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Report on the March 25, 2009 Session of the Joint
House/Senate Education Committee
The hearing was basically educational in nature with no public comment
allowed although the Chair did invite PERA's CEO to make some reaction
comments before the meeting closed. The hearing room was completely full
(mostly with PERA-interested spectators) by 7:30 a.m. and Capitol staff
set up a sound system in an adjoining room for some 25 other attendees
who could not get into the hearing room.
The first presenters were from the Colorado School Library Assn. and had
no relationship to the portion of the meeting involving PERA.
Dr. Michael Mannino, associate professor, UCD Business School, reported
on his study: "Deferred Retirement Compensation for K-12 Employees:
Understanding the Need for Pension Reform", which was published in the
January 2009 issue of the Journal of Pension Economics & Finance.
He said his report was related to deferred compensation as associated
with defined benefit
plans and that he conducted two studies: one of 278 University retirees
with 25 years or more of service and another with 846 Denver Public
School Retirement System retirees.
He said that some principles he wanted to measure were:
a. Are these risk adjusted benefits, i.e. does the taxpayer assume all
the risk?
b. How stable are the benefits, i.e. they should not be paid on the
performance of the stock market.
c. Are they comparable to the private sector? He said not many private
plans are like DPSRS & PERA but he wanted to know what it would cost to
purchase these benefits in the private sector.
d. What was the amount of replacement earnings including inflation
adjustment?
He said:
1) The contribution rate of private employers to retirement averaged
11.85% (FICA & retirement) while employer contribution to the PERA plan
was about 11.35%. (Not surprisingly, he did not mention that CU
contribution to pensions for faculty is 16.2%
(FICA & defined contribution plan. Nor did he use the US Chamber of
Commerce retirement contribution average rate of 14.25%.)
2) The contribution rate is not a reasonable way to look at retirement.
(Why not? Don't we need to ask what it costs the taxpayer?)
3) Public employees should not have better benefits than private
employees.
4) The pay structure for K-12 and University staff is poorly designed
which results in loss of
employees in peak years and pension spiking, although this activity is a
"rational" action.
5) Using an employer contribution is a poor measure.
6) His study does not reflect current state of the PERA portfolio.
He then talked about some other areas, e.g. discount rate, account
balance, and the difference between present value and the account
balance, lump sum deferred compensation, supplemental contribution
rates, pension value, mortality tables, and what would it cost to
purchase an annuity with and without inflation built in.
Finally, he presented some recommendations:
a) The choice of DB vs. DC plan should be given to all employees.
b) School administrators need to be moved to a DC plan because they cost
more than other employees and are able to arrange pension spiking more
easily.
c) Retirement benefits should be restructured so as to reduce the
retirement subsidy of one group to the next, e.g. Early retirement
should be deleted.
d) Pension spiking should be looked at.
Only three questions were asked by the Committee of the presenter.
Meredith Williams, PERA CEO, was invited to come forward and comment. He
said he had been on the editorial board of the Journal of Government
Financial Management for 15 years and read many reports but the logic of
this one "fails me---tried to go from A to B to C to D and I can't get
there."". He said he PERA economist will review the report and make
formal written comments to the Committee. The report seemed to contain a
lot of "unsubstantiated opinions," that he has been around the pension
industry for many years and had never heard some of the terms used by
Dr. Mannino such as Lump Sum Deferred Compensation, Extra Value, etc.,
that we should remember that the University faculty and the private
sector have Social Security as a foundation while PERA members do not ,
that in private industry pension benefits include
Social Security, defined benefit plans, 401k plan, profit sharing, stock
options and ESOPs, that a single premium annuity is a risky
venture..."just ask those with annuities in Long Term Capital Management
and AIG". He added that the Board and staff will take a comprehensive
review of PERA's status and the benefits and may have to propose
difficult changes for next year. He said that the issue of employers
having all the investment risk is certainly one that may have to be
reviewed and changed.
The meeting concluded at about 9:05 a.m.
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