At least one Gem State lawmaker, Rep. Jeff Thompson, R-Idaho Falls, is looking to Utah for guidance on what a new pension program might look like. Thompson, a member of the budget-setting committee, is studying a means of reforming the Public Employee Retirement System of Idaho (PERSI), which has experienced large funding gaps for the past few years. “I believe this is an issue we need to deal with,” he said.
Idaho operates on a defined-benefit program, which means that public employers and employees contribute certain amounts to the investment pool. Upon retirement, employees receive a set monthly pension based on months of on the job and highest salary levels over 42 consecutive months of employment with a particular government agency.
Under a defined-contribution plan, public employers and employees would pitch in a set amount to retirement accounts on a monthly basis. The money then would be invested by PERSI and the investment returns would fund an employee’s retirement, but there would be no set amount that a beneficiary would receive upon retirement. If investments perform well, more money is available for retirement. If investments crash, so do defined-contribution plans.
Idaho’s neighbor to the south will, as of July 1, offer new state employees the option of choosing a strictly defined-contribution plan or a new hybrid model that includes a little of both systems.
The architect of the plan, Utah Sen. Dan Liljenquist, R-Bountiful, has been noticed by major news bureaus, including the Wall Street Journal and the New York Times, and has also received praise from interest groups like Freedom Works, a national entity dedicated to the principles of limited government. The GOP senator is working with lawmakers in 18 states across the country to devise Utah-like plans for them.
Liljenquist said that even with the changes implemented in his state, the program is still competitive. “Nobody in the private sector gets a retirement deal like this,” Liljenquist said of the pension benefits. “Nobody.”
One of the most noticeable alterations for Utah is that the state employees have the option to choose a defined-contribution plan they can take with them should they leave state employment. Advocates for this option say employees not planning lifelong government careers can take retirement accounts with them to new jobs. Employees are able to direct their own investments and put money where they wish, but they can receive investment help and advice from Utah Retirement System advisors.
The Beehive State caps contributions to this plan at 10 percent, but employees can contribute more if they wish.
Utah still makes a defined-benefit plan an option for all employees, but it is believes they will most likely be utilized by those employees whose career paths keep them employed by government entities, like firefighters, teachers, and law enforcement officials.
Perhaps the biggest difference in the new defined-benefit plan is how the fund is handled when markets collapse. Under the new system, if investments slump, it’s the employees themselves who have to fork over more money to close the gap, not taxpayers.
Like the defined-contribution plan, Utah pays up to 10 percent of each employee’s salary into the defined-benefit plan and no more, even in hard financial times. If more than 10 percent is needed to maintain the system – it’s only happened once in Utah history, Liljenquist says – workers have money taken straight out of their checks.
If the rate required to maintain the defined-benefit program drops below 10 percent – it’s sitting at 7.5 percent now – the state pays the difference into a 401(k) account for employees. That means that if the plan was active now, Utah would put 7.5 percent into a defined-benefit account and 2.5 percent into a 401(k) plan.
Another change is that a key multiplier used in the final determination of the amount paid upon an employee’s retirement is lowered from 2 percent to 1.5 percent, thereby reducing the liabilities incurred by employees and lowering retiree payouts.
Liljenquist says that the issue boils down to equality. “Should taxpayers be on the hook for higher taxes to fund pensions for government employees?” he asked. “That’s a fairness issue.”
One member of the Idaho House budget-setting committee, Rep. Fred Wood, R-Burley, told IdahoReporter.com that the Legislature can only change the retirement system structure when the fund reaches complete solvency. But he feels there will be discussion about possible changes to the system in anticipation of the time when full solvency is realized.
House Revenue and Taxation Committee Chairman Dennis Lake, R-Blackfoot, concurred with Wood that there could be discussion about pension
reform. “It’s easier to switch if we are fully-funded,” Lake said. “We could switch in a heartbeat if we are fully-funded.”
Lake isn’t thrilled that some lawmakers are looking to reform the pension program. “I think PERSI is working quite well,” he stated.
The fund, administered by PERSI, is worth about $12.1 billion and is 90.9 percent funded as of April 28. It still needs an additional $1.15 billion to close the funding gap. The program has recovered from market losses in the last few years that drove the unfunded liability as high as $3.2 billion at the end of fiscal year 2009.
One of Liljensquists’s allies in the Utah House, Rep. Holly Richardson, R-Pleasant Grove, told IdahoReporter.com that the pension reform plan is simply bringing the public employees in line with their private sector counterparts.
She said that pension reform, while not a high-profile issue, “has real impacts on real people” because shifting state funding to close shortfalls in retirement accounts can hurt other legitimate government programs. “When the state budget is squeezed by deficits, that money has to come from somewhere,” Richardson said. “It squeezes education. It squeezes corrections. We don’t have a magic pot of money.”
In Idaho, the state and local governments were almost forced to pay an extra $40 million in program contribution rate hikes in the next fiscal year to help close the unfunded pension gap. The state’s portion of that figure would have amounted to $15 million.
If the PERSI oversight board decided not to delay the contribution rate hikes a year, it’s possible that the budgets of the two biggest spending items for the Idaho Legislature, public schools and Medicaid, could have taken larger hits than they did. The budget for public schools was cut by $47 million, while Medicaid saw an overall reduction of $34.7 million this year.
That scenario was not lost on Thompson, who helps write department budgets each year. In referring to the $15 million, Thompson said, “If that payment hadn’t been postponed, the money would have come from those accounts (Medicaid or public schools).”
The Utah plan also makes one other small but important change. Monthly pension payments will be based on the highest rate of pay for 60 consecutive months, not 36 months like the old system. This alteration prevents state employees from spiking pensions toward the end of lengthy careers.
Idaho bases its pension benefits on 42 months of highest consecutive pay.
If the Idaho Legislature decides to take up the issue, the change would likely be challenged. The Idaho Public Employee Association, a voluntary union for state and local government employees, is on the record as being firmly against defined-contribution plans. The group favors defined-benefit programs, which it feels are more economically-sound and provide greater returns on investments than defined-contribution systems.
Wood says he is mostly comfortable with a defined-benefit plan, but he does have some concerns about the plan going forward. If future legislators and PERSI board members are able to fend off “human greed,” Wood said, by not giving retirees large cost-of-living adjustments annually – they are entitled to a 1 percent increase each year – then he feels the program is likely fine.
Utah has taken care of that aspect of pensions, too. Liljenquist’s plan caps yearly cost-of-living-adjustments at 2.5 percent, even if the consumer price index says inflation would justify a greater amount.
In the end, Liljenquist says that pension reform must happen, regardless of which party is bringing it. Democratic lawmakers in New York are preparing a Liljenquist-inspired pension reform plan of their own, which the Utah lawmaker says shows the importance of the issue. “This is an issue for all of us,” Liljenquist said. “Not a partisanship issue.”
Thompson plans to begin work on the issue as early as next week in meetings with House leadership. He says he will “reach out” to Liljenquist and will likely invite the Utah senator to meet with Idaho lawmakers in coming months.