In three years, PERA's portfolio fell from $30 billion to $23 billion at the end of 2002. It had a three-year annualized loss of 6.6 percent. The typical pension fund lost just 4percent per year.

Harlen Ainscough has worked for the state of Colorado for almost 15 years. But if the 57-year-old hazardous-waste regulator retired this year, he'd have nearly 34 years of service time for his pension.

Like many other members of the Colorado Public Employees' Retirement Association, Ainscough took advantage of an extraordinary benefit: the opportunity to purchase extra years of pension service credit at a fraction of their cost.

Ainscough spent $170,000 to buy 18 3/4 years of service time. He's used a home-equity line of credit for most of his living expenses while putting as much salary as possible into his 401(k) and 457 retirement plans. Then, he rolls that money into the purchase of PERA service credit.

"People in the private sector might be upset about that, but this was a huge expense for me," said Ainscough, who's also state vice president of the Colorado Federation of Public Employees union. "We shouldn't be penalized for taking advantage of a good situation."

For three years, PERA conducted what one executive called, in retrospect, a "fire sale" on the service credit.

While investment returns are the chief contributor to the pension fund's liabilities, the purchase of service credit didn't help: It added hundreds of millions of dollars in liabilities but gave PERA just a fraction of the cash to pay for the benefits.

PERA had long allowed members to purchase extra service to cover years they'd spent working in the private sector or for any other non- PERA employer. The option made it easier for PERA employers to attract workers, since they could get a full pension even if they'd spent part of their career elsewhere. The price of a year of service, 18.1 percent of salary, was equal to one year's worth of PERA contributions by the employer and the employee.

It made sense for the employee, too. A pension is calculated from two main pieces of data: salary and years of service. A 30-year PERA member making $50,000 would make $37,500 per year in retirement. By adding five years of service credit, the PERA member could bump it up by $6,000, to $43,500.

And service credit was easy to purchase: PERA allowed installment payments up to 10 years of length, as long as the member paid 8.5 percent in interest. Or, money could be rolled over from a 401(k) plan without a withdrawal penalty.

But the deal got sweeter. Gov. Bill Owens, then in the early part of his first term, wanted to streamline government and bring new employees into the state work force. In 2000, with his encouragement - some say pressure - PERA cut the already-low price of purchasing extra years by 14 percent, to 15.5 percent of salary.

Owens said he doesn't recall the specifics of what was said to PERA, but "I thought it was valuable to have the flexibility to get new employees into some of the positions in the state bureaucracy."

Jeff Wells, the state's director of personnel and administration, was the governor's emissary. "My task was to offer a menu of items. Some would help employees. Some would help the state budget. Some would help PERA. And some of the proposals would incentivize early retirement. It would be unfair to say the administration singled out one thing and everything else was ancillary."

Service-credit purchases kicked up by 38 percent in 2001, topping $100 million.

PERA decided to raise the price back to 18.1 percent of salary for members under 50 and increase it to 22.1 percent for older members. But they told employees it wouldn't happen until November 2003.

Given that window, thousands of employees raced to the sale.

Investment counselors "would always tell you, 'Run, don't walk, to buy PERA service years,' " said Bruce Mendelson, a retired analyst from the Department of Health. He bought 6 1/4 years of service for $90,000 with a direct rollover from a 401(k). It takes his PERA service time from 29 years to 35 and increases his annual pension payment by 20 percent.

In 2002 and 2003, PERA members spent $1.13 billion to add 128,133 years to their pension service time.

"We were the most popular people in town," PERA Executive Director Meredith Williams told the state's Legislative Audit Committee last month. "Everybody and their dog bought service."

In September 2004, recognizing it was still selling benefits below cost, PERA announced another price increase, effective Nov. 1, 2005. The prices for 50-year-olds would double. Another $212.8 million was spent in 2004 for 32,684 years.

The fire sale's impact was huge. In 2003 alone, for example, PERA sold $2 billion worth of benefits for $800 million, Williams told legislators last month.

PERA members who bought the service time also made the day they could retire without reduced benefits come sooner. And in 1998, PERA made it possible to retire at age 50 with 30 years of service. In the mid-1990s, roughly 200 PERA members a year retired before age 55. In 2004, that number rose to 1,340.

The bottom line: More and more people were drawing larger benefits sooner than expected.

"The governor trying to reduce the size of state government has backfired," Ainscough said.