cost them $3 to $5 million in a single school year”, this is money that they previously were spending but now are not by claiming these are “independent contractors.” In other words, they’ve always spent this money until they recently began gaming the system. They are not being “singled out” in any way.
In making the determination that substitute teachers are PERA members (as they always have been), PERA is following state statute as well as court rulings that define what an “independent contractor” is. There are two main tests for determining whether someone is an independent contractor: whether they are performing a task that is a “core function to the employer’s mission” and whether the employee’s work is “directed by the employer or by the outside contractor.” Since a substitute teacher is teaching students, that is clearly “core” to a school district’s mission. And since a substitute teacher’s work is directed by the regular teacher (through sub plans) and by the principal, clearly their activities are being directed by the employer and not the private contractor. (I’m pretty sure Kelly Services and ESS West, LLC are not making sub plans, and I hope we can all agree that we would not want that.) From my perspective, PERA is exactly correct in their interpretation of the law and the employers (school districts) are clearly wrong.
Note that PERA fully understands the needs of the employers and fully supports the issues they are trying to address (not just in this issue, but in other recent legislation that has passed that allows rural districts to hire retirees for more than 110 days in a year and for subs to work more than 110 days in a year). I support addressing these needs as well. The problem is that PERA (specifically, the PERA Board) has a fiduciary duty to PERA members, which requires that these changes be fully funded. But the legislature (so far) has chosen to make changes without providing the funding, which is not going to work long term.
This is also why there are some legitimate “independent contractors” that are not (and have never been) considered to be PERA members. For example, if a district hires a snow removal service to plow parking lots, those employees are not considered PERA members, because it’s not a position that is “core” to the mission of the employer and their day-to-day activity is not directed by a district employee (and it’s also a job of limited duration). It’s also why some other state agencies can hire “trash collectors or construction workers” and not have to make PERA contributions.
What’s Really The Issue?
In a word, money. While I don’t doubt that some (most?) school districts are having difficulty finding substitute teachers (and some other positions like OT and SLP), the obvious question that the article didn’t directly address is why are these third parties able to find folks to fill these positions when school districts can’t? After all, if being a substitute teaching is not particularly desirable these days, it doesn’t suddenly become desirable because your paycheck is from ESS West, LLC instead of APS. It’s because by using third parties and claiming these positions are not PERA members, the school district can get out of making contributions to PERA. Substitute teachers, just like all PERA members who work for a public school district, contribute 11% to PERA and their employer (school districts) contribute 21.4%. By classifying these employees as “private”, the employee instead contributes 6.2% to Social Security and so does the employer. (No matter which way the employee is classified, both the employer and the employer pays the 1.45% Medicare tax.) In other words, the employer (school district) is saving 15.2% by classifying them as a private employee, and the employee is also “saving” 4.8% by contributing to Social Security instead of to PERA. The private contractor then uses these savings to pay the employee a little bit more than the district would for that same position, which works out great for the employee (higher pay and smaller deduction for retirement) and great for the district (a much lower cost than contributing to PERA). Other than the fact that it violates the law, it seems like a win-win, so what’s the big deal?
Why Is It a Problem?
There are two reasons it’s a big deal: the impact on PERA’s funded status and the “slippery slope” of privatizing education. The article mentions that the state legislature actually discussed this issue in the 2024 session but “declined to authorize a bill draft reversing the policy, saying they were worried it would lead to school districts turning to contract labor to avoid paying the benefits owed to public employees.” Inexplicably, the reporters didn’t follow up on that and provide any context. So I will.
The “savings” for employers (school districts) comes from the differential between what they have to contribute to PERA (21.4%) and what they have to contribute to Social Security (6.2%). But the article fails to discuss why employers are currently having to contribute 21.4% (and employees 11%). After all, it used to be that both employees and employers contributed 8%. If that was still the case, this wouldn’t be an issue at all and there would be no lawsuit (for a differential of only 1.8% it wouldn’t be worth it, because the third parties take a cut that undoubtedly amounts to more than 1.8%). So why have contributions increased so much? Because the state of Colorado underfunded PERA for decades.
In 2000 PERA’s funded status was over 100% (I believe it was around 103%). This was because of the incredible run of the stock market in the 1990s. In their infinite wisdom, the state legislature (controlled by Democrats) and the Governor (Republican Bill Owens, so this was a bipartisan horrible decision) decided it was irresponsible to have a state agency funded at over 100% so made some drastic changes to PERA (increased benefits, decreased contributions, had a fire sale on purchasing service credit, and even partially matched 401k contributions). Then the dot-com bust happened, and then the Great Recession, and suddenly PERA’s funded status was under 60%. Since around 2006 the legislature has made multiple changes multiple times to try to address this shortfall (most recently in 2018), including increasing contributions multiple times, cutting the Annual Increase (COLA) for retirees multiple times, and drastically reducing benefits for new hires, but they still didn’t fully fund PERA.
In retirement plans there is something called the “normal cost“, which is an actuarially determined amount that has to be contributed to the plan to pay future expected benefits (this is what was underfunded for decades). The current normal cost for the School Division is 14.6%. The current combined contributions of employees and employers in the school division is 32.4%. How can that be? The additional 17.2% is devoted to trying to make up for the decades of underfunding (the “unfunded liability”). Under current legislation, PERA is expected to reach 100% funding by the late 2040’s (it will take that long for all the legislative changes to contributions and benefits to make up for the decades of underfunding).
Another way to look at the normal cost of 14.6% is that employees are currently contributing 11%, which means employers are only contributing 3.6% toward the retirement benefit of their employees. The remaining 17.2% is to make up for the decades of underfunding by the state.
Because substitute teachers pay into PERA and earn service credit (and potentially receive a retirement benefit if they vest), their contributions (and their employer’s contributions) are part of the actuarial determination of the normal cost. If you suddenly remove those contributions from substitutes (and other “independent contractor” positions that should qualify as PERA members) and their employers, the normal cost will increase. In other words, everyone else (employees and employers) will have to contribute more to make up the difference. In the short term, this will be accomplished through the Automatic Adjustment Provision (AAP). If this lawsuit is successful, the AAP will likely be triggered quickly which will result in increasing the employee contributions, increasing the employer contributions, and decreasing the Annual Increase (COLA) for retirees (which is already at a low 1%, but could decrease all the way to 0.5%). But the AAP has statutory limits on it, and there are only two more “downward” adjustments that can automatically happen. After that, the legislature would have to pass additional legislation to make even more changes (likely increase contributions even more, decrease benefits, and possibly eliminate the COLA altogether) or PERA’s underfunded status will get increasingly worse.
But it gets even worse, because if this lawsuit is successful it will incentivize employers (school districts) to turn to even more “independent contractors” to fulfill core mission positions (for example, counselors, teachers, administrators, etc.) Because the budgetary savings to employers (in the short run) is the same, it’s a huge “win” for employers. It is not inconceivable that this is the “slippery slope” to privatizing public education in Colorado. (If all school district employees are independent contractors and not PERA members, then the “short run” turns into the “long run” in terms of budgetary savings.)
What’s The Solution?
The solution is what is has always been, for the state legislature to fully fund the promised PERA benefits. If the legislature provided the money to pay for the PERA contributions for substitutes (and other similar positions that districts are outsourcing), then the problem is solved. (And, I suspect, at least some of these employers will suddenly be able to hire substitutes in house again and not “need” these third parties.) But the legislature needs to be very careful about the mechanism of how they provide this funding. It needs to be part of the “regular” per-pupil funding and not a separate “carve out” where they reimburse districts for the PERA contributions for “private contractors” who are PERA members. Because if they do that, they will be incentivizing the districts to use even more private contractors (because the reimbursement would be above and beyond the regular state funding they receive, so “more money”, and we’re back on the slippery slope.)
Alternatively, the legislature could come up with some different way to pay off the unfunded liability, in which employees and employers would only have to come up with the normal cost of 14.6% (7.3% contributions from each, perhaps).
What’s The Takeaway?
There are (at least) three takeaways.
- While I appreciate the work that The Colorado Sun does, in this case they did a very poor job of researching and reporting this issue. Everything I’ve written here is public knowledge and has been discussed in PERA Board Meetings, so there’s no reason The Sun couldn’t have included it. They should have in order to provide the full story.
- PERA is not “the enemy” and, in fact, has no choice in the matter. They are tasked with following state statute, and that is what they are doing. If the state changes the law, PERA will enforce the new law.
- If you believe in public education, contact your state legislators and the Pension Review Subcommittee. Make sure they understand the issue (and that they don’t rely solely on articles like this one in the Colorado Sun). Also make sure they understand that they need to fully fund public education, including funding that allows them to pay the already promised (and legally required) PERA retirement benefits. Yes, funding and state budgets are difficult, and there are competing priorities. But in this last session where they chose not to address the issue in this lawsuit, they also cut the state income tax rate (again). Unfortunately, this has the potential for them to repeat history from the year 2000 which is what got us into this mess to begin with. Providing adequate funding now is relatively easy. Letting the problem get worse and having to backfill is much, much more expensive (as we see with current contribution requirements and benefit cuts). Penny wise, pound foolish.
Fisch Financial 