IB-D-2015 (July 2015)
Author: Linda Gorman
Colorado state government has a spending problem. Between FY 1999-00 and FY 2013-14, its inflation-adjusted expenditures rose by 38 percent.1 Its inflation-adjusted revenues rose by just 34 percent. Although Colorado’s working age population grew over the period, its private sector employment stagnated.
Problems with Colorado’s public employee pension system are making it hard for our state government to attract some of the best employees. That’s the persuasive finding of a new study by the Urban Institute, a left-leaning think tank in Washington.
An employer’s retirement plan is part of an overall compensation package designed to entice and retain talented employees. Yet as detailed by the Urban Institute, the Colorado state government’s Public Employees Retirement Association (PERA) is failing in that task.
The Institute surveyed state and local plans across the country, grading them on how well they served younger workers, shorter-term workers, and career employees. For all three categories, PERA isn’t working.
Because state government workers must wait almost 20 years to see substantial benefits aside from their own contributions, PERA gets graded with an F for rewarding younger workers, and a D for short-term employees.
PERA was designed in an age when many employees worked for a single employer for their entire career. But these days, workers are more mobile. Short-term employees are not only young employees; they can also be mid-career workers looking for a change, or trying their hand at government service after a couple decades in the private sector. PERA’s unfair benefits system discourages such people from devoting their talents to public service.
Remember, these people give up their Social Security for the duration of their mandatory PERA membership as a state employee.
As for long-term employees, PERA’s generous pensions get a grade of A. This finding by the left-leaning Urban Institute confirms similar findings by the right-leaning American Enterprise Institute, in their own study of PERA.
Unfortunately, after long-time state employees reach their early 60s, their benefits actually decline as a percentage of their final year’s earnings. Little wonder that the average age at which a PERA member retires is just over 60.
By encouraging people to work until 60, and then retire soon thereafter, PERA deprives the government and the taxpayer of some of its most experienced employees’ services. They could be mentoring younger workers, or helping mid-career innovators become fully proficient.
The shortcomings would be difficult to justify, even if PERA were well-funded. Instead, the Urban Institute, like previous studies by the Independence Institute, found that PERA’s promised benefits are far from secure: PERA got an overall D on funding levels, including an F for the fund that covers state employees.
The Urban Institute is not a hotbed of right-wing anti-government activism. The Institute was founded in 1968 by Democratic President Lyndon Johnson to provide information about how to make big government work more effectively. The current president, Sarah Rosen Wartell, is co-founded of the Center for American Progress, which is the major Democratic think tank in Washington. The Urban Institute’s current Board Chairman is Jamie Gorelick, former Deputy Attorney General under President Bill Clinton.
The Urban Institute argues that state employees would be better off with cash balance plans. As with an IRA, a cash balance plan keeps all of the employee’s contributions, plus the employer’s matching contributions, in a personal account, which the employee owns. A cash balance plan is the opposite of PERA’s pension system, whereby all employees must pay into a general fund, which promises to pay them a particular amount of money monthly when they retire.
But that promise can only be kept if there is enough money in the general fund, and in PERA’s case, there isn’t. Cash balance plans are a far fairer approach to younger and more mobile employees. They vest more uniformly, and avoid delaying rewarding younger employees in order to pay current or near-term benefits.
Employees respond to incentives, and right now, PERA is not creating incentives for some of the best workers to begin or continue careers with our state government.
Change is coming to Colorado’s public employee pensions. For younger workers, for those who choose government service after success elsewhere, and for the rest of us who want a motivated, quality state workforce, that change can’t come soon enough.
Joshua Sharf is a fiscal policy analyst for the Independence Institute, a free market think tank in Denver.
Imagine that you and your neighbor are friends and professional peers. You belong to the same professional organizations. You each have worked for your respective employers for a long time as retirement approaches.
But one of you works for a private employer, the other for the State of Colorado.
The state employee can retire with full, but insecure, benefits as early as 58. The other will be eligible for full Social Security at age 67, continuing to fund his neighbor’s retirement until then.
If you don’t think this scenario is fair, you’re not alone.
As detailed in Complete Colorado, a recent survey of Coloradans, found almost two-thirds support for raising the PERA retirement age to match the Social Security retirement age, with only a quarter of those polled opposing. Support for the idea cut across all races, ages, political affiliations, regions, and both sexes. The survey was commissioned by the Independence Institute and conducted by Magellan Strategies.
The early retirement for long-term PERA members isn’t notional; it’s real. PERA Executive Director Greg Smith has said the actual average age of retirement is 60, still well below the current Social Security age, and well below the age at which most people actually stop working and paying into PERA’s system.
Support for equalizing the retirement age shouldn’t come as a surprise. Last year’s statewide income tax increase, Amendment 66, was billed as necessary to properly fund education in Colorado. It failed in large part because voters feared — with reason — that the revenue would instead be diverted from classrooms to shore up the School Fund of PERA.
In a few weeks, PERA will release its annual Comprehensive Annual Financial Report, which Smith has said will show that 2013 produced returns north of 13 percent. PERA will tout this success story as evidence that the system is on track to long-term solvency.
Do not be misled.
An investment portfolio designed for higher returns means one designed for higher risk, as well. Because PERA is still substantially underfunded, and because it has annual obligations it can’t delay, all it takes is one or two years of substandard returns to more than undo the progress of the last two years.
Coloradans are becoming increasingly concerned about the state of PERA’s finances. The pressures on politicians to meet current needs at the expense of retirees’ future needs are strong. The requirement to fully fund a defined benefit plan is weakening our communities, while failing to provide real retirement security to our state employees and teachers.
We all understand that change must come to the system, and phasing in the equalization of retirement ages is a key element in that change.
From an actuarial point of view, there is almost no single change that can make as big a difference to the benefits security as adding a couple of years to an employee’s working life. It allows a lifetime of accumulated assets to continue earning returns when the balance is at its highest, and thus, when they will earn the most.
Far from robbing an employee of years of retirement, it helps to prevent the delivery of an unpleasant surprise: that benefits she had been counting on won’t be there. Such a surprise could come far too late for her to return to the workforce at her previous salary or seniority.
Indeed, phasing in such changes is among the fairest and most compassionate things PERA could do. Older employees, those nearing retirement, wouldn’t be asked to make any adjustment at all. Those who are younger would have more time to adjust their plans to the new reality, one that more closely mirrors that of their fellow citizens who are helping to provide their retirement.
To repeat: Change is coming to PERA.
Equalizing the retirement age with that of Social Security can help provide a more secure retirement for state and school employees, helping us keep our promises to them, while strengthening our communities, and reducing the pressures on politicians to use today’s dollars at retirees’ expense.
Joshua Sharf manages the PERA Project at the Independence Institute, a free market think tank in Denver.
Last fall, Colorado officials claimed a $1 billion tax increase was needed to save the state’s public schools. Voters did not approve the tax increase. If officials were telling the truth, one would expect that this year they would be directing every extra budget dollar toward K-12 education.
This is not happening. Instead, bills currently before the Legislature include an estimated $75 million in special interest tax giveaways.
The Office of Economic Development and International Trade will enjoy a $3.7 million increase. It works closely with the Colorado Economic Development Commission, which awards business grants from the taxpayer-financed “strategic fund.” In August 2013, the Colorado Economic Development Commission approved a $200,000 loan to “small, rural movie theaters that are facing financial pressure.” Given that almost all businesses face financial pressure, it is no wonder a Denver Post study showed nearly one-third of the businesses the commission funded had ceased to exist as independent entities.
Other economic development giveaways include $5 million in special rewards for television and film producers and a $5 million slush fund for the Advanced Industries Accelerator Program. The program benefits people involved with currently fashionable businesses like aerospace, bioscience and electronics.
The problem with taxpayer-funded grants, tax credits and tax exemptions is that one man’s tax preference is often another man’s tax burden. The Governor’s Office says the state needs $24.1 billion to run its government. Yet when favored businesses and individuals receive grants or tax exemptions, the businesses and individuals out of political favor are required to pay more. The state ends up taking money from successful businesses and individuals — money that might have been used to develop successful new enterprises — so it can fund business proposals it thinks might produce tax revenue in a decade or so.
Giving tax deductions for the interest on government bonds but not private ones biases investment decisions in favor of lending to governments rather than private businesses. Providing tax credits to businesses that create 20 new jobs at 110 percent of the county average wage biases the tax system in favor of businesses that hire high-wage employees at the expense of those who hire lower-wage employees.
Worse, such special interest preferences make it almost impossible to maintain a “clean” tax base. Clean tax bases seek to raise revenue while avoiding special preferences for particular types of consumption or investment. They tend to be easier to comply with and understand than ones with tangled labyrinths of special-interest concessions. Simple tax laws with a low general rate often raise more revenue than do complicated laws with a higher general rate and lots of special exemptions.
Lower rates in a simple tax system are also beneficial because they are less likely to trigger wasteful tax avoidance schemes.
As a rule, the political system is incapable of distinguishing legitimate economic arguments from illegitimate ones, and often distorts economic decisions by picking winners and losers on the basis of political power or emotional pleading.
Tax breaks blessing certain special interests at greater cost to the rest of us persist. Meanwhile, lawmakers scarcely have considered a liberating and cost-saving use of tax credits.
The current political practice favoring the consumption of K-12 education via public schools biases educational decisions. Nonprofit scholarship-granting organizations could serve more needy elementary and secondary students with private tuition aid if the organizations’ donors received a tax credit for their contributions. Children leave the public system to receive a quality education. The state comes out ahead because the scholarship costs less than the per-pupil amount for students remaining in public schools.
Colorado citizens already pay plenty of taxes. Before officials come back with additional proposals for tax increases, they should stop expanding the system of special tax rates for special groups and start rolling back existing ones. At the same time, they should look at enacting tax credits that provide a general educational benefit while reducing the expense to taxpayers.
Without reforms, Colorado voters have every reason to continue to say no to new taxes.
Linda Gorman is an economist at the Independence Institute, a free market think tank in Denver.
IB-I-2013 (October 2013)
Author: Linda Gorman
Parents spend their money to benefit their children. School bureaucrats spend other people’s money to benefit the schools and those who run them. Amendment 66 raises taxes to take money from working Coloradans. It gives the broken public school bureaucracy more to spend and leaves parents with less. Taking money from parents harms children.
IB-H-2013 (October 2013)
Author: Linda Gorman
More spending does not create better schools. Many well-funded districts have lower graduation rates. Colorado Springs spent $1,500 less than Denver. It graduated 76 percent of its students, while Denver only graduated 46 percent. If passing Amendment 66 lets Denver spend $4,000 more, it might end up matching Indianapolis’s 30 percent graduation rate.
IB-G-2013 (October 2013)
Author: Linda Gorman
Amendment 66 will take the money you spend to benefit your children and give it to public education bureaucrats. Education bureaucrats do not necessarily use higher funding to benefit children. They will spend it on things that they like – generous pensions, higher salaries, and more educational consultants.
A Billion Dollars Worth of Bad Ideas: The Amendment 66 Tax Hike Leaves Kids and Teachers Behind, Harms Colorado’s Working Families, Enriches a Broken Bureaucracy
IP-7-2013 (October 2013)
Author: Linda Gorman
Amendment 66 would replace Colorado’s flat income tax of 4.63 percent of federal adjusted gross income with the two bracket system shown in Table 1: Colorado Income Tax Rates if Amendment 66 Passes. Passing Amendment 66 also passes SB13-213, the new 141-page state school finance law.
IP-6-2013 (Sept. 2013)
Author: Joshua Sharf
The trajectory of the Public Employee Retirement Association of Colorado’s (PERA) financial condition has been anything but linear. From times of seeming excess to times of projections for failure, the public employee pension scheme has changed radically over time. As of 2013, expected improvements to the system’s outlook have not materialized, and PERA is once again in crisis. While far from alone in the government employee problem, Colorado may be facing one of the worst current circumstances.
At present, everyone in Colorado pays the same marginal income tax rate, 4.63 cents out of every additional taxable dollar earned. Colorado officials and their allied interest groups support a constitutional amendment both to increase the state’s income tax and to create two tax brackets. They say the additional funding will improve K-12 education, although it is surprisingly difficult to find definitive evidence from other states showing that increasing spending from current levels will improve educational achievement.
What officials don’t talk about is the fact that higher state taxes may affect average incomes. The highest tax bracket would be 5.9 cents out of every additional taxable dollar earned by households with incomes above $75,000 a year. Households with taxable incomes of $75,000 or less will pay a marginal tax of 5 percent, 5 cents out of every additional dollar earned.
But people have all sorts of ways to adjust their taxable income. They can work less. They can increase mortgage deductions by buying a bigger house. They can shift their savings into tax-free bonds. And if one state’s income taxes are just too much, they can change their residence.
The following chart shows the historical relationship between federal marginal tax rates and average real income. It suggests that raising tax rates may affect income. When marginal taxes fall, average incomes tend to rise and vice versa. Given the strong correlation between parental income and school achievement, the children might be better off if their parents keep the money.
Source: Emmanuel Saez. 2004. “Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications,” Tax Policy and the Economy, 18, 117-173.
This article originally appeared on Complete Colorado Page 2, August 2, 2013.