The State Retirement System recently asked the State Budget & Control Board to approve a COLA (cost of living adjustment) for state and local government retirees. I believe that state government should as a rule provide COLAs to its retirees so that their retirement income is not eaten away by inflation. The Budget & Control Board approved the COLA request.

However, as part of my duty to protect the soundness of the Retirement System, I asked a number of questions in connection with this request. I wanted to assure that we could continue to grant COLAs in the future.

In asking for information, Board members learned that next year's COLAs would cost the Retirement Plan $305 million. Yet, we learned that no one pays anything into the Plan to cover the cost of paying COLAs. This means that the Plan has to borrow money from non-retired Plan participants every year to give COLAs to retired Plan participants. We learned that since COLAs benefits are granted to retirees and paid for using assets of active employees, the Plan has run up a deficit of well over $3 billion. We later received information from the Plan that this deficit balloons to well over $11 billion if we assume that we will continue to grant COLAs to current employees when they eventually retire! However, we also learned that the State's ability to pay COLAs would likely come to a screeching halt in 2-3 years unless we restructure the Plan to include and fund COLA costs.

It's surprising how little that state officials and state employees seem to understand about the real financial condition of the state retirement system. For some reason no one wants to acknowledge that our Plan has an ever-growing multibillion-dollar deficit caused in large part by repeatedly paying out benefits, like COLAs, without anyone putting money into the Plan to pay for them. Nor does anyone seem willing to admit that COLA payments are at looming risk of elimination unless the Plan is restructured to provide for them.

Why stick heads in the sand for such a serious problem as this? Why live in denial of a threat that demands immediate response?

I'm an accountant. Accounting for the costs of retirement benefits is complicated. However, we absolutely must account for these costs as accurately and completely as possible. We need to use honest numbers that include all expected costs to assure that we accumulate enough funds to pay for all retirement benefits, including COLAs. We currently are not adequately funding the Plan. We can't continue to ignore this fact.

Regrettably, Retirement System Trustees decided in the mid-1990s to arbitrarily reduce the Plan's liabilities by removing COLAs from their calculations. This was their way of dealing with an extremely large deficit that had accumulated in the Plan at that time. Their decision was probably motivated by their understandable desire to avoid difficult and expensive choices, rather than to intentionally mislead anyone.

But their decision made the Plan to appear much stronger than it was. Those distorted numbers have been used since then, resulting in today's ever-growing multibillion-dollar deficit. Their decision to "manage" the numbers this way was ill conceived and the unintended consequence has placed future COLAs at great risk.

Recently we have seen somewhat similar practices in the corporate sector. With their companies going down the tubes, CEOs publicly denied their companies had problems. Top executives from those companies now are being investigated for cooking their books and making false claims of financial strength. In misstating their finances to mask problems, they have sadly cost their investors hundreds of millions of dollars and deprived many of their employees of their livelihoods and golden years. State officials must meticulously avoid behavior like that.

Although unintended, the ill conceived decision described above has created a serious funding problem for the Retirement Plan that grows more out of hand each year. There are no easy solutions to this problem because the problem has been denied and ignored for so long. Yet, any solution starts by doing an accurate and complete accounting of the Retirement Plan's financial condition.

We cannot maintain the status quo. We've dug a deep hole that gets deeper every year. It took the State many years to dig it so deep and it will take many years to fill it back. The longer we ignore this problem, the more expensive and painful and risky the delayed solution will be for all of us.

The State is not honestly funding the Retirement System. By obscuring the cost of COLAs, the State is not adequately protecting the long-term interests of retirees or State employees. Until we build COLA costs into the funding formula, there is a great and growing risk that COLAs will be eliminated. We shouldn't take that risk.

This is not a technical accounting problem. This is a serious financial problem in how we've structured our retirement plan. We must immediately and honestly and responsibly address this menacing costly problem.