The Aaron Harber Show

Is PERA Colorado's Biggest Ponzi Scheme?
July 14, 2009
By Aaron Harber

Recent headlines about the disaster known as the Public Employees Retirement Association give the misimpression new information has come out which reveals PERA is unable to keep its promises. The truth is anyone who can count on his or her fingers knew this was the case years ago.

The management and board of PERA as well as our political leadership should be held responsible for this catastrophe. They have (1) over-promised benefits, (2) underestimated costs, (3) irresponsibly expanded benefits, and (4) made fantasy rate of return assumptions for PERA’s investment portfolio. Any one of these blunders would be justification for criticism but terrible decisions were made in all four arenas.

PERA has promised $56 billion in benefits to current and future retirees but only has $28 billion in assets --- a stunning 100% shortfall of $28 billion. Has PERA become a Ponzi scheme which depends on miracles to meet its obligations? A large gap has been known for years but PERA has taken no significant action to close the gap. In fact, the gap has grown by billions of dollars as PERA and Colorado’s leadership sat idle.

Short of closing PERA to future beneficiaries, what can be done? Actions should be taken on several fronts to salvage the commitments made to almost 450,000 current and former government employees covered by PERA, including the following.

• Permanently freeze benefits to retirees so they can be guaranteed their current pension levels (i.e., rather than paying more now and going bankrupt).
• Marginally (e.g., 20%) reduce the pension benefit schedule for current employees.
• Severely (40%) reduce the pension benefit schedule for future, new hires.
• Substantially increase co-pays to private sector levels for additional benefits such as health care.
• Increase employee contributions from 11% to 15% (a 18% rate for 30 years would be needed to make PERA solvent).
• Examine how the State (taxpayers) could contribute 1 or 2 more points as a match.
• Reduce PERA’s projected annual rate of return from 8½% to 4% or another realistic number.
• Replace PERA’s board of directors and top management.
• Trim PERA’s staff to the bare minimum.
• Create total transparency for all aspects of PERA.

While there will be political resistance to increasing taxpayers’ contributions to what is viewed as an overly generous pension plan, many employees joined the government due to the pension system. This commitment should be honored to a reasonable extent. Today everyone must sacrifice, however, and most citizens will loathe helping PERA.

Given the state of the Economy, it is difficult to argue any pension system is needed to attract government employees. Simply having a job suffices. This may be true for years to come. In fact, PERA could be disbanded with no significant impact on the quality of government hires. In view of the mess that now is PERA, this may be Colorado’s best option.

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