Last Friday, the board of the Colorado Public Employees Retirement Association (PERA) held its quarterly meeting. As part of the briefing, executive director Andrew Roth discussed pending legislation affecting PERA, and pointed to three bills in particular.
One bill expands PERA too little; one bill expands it too much; and the third one is just right.
Too little
House Bill 26-1026 is titled “Expanding Plan Options for PERA,” but it doesn’t expand them enough or in the right ways.
PERA members can buy service credit – in effect buying years of service they didn’t actually work for a PERA-covered organization. This has gotten PERA in trouble in the past. The fire sale on service credit in the early 2000s meant that some members were being induced to retire earlier by getting a dollar worth of benefits for about 30 cents. That mistake added several billion dollars to PERA’s unfunded liability. However, that price hasn’t been available for many years. PERA members currently buy service credit at the actuarial cost of the benefits.
Currently, PERA members can buy service credit only for years in which they were employed for non-PERA organizations, such as private industry or the federal government. This bill would allow them to buy service credit for years in which they weren’t employed at all. They’ll still have to pay the actuarial value of that service credit. there’s some risk that, as in the past, that actuarial value will be underestimated, and taxpayers would need to eat the error.
The bill also expands access to the 401(k) and 457 programs to all PERA employers, in both Roth and pre-tax forms. That’s nice, and it give members some access to a defined contribution (DC) plan that they didn’t have before. But it’s not access to PERA’s full-on DC program.
In other words, it give members some access to a defined contribution (DC) plan that they didn’t have before. But it’s not access to PERA’s full-on DC program. If it were, it would extend access to the DC plan to public school employees. That would be a truly bold step, but it’s one that the teachers’ unions have fought against for decades, and it’s too much to expect three conventional Democrats to push back on it now.
As the bill stands, the paltry gains in plan options don’t offset the risks of the increased service credit.
Too much
House Bill 26-1027 expands PERA too much. It would add the executive directors of boards of cooperative services (BOCES) to the list of public employees who can double-dip. Double-dipping in this case means that an employee can retire and then return to work and collect a salary while continuing to receive a PERA pension.
The practice had been virtually extinguished about 14 years ago before being revived, re-creating a class of worker who is both retired and not retired at the same time. Theoretically this was to ease a labor shortage, but the shortages persist. We should remember that PERA is a Social Security replacement plan; someone contributing to PERA and building service credit is neither paying into Social Security nor accruing benefits.
Non-PERA retirees, who frequently rely on Social Security, have to deduct a certain percentage of their wages from their Social Security payment, and don’t have access to this benefit.
While allowing PERA double-dipping is unfair, it’s already in the law, and this bill would only slightly expand the number of employees able to take advantage of this perk.
Just right
Under current Colorado law, recipients of pensions and annuities from any source can deduct that income from their state income tax returns subject to certain age and income restrictions. The same is true for Social Security income.
House Bill 26-1062, sponsored by GOP Rep. Ron Weinberg, would do away with those restrictions. Beginning in tax year 2027, all income from pensions, annuities, and Social Security would be deductible from state income taxes, to the degree that it was included on the federal adjusted gross income. The bill would preserve the definition of “pensions and annuities” that includes regular distributions from IRAs and self-employed retirements accounts, in effect ending the state income tax on retirees.
The PERA Board favors the change because it’s a substantial net benefit to its membership. In 2024, PERA reported that of the 141,000 members receiving benefits, 62.5%, or 5 in 8, had an annual benefit of $25,000 or more. Depending on age, the maximum amount that can be deducted from state income taxes is $24,000, so those members will benefit from an increased deduction.
But so will the general public. In 2023, Coloradans used the pension and annuity subtraction on their state income taxes – subject to the same dollar and age restrictions – to the tune of $14.3 billion, roughly $4.3 billion of which was from PERA benefits, leaving about $10 billion in subtractions for the rest of the population.
The average deduction was just under $25,000. While the total amount of pension, annuity, Social Security, and IRA distribution money reported is not publicly available, it’s hard to believe that it averaged a mere $25,000 per taxpayer.
Removing the limits will mean much more money staying in the hands of people who earned it, rather than the state.
Joshua Sharf is senior fellow in fiscal policy at Independence Institute, a free market think tank in Denver.
