January 19, 2011

Utah: One State’s Pension Reform Success

Despite dire headlines from New Jersey, Illinois, not all states are having trouble

As Illinois and New Jersey struggle to reform their broken public pension plans, The Wall Street Journal reports on a recent state success story.

According to the paper, last March Utah replaced defined-benefit pensions with a 401(k)-style plan for new state and municipal workers.

The sponsor of the Utah reform was Sen. Dan Liljenquist, who watched in horror during the 2008 stock market plunge as the state pension fund lost 22% of its assets. From nearly 100% funded in 2007, it fell to 70% funded by 2009. Utah suddenly faced a long-term $6.5 billion funding gap, and the state would have had to nearly double its annual contributions out of the current budget to make up the shortfall.

The Journal recounts how Liljenquist requested an analysis to determine the real and unvarnished financial condition of the pension fund. The state was assuming a 7.75% annual return on investment, and actuaries found that if that return fell to only 6% the system would be technically insolvent. The Utah constitution limits total state debt to 1.5% of the value of all property in the state, and the unfunded pension liability was one and a half times over that limit.

As the paper notes, Utah's constitution bars pension changes for current workers—short of an imminent financial crisis in the fund—so the legislature created a defined-contribution plan for all new hires starting this year. The state contributes 10% of each worker's salary (12% for public safety workers and firefighters), a generous amount by private company standards. If they wish, new workers can choose a defined-benefit plan, but the state contribution to such a plan is no longer open-ended and is legally capped at 10%.

The reform has benefits for taxpayers and public employees, according to the story. Workers own their retirement account and can carry it to another job. They also benefit because politicians can no longer take money from the pension plan to pay for other government spending. As for taxpayers, the reform will eventually slash state pension liabilities in half and they no longer bear the risk of having to pay higher taxes if the stock market declines.

Union leaders nonetheless resisted the plan, according to the paper, holding public rallies and threatening to defeat any legislator who dared to vote for it. But polls found that Utah voters supported reform, recognizing that the changes were fair and financially imperative.

From now on in Utah, tax increases or spending cuts for schools, parks or roads won't be necessary to make legally required payments to retired state workers, the paper writes. The contrast couldn't be sharper with California, New York, New Jersey, Illinois and other states in which pension contributions are squeezing out other priorities. The Journal said that Montana could be the next state to adopt the Utah model, and something like a dozen more are interested in what looks to be a winner for taxpayers, workers and state budgets.

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