The Pension Crisis
& Utah’s Response
Senator Dan LiljenquistJohn F. Kennedy School of Government
Harvard UniversityNovember 30, 2011
“Politics is NOT the art of the possible. It consists in choosing
between the disastrous and the
unpalatable”John Kenneth Galbraith
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Utah has never borrowed money from its pension trust fund
Utah has always paid the full actuary recommended contribution
rates
Utah has not increased retirement benefits in over 20 years
Utah’s funded ratio averaged 95.1% between 1997 and 2007
Background on Utah Retirement System
7Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31
2000 2001 2002 2003 2004 2005 2006 2007
104.0% 103.0%
93.6% 92.5% 92.4% 92.2%96.4%
100.8%
Utah’s Retirement System was 100% funded in 2007
Utah’s Actual Funded Ratio – 2000 to 2007
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2000 2001 2002 2003 2004 2005 2006 2007 2008-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
Utah’s pension funds lost 22.3% of their value in 2008
Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31
Investment Income (in Millions)
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Unanswered questions…o What impact would the losses have on
Utah’s budget now and in the future?
o Would the market recover the losses?
o How would the losses impact employer contribution rates?
o How long would it take for the pension system to recover?
o What would happen if Utah had another year like 2008?
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o Forty year actuarial projections, with market returns of 6%, 7%, 7.75%, and 8.5%
o Modeled scenarios included:o Standard option (increase contribution
rates)o Do-Nothing option (freeze contribution
rates at existing levels)o Delay options (freeze contribution rates
for 3 or 5 years and then increase contribution rates)
Unanswered questions…
12Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31; and
Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10, 2009
2007 2008 2009 2010 2011 2012 2013
100.8%96.5%
? ? ? ? ?
Utah’s pension system still appeared to be in excellent shape, however…
Utah’s Projected Funded Ratio
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2007 2008 2009 2010 2011 2012 2013
100.8%96.5%
87.8% 85.8%80.6%
75.1%70.5%
The 2008 losses blew a 30% hole in Utah’s pension system
Utah’s Projected Funded Ratio
Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31; and
Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10, 2009
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FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
13.3%
15.4%
? ? ? ? ?
Required employer contribution increases in 2008 were manageable, however…
Utah’s Projected Employer Contribution Rates
Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31; and
Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10, 2009
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FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
13.3%
15.4% 16.2%
18.2%
20.5%
22.8% 23.1%
Required contribution rates will increase by 75% over the coming years
Utah’s Projected Actuarial Required Contribution Rates
Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31; and
Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10, 2009
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Brutal reality of the 2008 crash
Utah will have to commit ~10% of its General Fund for 25 years to pay for the 2008 Market Crash
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FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2020
FY 2025
FY 2030
FY 2035
FY 2040
FY 2045
FY 2050
8.5% Return
7.75% Re-turn
7% Return
6% Return
100%
80%
60%
40%
20%
Message #1 - Doing nothing leads to bankruptcy
Utah’s Projected Funded Ratio with Employer Contributions Frozen at 2010 Rates
Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31; and
Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10, 2009
Message #2 - 2008 crash is like a “Chemical Spill”
o First, you have to contain the situation
o Second, you have to work over time to clean things up
Message #3 - 2008 crash will devastate public
educationo Approximately 8,000 teachers kept
out of classrooms for 25 years
o 100% of public education growth for the next five years, increasing class sizes by up to 8 children per class
o Increased contributions will equate to 19% of current state public education funding
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Message #5 – We are determined to meet our current commitments
Meet Current Pension
Obligations•Pay full actuary recommended contribution rates•Shore-up the current retirement system by closing incentives for post-retirement reemployment
Eliminate Pension Related Bankruptcy Risk
•Pay off the unfunded liability as quickly as possible•Create a new system for new employees with:•Lower costs, and•Predictable employer contributions
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Be Polite and RespectfulThank you for reaching out and sharing your thoughts about the Utah Retirement System. I appreciate the sacrifices you have made and make to educate the children of our State.
As you may know, the Utah Retirement System lost $6.5 Billion last year ($4.8 Billion in actual losses and $1.7 Billion that we needed to earn on the overall portfolio but didn't). To make the current system sound, the State will need to come up with $400 Million per year for the next 25 years to make up the $6.5 Billion gap. This is equivalent to 8% of our total State payroll for the next 25 years to meet the commitments we have made to our current employees. With the severe budget issues we are facing (we are down $850 Million this year) and the growth we are seeing in our public schools, we cannot afford to ramp into the higher contribution rates and will likely need to make changes to the retirement system.
As we look at our options, I want you to know that I am determined to meet the commitments we have made to our current and retired employees. It is the right thing to do. To ensure that we are able to meet that commitment, however, we will likely need the flexibility to adjust the retirement system for new employees and to change the post-retirement reemployment rules.
Please know that we are looking at all options and working with all of the interested parties to determine the best approach.
Thank you again for reaching out.
Anticipate Objections
There is No Problem
We need to “Study” the issue
We will grow out of this
Transition costs are too high
401Ks don’t work
Actuaries and URS Disagree
Second actuarial analysis & 1.5 year
before implementation
Updated actuarial reports & URS letter
showing we can’t grow out of it
Kept same vesting schedule & Focused on blended contribution
rates
URS will manage 401K program & No
Borrowing
Argument Resolution
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Ask the hard questions / demand data
Be hypothesis driven / avoid ideology
Involve ALL parties / build partnerships
Circulate reform proposals broadly
Be kind, polite and responsive
Keep moving forward
Other keys to the pension reform process
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Utah’s New Retirement System
Existing defined benefit programs closed to new
enrollees on June 30, 2011
Employer contributions to new retirement program capped by statute at 10% of base salaryNew employees can choose
between:(1) a straight 401(k) plan, or(2) a hybrid pension / 401(k)
plan
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Utah’s New Retirement System
Defined Contribution 401(k) Plan
Hybrid Pension / 401(a) Plan
• Employer contribution:• Employee contribution:
• Vesting period:
• Restrictions:
• 10% of salary • 10% of salary
• N/A • Employee pays all pension related contributions:• If > 10%, then
automatic payroll deduction
• If < 10%, then balance goes into 401(k) plan
• 4 years • 4 years
• No borrowing from plan
• 401(k) plan self-directed with URS investment options
• No borrowing from plan• URS manages pension
investing; 401(k) portion self-directed with URS investment options
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Expected results of Utah’s pension reforms
oCombined retirement systems and statutory restrictions will help prevent “pension creep”
oUtah will gradually reduce pension related bankruptcy risk until the risk is eliminated
oEach new employee costs will be less than half the cost of old employees (10% vs. 23.1%), freeing up resources to fund the “tail” of the current programs
oCombined retirement contribution rates for public employees will peak in 7 years and gradually decline
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Recap of Lessons learned
oMOVE FORWARD – oBe polite and respectfuloBuild coalitions and educate the publicoAnticipate objections
oFRAME THE DEBATE –oTranslate the data into tangible tradeoffsoTailor the message to each different group
oDEMAND THE DATA – oDemand comprehensive, long-term financial
modeling from pension actuariesoReality is NOT negotiable – let the data do the
work