If New York, California, New Jersey, and Illinois were the answer a Jeopardy question, the category might be “States that are in Trouble because of Pensions.”
Pensions, or, simply put, an “arrangement to provide people with an income when they are no longer earning a regular income from employment,” have become a major problem for states since the financial crisis. Most states funded pension plans for their employees through investment funds that were hit hard when the stock market did its nose dive in 2008. Going from fully funded in 2007 to just 70%, Utah’s pension funds were no exception. According to the Wall Street Journal, “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.”
That’s a lot of money. But it’s not nearly as bad as some other states. Take, for example, California:
During the last decade, California state government payments for retirement benefits have grown at an alarming and unsustainable rate, exceeding $5 billion a year, more than state support for the entire UC system. These huge and growing slices of the budget pie are needed to pay for average state retirement packages now valued at more than $1.2 million. The taxpayers who pay for those retirement benefits have an average of $60,000 saved for their own retirement.
Local governments are facing pension bills that are starving vital services. Faced with mounting long-term budget deficits, Mayor Antonio Villaraigosa recently told labor leaders, “The days of unsustainable pensions are over.” In 2002, Los Angeles taxpayers contributed just under $100 million to the Los Angeles City Employees’ Retirement System, and it was fully funded. Today, that taxpayer contribution is more than $400 million, and the system is underfunded by more than $2.3 billion.
Mr. 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.
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 but is legally capped at 10%.
Benefits to this plan? Workers own their retirement plan, and if they leave government work, they take the plan with them. Politicians can’t raid the fund, and the move will eventually cut pension liabilities in half, which means that when economic crises loom, tax payers aren’t left holding the tab in the form of higher taxes to pay for a pension shortfall.
The Great Recession isn’t over, yet, and there are signs that it won’t be over soon. But in Utah, they’re planning and budgeting carefully, and it’s making a difference.
- Is the recession over, or are there more bubbles? (What they didn’t teach in law school)
- The Utah Pension Model (online.wsj.com)
- Chaffetz Introduces Legislation Opposing Bailout of State/Local Government Employee Pension Funds (chaffetz.house.gov)
- Pension Reform And Why It Matters (hollyonthehill.wordpress.com)