Utah's Retirement System
Utah’s Retirement System is financially unsustainable. [ed. -- Instead of "unsustainable," I originally wrote "unsound," which is imprecise; because the system is backed by the taxpayers of the State, who can always be hit up for more and more money to fund it, it is fiscally sound -- it's just not sustainable; as I will explain in the comments, to sustain the present system, the draw on taxpayers' wallets and all other areas of government would be huge]. On present course, we will soon be billions of dollars underwater. Something needs to change. And, that has our public employees very nervous.
Two initial points –
One, something has to be done this session. This is a compounding problem. The longer we wait, the worse the problem gets. It is neither wise nor fair to simply bump the problem forward. Because the system is structurally flawed, “wait” is not a proposal that fits the problem.
Two, existing employees must be treated fairly. They did not create the problem.
My preferred approach could be analogized to treating a serious wound.
First, let’s stop the bleeding. We cannot keep enrolling new hires into a system that is broken. Rather than entering new hires into a system that pays guaranteed benefits 30 years down the road (“Defined Benefits”), we need to enter new hires into a pay-as-we-go-system (“Defined Contributions” – like a 401K, for example). Likely, this could be done in such a way that new employees will love it. For less money to the State, salaries could be increased and employees could have much greater flexibility to leave for another job and take their benefits with them.
Second, let’s remove foreign objects. Double dipping is the biggest “foreign object.” We have employees retiring, collecting retirement, and, then, coming back and simultaneously getting paid to do the same job. What I just described isn’t necessarily a problem. Those folks earned the retirement benefits, and the agency decided it can benefit from their continued service. Fine. The problem is that they continue to accrue retirement credits; that is costly to the system. Once an employee begins to draw retirement, accrual of additional service credits should stop.
Third, let’s address the soft tissue. The last step is to address the benefits of existing employees. The system has to be actuarially sound. If steps one and two don’t right the system, adjustments will need to be made to the benefits of existing employees. As I pointed out above, this step involves taking things from people, and, therefore, must be handled with the utmost respect and sensitivity. A guiding factor must be the amount of time that employees have put into the system. No one appreciates having something taken away; however, the more time employees have put in, the more they have ordered their lives around the promised benefits and the less time they will have to adjust to changes before retirement. While I am hopeful that we won’t have to touch the benefits of existing employees, I don’ t think that is realistic; we are in a deep hole. However, I am optimistic that we can bring the system into balance without altering the benefits of our longer-serving employees.
I realize that everything I have written above must be extremely frustrating to state employees. I have held off quite a while before writing anything, in order to let our retirement committee run several models. It now seems, though, that what I have written above is an accurate description of where we stand and roughly what must be done. Please, come to the table, and help us figure out the best approach to this difficult issue.
Two initial points –
One, something has to be done this session. This is a compounding problem. The longer we wait, the worse the problem gets. It is neither wise nor fair to simply bump the problem forward. Because the system is structurally flawed, “wait” is not a proposal that fits the problem.
Two, existing employees must be treated fairly. They did not create the problem.
My preferred approach could be analogized to treating a serious wound.
First, let’s stop the bleeding. We cannot keep enrolling new hires into a system that is broken. Rather than entering new hires into a system that pays guaranteed benefits 30 years down the road (“Defined Benefits”), we need to enter new hires into a pay-as-we-go-system (“Defined Contributions” – like a 401K, for example). Likely, this could be done in such a way that new employees will love it. For less money to the State, salaries could be increased and employees could have much greater flexibility to leave for another job and take their benefits with them.
Second, let’s remove foreign objects. Double dipping is the biggest “foreign object.” We have employees retiring, collecting retirement, and, then, coming back and simultaneously getting paid to do the same job. What I just described isn’t necessarily a problem. Those folks earned the retirement benefits, and the agency decided it can benefit from their continued service. Fine. The problem is that they continue to accrue retirement credits; that is costly to the system. Once an employee begins to draw retirement, accrual of additional service credits should stop.
Third, let’s address the soft tissue. The last step is to address the benefits of existing employees. The system has to be actuarially sound. If steps one and two don’t right the system, adjustments will need to be made to the benefits of existing employees. As I pointed out above, this step involves taking things from people, and, therefore, must be handled with the utmost respect and sensitivity. A guiding factor must be the amount of time that employees have put into the system. No one appreciates having something taken away; however, the more time employees have put in, the more they have ordered their lives around the promised benefits and the less time they will have to adjust to changes before retirement. While I am hopeful that we won’t have to touch the benefits of existing employees, I don’ t think that is realistic; we are in a deep hole. However, I am optimistic that we can bring the system into balance without altering the benefits of our longer-serving employees.
I realize that everything I have written above must be extremely frustrating to state employees. I have held off quite a while before writing anything, in order to let our retirement committee run several models. It now seems, though, that what I have written above is an accurate description of where we stand and roughly what must be done. Please, come to the table, and help us figure out the best approach to this difficult issue.
posted by steve u. at 1/14/2010
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24 Comments:
Is the URS lying to us in its annual report? "Although everyone is being challenged in the current environment, the economy will recover as will the markets. We are positioning the portfolio today to take advantage of that eventual outcome. The portfolio is still statistically sound and has the strength to weather these temporary setbacks.” Bruce R. Cundick, URS Chief Investment Officer, URS Annual Report, April 2009
The only ones I hear saying URS is "financially unsound" are those who think the defined benefit plan is too rich for state employees. Those are two very different concerns. If you want to decrease state employee compensation, just say it.
You said that rehires "continue to accrue retirement credits". I have worked with several rehires and I didn't think they continued to earn credits. Did your information on this statement come from URS?
Most markets tanked in 2008 creating a huge pressure on URS last year. Obviously the actuarial figures for the next five years will suffer. However, 2009 was a stellar year which will offset some of those big 2008 losses over the next five years.
State Employee has it right - while there are some short term pressures (which are significant), the system has survived these dips in the past. In fact, to a lesser extent, we went through this exercise six or seven years ago.
Over the long run, retirement benefits are more of a policy question than a market volatilty question. I think we should give new hires a 401k contribution rather than a pension. It would be a great recruitment tool. No one plans to stay with their employer 30 years anymore. Times are changing. We need to keep up.
State Employee,
Excellent question to lead the commentary. I don't think the URS is lying; I don't get the sense that anyone around the table is lying. Rather, people are grappling with a tough issue.
Here are the numbers. They don't lie.
Over the next 25 years, Utah has a $6.5 billion unfunded liability in its retirement system. Above current expenditures, it will take another $400 million/year to cover that gap (and another compounding 4% annual rate of interest -- which is big, given the numbers we're talking about). That amount of money equals 10,000 teachers that cannot be hired. Remember, that is the present course we are on. When you look at our education funding levels and class sizes, foregoing the hiring of 10,000 teachers should catch everyone's attention.
Market Forces cites something I've often heard: that measuring the gap during a downturn misstates the case. Not so.
The 6.5 billion number for the gap actually assumes rebound of the markets. In fact, it likely assumes too much rebound, since it uses an annual rate of return of 7.75%. That means that the State's conservative investment portfolio would have to yield an average of 7.75% over the next 25 years, including all downturns. (Warren Buffet has pegged the highest likely returns to average around 7%).
What would be the effect of lower returns than the 7.75% we're assuming? Quite bluntly, if we don't change our present course, it could mean the bankruptcy of the State.
If, for example, we miss our modeled assumption by a mere 1.75%, meaning we'd get a healthy 6% rate of return, our unfunded liability over the next 25 years would be $24,000,000,000 (24 billion dollars). To merely fund the interest on the liability of our retirement fund would take half the general fund of the State.
I don't have time to look up numbers now, but I'd bet that the unfunded liabilities are all, or mostly, due to the slow financial markets. I did a lot of research on this in California and Utah's system is structured the same way.
If unfunded liabilities remain steady or increase even as the markets rebound, then that would be a bad sign, but we won't know that until the markets improve quite a bit more.
Even though I believe you're overestimating the potential impact of the perceived problem (i.e. that it could bankrupt the state), I agree that we should change to a defined-contribution system. Such a system is much better for the reasons you cite and for many others. Government shouldn't be in the business of investing or in providing retirement benefits, there are plenty of companies who can provide that service for state employees.
Sen. Urquhart, please make sure legislators are included in any changes to the retirement system. I don't know of any other job where you can work part time for four years and earn lifetime medical benefits when you retire. I admit legislators make a sacrifice of their time but they aren't forced to do so. Benefits should only be given during their time of service.
JHP,
While the downturn does exacerbate the situation, there isn't any mystery how markets would need to perform to right the system. The modeling shows that we'd need extraordinary performance, to even keep the liability within reach.
I don't mean to overstate or understate the situation, but the reality is that an average annual return of 6% would give us an unfunded liability, just for the retirement system, that is more than double our current budget.
State employees who return to work full time 6 months after retirement do not continue to accrue retirement credits.
It is only the employees who return to work over half time within 6 months of retiring who have their retirement benefits canceled who continue to accrue credits.
Sen. Urquhardt needs to get his facts straight on this.
The most simple, equitable and logical solution to the so called "double dipping" problem is to amend the law so that the state agency makes the required payments to the general fund of the retirement system rather than the employee's 401K.
Under this solution everyone wins. The retirement system is still being funded as if the employee has not retired, the employer gets an experienced worker at a bargain wage, and the employee (even without the 401K contribution) has a window of opportunity to increase his nest egg before leaving the workforce for good.
A couple of points/questions:
First, retired but returning employees do not accrue additional service credit, but their employer puts an amount equal to what would otherwise be the retirement contribution into the employee's 401K. Thus, a 25-year employee could buy out the final 5 years of service, without actuarial reduction and replenish the cost of that quite easily with the 401K contributions coming in.
Second, Sen. U, you didn't really answer the questions about why there's a disparity in what employees have always been told about the soundness of the system and what we're hearing now. The semi-response was made easier because the question was about who's lying. I agree that nobody's probably lying, but employees are being fed misinformation (or have been in the past).
We've heard for the longest time how everything is sound and then there's a down year in the markets and suddenly the ship is sinking. Either someone's head should roll for mismanaging what they had, or they were hoodwinking us about what they had all along. I suppose another alternative is that they were proceeding on unfounded assumptions that should have been checking all along. Either way, there should be some accountability for whomever was perpetuating the apparent misimpression of soundness.
While I appreciate the need to do something, it's important to realize that many state employees make substantially less in salary than folks in the private sector. Additionally, many of the state's most valuable professional employees make not only less salary, but less total compensation too. Significantly so in many cases. Take away the stability of the benefits package and you will lose many good people. You won't lose too many bad ones who have few options, you'll lose mostly the best. That's a reality if legislators are not careful.
Sorry for the long post but it's an important topic.
I agree with Steve. $400 MILLION dollars a year for the next 25 years is a disaster for the State. To put this amount in perspective, our entire General Fund as a State is about $5.5 Billion. So 7% to 8% of our total State revenues will have to go to pay off this debt.
I feel bad for State employees. They did not cause the market crash, but probably won't get merit increases or COLAs for a long time.
I don't think "Market Forces" understands the investment realities of Utah's pension system. There is NO WAY that Utah can grow out of this problem.
The investment returns in 2009 were at 13% (a good year, but not stellar compared to other market rebound years). Now, take off 7.75% that URS was already counting on for a return on the portfolio in 2009.
You are left with a 5.25% return to offset your 2008 losses. But wait, URS still has to cover the investment earnings that it needed from the missing $6.5 Billion. The 5.25% barely covers the lost investment income from the missing $6.5 Billion.
The actual data shows that the 2009 URS returns only shaved off $200 Million of the $6.5 Billion gap. So to grow our way out of this problem would require above 13% returns EACH YEAR for the next 20 YEARS.
If the solution is for URS to shoot for 13% returns, we might as well go to Vegas now and bet all of our pension portfolio on a game of CRAPS.
This system needs seriour reform.
Sen. Urquhart,
I have in front of me the November 10,2009 letter from GRN to Sen. Liljenquist outlining their actuarial projections.
I can find nothing in the text or charts that agrees with your stated figures. Can you tell me from what source you are getting the numbers you are quoting in this thread? Thank you.
Investment advice,
I think you need to get together with steve u. and check your figures. He said that if average returns dropped 1.75% that the state's liability would grow from $6.5 billion to $24 billion. Yet, you tell me that average growth 5.25% above expectations would hardly dent the liability. Something isn't right about those numbers!
Like JBT, I am curious about the source of the $6.5 billion number (and the $24 billion number). I am wondering if it must include health benefits as well as pension numbers. In the 2008 annual report, I can see that URS was just 84.1% funded because of the bad year in 2008 (a $3.6 billion unfunded liability). However, in a quick review, I couldn't find the $6.5 billion number. Steve, can you share the source for your numbers? Thanks!
The numbers I cite come from a Nov. 10, 2009, report prepared for the Retirement and Independent Entities Committee by Gabriel, Roeder, Smith & Co, and an oral report to the committee from the same group on Sept. 9, 2009. Unfortunately, I can’t find it online at our legislative website (though I can find the RFP for the study). I’ll call tomorrow and see if I can get some help getting it online for everyone’s review. (Which makes for a good time to state that, during this next interim, I am going to request that we study a requirement that any document that is distributed to a committee or to the floor immediately be posted online for the public’s review).
JBT,
The numbers in the 11/10/09 report are only for the the big system, and, therefore, exclude Public Safety, Firefighters, Judges, and Governors/Legislators systems. Another $900 Million is the unfunded liability gap for those other URS pension systems. The actuaries testified to the $6.5 Billion number in the Committee's 9/9/09 meeting.
Market Forces,
Investment Advice gets it right. Average returns around 13% close the gap. Average returns less than that don't, and the further away from 13% we are, the worse it gets because of compounding effects. Thus, average returns of 7.75% leave the $6.5 Billion gap, while 6% balloons it to $24 Billion.
How much leyway does the state have when it comes to how the retirement system works? Seems to me the State wants to move to 401k's because the risk from a pension fund is very high, yet 401k's where slaughtered in 2008 and that seems like a bad solution as well if people are simply left to loose their retirement every time the market goes haywire.
Is their a way the State could create a retirement plan that has a defined contribution from the state but backed by an insurance policy paid from a portion of the interest of some type to have a minimum unit of benefit per unit of contribution. Seems to me the concern is to centred around the risk to the state from the state being the guarantor of the pension rather then for the end quality of the retirement benefit.
Sen. Urquhart,
You are still not giving enough facts and information to access the validity and meaning of your numbers in this discussion.
For example, what employer contribution rate scenario creates the 6.5 billion actuarial deficit in 25 years?
Sen. Urquhart seems to be MIA on this topic when questioned about his numbers. What does that suggest?
As far as cost-saving measures, what about providing an option for existing state employees to switch into a defined contribution program? I suspect there are quite a few willing to give up a defined benefit in exchange for increased control and portability.
Also, can you explain exactly how "double dipping" costs the state more money? While I understand that it appears unseemly to have a person being paid a salary and receive a pension, won't that position be filled by another person for whom the state has to make a retirement contribution? To me, it seems that it's the 401(k) contribution that's the real cost.
And, finally, the most qualified state employees do have other options. Many of us have turned these options down, for a variety of reasons. Benefits like a pension are tools to keep us with the state. If you're not careful, over time the state will be left with only those who don't have options. Maybe that's the intent, but just make sure you understand the path you're heading down as you embark on your journey.
I found the link to the actuarial report, and posted a link to it as its own post (1/24/10).
This post has been removed by the author.
Sorry about my previous post it was not edited yet:)
Ben F. asked about the legislators being included in the change, I wonder if your planning on changing the legislators benefits also? Please respond to what changes you are making for yourself.
Anon.,
I am assuming/planning that legislators will be included in the same changes to all other state employees. No good reason not to.
Thank you for this Blog at least it is a bit more in depth with the issue then the news reports.
There are two things I don’t understand first are we talking about just one bill or is there more then one? (I have only read about one in the news do you have links to the bill) My biggest fear is that I am not a savvy enough investor to ensure that if we move away from the current system to one in which I make all the decisions that I would end up doing a very good job. I really hope that if you go this way there is a lot of thought given to how to educate employees on what to do with the money. I also hope you add extra options like a Roth 401 k so that we have stronger pensions when we retire. Also do I understand it right that currently we get 2 percent a year and can retire after 30 years so we would be getting 60% of our wages? And under the new plan we would loose 1.5 % to the 401 k and also it would cut down to 1% year which would mean that I would have 35% of my wage when I retire.
My second question is that it seems like you are hiding a wage cut in the retirement plan I wonder if things are so bad instead of cutting the retirement why are we not cutting wages? I guess one of the things that really bugs me about the whole idea is during fat years all my supervisors say its good to work for the government because its stable. But when we need to cash that in the cuts are made just like everywhere else, I just can’t understand why it is happening now. I would be a lot less skeptical if was happening in a year where the economy was better. Why not wait a few years when there was less fear in the air if it is a really good idea it does not need to be done during an environment of fear. It seems opportunistic to do it now when people cant really leave very easy but I can promise that when things get better people will be leaving there jobs because you have lost the benefit of government work its not stable and for educated people the benefits are no longer better then the private sector. Do we really want the government run by people who cant get other jobs? Thanks for your time
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