Pension Sustainability: Colorado

Analysis of Colorado's policies

As of December 31, 2015, the most recent date for which an actuarial valuation is available, Colorado's School Division of its pension system for teachers is 60.7 percent funded, a decrease of 0.2 percentage points since the previous fiscal year. Its current pension debt exceeds $16,800 per pupil throughout the state. Colorado also has a 50-year amortization period. This means that if the plan earns its assumed rate of return of 7.50 percent and makes its full actuarially determined contribution payments, it would take the state 50 years to pay off its unfunded liabilities. Colorado's amortization period significantly exceeds the standard 30-year period, and its funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.

Colorado commits excessive resources toward its teachers' retirement system. The mandatory employee contribution rate to the defined benefit plan is 8 percent and reasonable considering that the state does not enroll its members in Social Security. The employer contribution rate of 22.54 percent, is excessive. Statutory requirements set the employer contribution rate at an established rate of 10.15 percent (9.13 percent of which fund pensions after subtracting 1.02 percent for health care), rather than an actuarially determined amount. Enactments in 2004, 2006, and 2010, however, mandated increases in the rate until 103 percent funding is reached. These increases are aimed at paying down the system's pension debt. There are two components slated for increase: the Amortization Equalization Disbursement contribution, or AED, and the Supplemental Amortization Equalization Disbursement, or SAED. The AED increase for 2014, 3.50 percent, comes from funds that would have otherwise been available for wage increases and will rise to 4.50 percent by 2016. The SAED component is 4.50 percent in 2015 and will increase by 0.5 percent each year to 5.50 percent. These increases render employer contributions unreasonably high, even though teachers and local districts are not also contributing to Social Security.

Citation

Report on the Actuarial Valuation of the Public Employees’ Retirement Association of Colorado, Prepared as of December 31, 2015. Colorado Public Employees’ Retirement Association, Comprehensive Annual Financial Report, For the Year Ended December 31, 2015

Recommendations for Colorado

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of 30 years or less to allow more protection during financial downturns. Colorado, however, should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The Flexibility and Neutrality analyses provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Colorado referred to its funding and liability rates under the new GASB reporting requirements. This state further asserted that the employer contribution rate is "9.13% plus 4.5% for AED=13.63% fixed by statute." In addition, Colorado questioned whether teacher and employer contribution rates shouldn't be assessed as reasonable on an individual basis, particularly for states that are providing "Social Security substitute systems."

Last word

For the purposes of continuity and comparison, this analysis uses the previous reporting requirements for funding and liability rates. In addition, the employer contribution rate in this analysis also includes SAED.