As we continue our five part legislative update, here is part II, which deals with the public sector retirement issues. We will be highlighting transportation funding in part III.Part II: Public Sector Retirement Issue
As the economic downturn continues to take its toll on general fund of state and local budgets, one of the more subtle, but equally significant effects of the downturn is being felt in public sector retirement programs. The Utah State Retirement System (URS) has seen fund losses for 2008-09 of approximately $5 Billion or 24% of the total URS portfolio value.
For the general health of the State's budget and in order to maintain an actuarially sound retirement system, we are anticipating steady increases in the retirement contribution rates that will be required of public employers to maintain the current benefit package for public employees. At this point we can only speculate about future increases in state and local government retirement funding obligations, but most experts believe we will witness increases for at least the next 2-4 years.
Because the budget impact could be quite large, many state and local government lawmakers have expressed concern about the funding liability that the current system may require. In light of this concern, the Utah League of Cities and Towns, Utah Association of Counties and the Utah Association of Special Districts have been meeting with members of local government employee groups, peace officer groups, firefighter associations, city and county management associations, local government finance officers, and the staff of the URS to discuss possible alternations to the system. We have invited the chairs of the Retirement and Independent Entities interim committee to participate in our effort as well.Local governments see immense value in maintaining a defined benefit system but also recognize that changes are necessary to ensure that the current system does not become an overwhelming liability and the budget priorities of the state and local governments can be fully realized. We have established a set of guiding principles and have begun discussing various alternatives to the current system.
Thus far, two alternatives have come to the forefront of the discussion. They are outlined below:
For the general health of the State's budget and in order to maintain an actuarially sound retirement system, we are anticipating steady increases in the retirement contribution rates that will be required of public employers to maintain the current benefit package for public employees. At this point we can only speculate about future increases in state and local government retirement funding obligations, but most experts believe we will witness increases for at least the next 2-4 years.
Because the budget impact could be quite large, many state and local government lawmakers have expressed concern about the funding liability that the current system may require. In light of this concern, the Utah League of Cities and Towns, Utah Association of Counties and the Utah Association of Special Districts have been meeting with members of local government employee groups, peace officer groups, firefighter associations, city and county management associations, local government finance officers, and the staff of the URS to discuss possible alternations to the system. We have invited the chairs of the Retirement and Independent Entities interim committee to participate in our effort as well.Local governments see immense value in maintaining a defined benefit system but also recognize that changes are necessary to ensure that the current system does not become an overwhelming liability and the budget priorities of the state and local governments can be fully realized. We have established a set of guiding principles and have begun discussing various alternatives to the current system.
Thus far, two alternatives have come to the forefront of the discussion. They are outlined below:
- Alternative 1: Defined Benefit with Employee Contributions
This alternative would not reduce any pension benefit for any retirement sub-system, and would allow for the continuation of a defined benefit system for future public sector employees. It would allow the state and local government employers to cap the employer contribution rate at the 2009-2010 rate (11.66% Local, 14.22% State, and 26-30% Public Safety), and require that participating employees contribute the remaining portion of the required, actuarially adjusted contribution rate for the 2010-2011 year (1.7% Local, 2.1% State and 1.8%-3.7% Public Safety) and all future years, where the rate is yet to be determined. This option would allow for all employee contributions to be exempt from vesting requirements, thus increasing employee portability from URS. With the establishment of the employer contribution rate, it is anticipated that the employee contribution amount will float from year to year based on actuarial assumptions that will be made by the URS.
This option would limit the amount of employee contribution to not allow an increase of over 2.5% year over year (smoothing), thus limiting employee exposure. This option would also require that the employer make a 401K or 457 payments to the employee if the actuarial assumptions require less contribution than what has been established as the capped employer rate, which would be based on the 2009- 2010 rate (11.66% Local, 14.22% State, and 26-30% Public Safety) . This option would not preclude the employer from “picking up” the employee’s required contribution as a part of an employee compensation package.
Fiscal Implication: This option would eliminate the need for additional state and local government appropriations for the 2010-11 fiscal year, but would require the employee to either take a compensation reduction commensurate to the employee contribution match or payment of the additional contribution could be negotiated with the employer as a part of the municipal or state compensation arrangement. - Alternative 2: Prospective Defined Contribution Option
This alternative would guarantee existing public employees a defined benefit system as currently constituted and not require any additional employee participation in the defined benefit system. This option would, however, not allow new employees employed after 2010 to participate in the defined benefit system. Instead, a defined contribution system would be offered to all “new hires”. The defined contribution amount would be negotiated by the employer and employee at the time of employment. It would also require that a portion of what otherwise would have been paid into a defined benefit system under the current system be set aside by the employer for all “new hires” to underwrite the cost associated with phasing out of the current defined benefit system for existing employees.
In essence, this proposal looks at moving toward a Defined Contribution plan for all new employees while guaranteeing the current benefit package for all existing employees.
The ULCT is working closely with legislative leadership and members of the Legislative Retirement Committee to evaluate these options and others that may be contemplated. This process is still very fluid, and we will continue to provide periodic updates as they become available. The next legislative meeting on this issue is scheduled for November 12, 2009.
