PERA's more than 400,000 members include teachers, state police, employees at public colleges and universities, state judges and most other state employees. Senate Bill-1, aimed at getting PERA back on its feet financially, recently was passed by the Colorado legislature and signed into law by the Governor.

The bad news is that under this bill, retirees will suffer a one year cost of living increase (COLA) holiday. After this holiday, current and future retirees will have their COLA reduced from an automatic 3.5 percent to a guaranteed 2 percent for the next 30 years regardless of actual inflation, as long as PERA's investment returns are positive.

Consequently, a person with the average monthly retirement benefit of $2,772 cumulatively will lose $170,964 over a 25 year period, ignoring the one year COLA holiday and possible negative returns on investments.

Further, there will be a phased-in 2 percent increase in current PERA employees" contributions, and a phased-in 2 percent increase in employer contributions that will be taken from future salary increases.

Retirement ages also are being raised. Despite the "2+2+2" marketing slogan that implied an equal sharing of the financial burden between employers, employees and retirees, retirees actually will shoulder about 90 percent of the burden of making the plan actuarially viable according to PERA officials.

This is because of the future value of compounding interest and the only significant near-term saving is from the COLA reduction. Colorado is the only state which is cutting benefits for those already retired in order to fund its retirement plan for current public employees.

The worse news for PERA members who are not retired is that a class action lawsuit challenging the COLA reductions has been filed. If it is successful and the 3.5 percent COLA is retained, employee contribution rates either must be raised to approximately 21 percent of salary (PERA's estimate) or the defined benefit plan will have to be changed to a defined contribution plan for those not currently retired.

Apparently current retirees would retain their defined benefit plan under the latter scenario. Changing from a defined benefit to a defined contribution plan transfers market risk from PERA to individuals. It would force workers to time their retirement according to favorable market conditions.

The situation is complicated.

A seemingly solid Attorney General's Opinion says that the legislature may change benefits for those not vested but may not change benefits for those already retired and who currently receive benefits. The legality of changing the plan for those vested but currently working is uncertain according to the Opinion.

In large part, the lawsuit will hinge on the legal definition of the words "retiree benefit." PERA claims that "retiree benefits" do not include legislated COLA raises and those bringing the lawsuit claim otherwise. The other issue will be whether the legislature can change the plan for those vested but not yet retired. The courts will decide.

How did PERA get in this mess? According to the impartial Pew Center on the States, "between the years 2003 and 2006, the amount of money (COLORADO) contributed to its pension systems fell far short of annual required contributions."

Several other factors also played a role. Around the turn of the century when PERA was funded at more than 100 percent, working members were allowed to purchase service credit at very low rates, PERA matched employee contributions to a Sec. 403(b) plan up to several thousand dollars, and the 3.5 percent COLA was enacted.

This made sense at the time: there was speculation that the legislature might try to take excess funds for general revenue purposes. More people than expected took advantage of these benefits and PERA soon began to be underfunded. Then the market crash of 2008 hit. PERA was heavily invested in Lehmann Brothers which went bankrupt. With Lehmann's bankruptcy, years of state underfunding, increases in benefits, and the overall market decline, PERA found itself in serious trouble financially.

What all of this means for PERA members and retirees is that they will work longer before retirement, pay more into the system, receive lower salary raises, receive lower pensions, and receive a benefit with reduced purchasing power if inflation goes above 2 percent. Most economists assume inflation will rise substantially above 2 percent in the next few years. If this happens, it will have a profoundly negative impact on PERA retirees.

Under present circumstances Senate Bill-1 probably was the best that could be achieved. There is one small window of hope for a slightly better plan, however. PERA has agreed to study a proposal for a progressive COLA where each retiree's benefit would be divided into several tiers. Benefits that fall into the lowest tier would receive a COLA to match inflation without any cap; benefits that fall into higher tiers would receive COLAs with progressively lower caps. Stay tuned.

Myron Hulen, Ph.D, Emeritus, was a professor at Colorado State University's College of Business. EDITOR'S NOTE: This is an online-only column and has not been edited.