The Pension Crisis & Utah’s Response Senator Dan Liljenquist John F. Kennedy School of Government Harvard University November 30, 2011

“Politics is the Art of the Possible” Otto Von Bismark

“Politics is NOT the art of the possible. It consists in choosing between the disastrous and the unpalatable” John Kenneth Galbraith

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 6

Source: Utah Retirement Systems Comprehensive Annual Financial Reports for year ending Dec. 31 Utah’s Actual Funded Ratio – 2000 to

Utah’s pension funds lost 22.3% of their value in 2008 Source: Utah Retirement Systems Comprehensive Annual Financial Reports for year ending Dec. 31 Investment Income (in Millions) 8

Step 1: Demand the Data Pension Reform Steps

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? 10

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) 11 Unanswered questions…

Source: Utah Retirement Systems Comprehensive Annual Financial Reports for year ending Dec. 31; and Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10, 2009 Utah’s Projected Funded Ratio 12

Utah’s Projected Funded Ratio Source: Utah Retirement Systems Comprehensive Annual Financial Reports for year ending Dec. 31; and Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10,

Utah’s Projected Employer Contribution Rates Source: Utah Retirement Systems Comprehensive Annual Financial Reports for year ending Dec. 31; and Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10,

Utah’s Projected Actuarial Required Contribution Rates Source: Utah Retirement Systems Comprehensive Annual Financial Reports for year ending Dec. 31; and Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10,

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 16

Step 1: Demand the Data Pension Reform Steps Step 2: Frame the Debate

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 for year ending Dec. 31; and Memo to the Honorable Daniel R. Liljenquist, Senate Chair, from Gabriel Roeder Smith & Company, November 10,

Message # 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 # crash will devastate public education o 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

Message #4 – We cannot afford another year like 2008

Message #5 – We are determined to meet our current commitments 22 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

Message #6 – Pension reform is the “Wage Liberation Act” 23 Raises COLAs Healthcare Pension Costs

Step 1: Demand the Data Pension Reform Steps Step 2: Frame the Debate Step 3: Move Forward

Thousands of Utah public employees protested the reforms 25

Be Polite and Respectful 26 Thank 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.

Build Coalitions 27

Educate through the Media 28

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

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 30

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 salary New employees can choose between: (1) a straight 401(k) plan, or (2) a hybrid pension / 401(k) plan 31

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 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 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 32

Expected results of Utah’s pension reforms o Combined retirement systems and statutory restrictions will help prevent “pension creep” o Utah will gradually reduce pension related bankruptcy risk until the risk is eliminated o Each 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 o Combined retirement contribution rates for public employees will peak in 7 years and gradually decline 33

Recap of Lessons learned o MOVE FORWARD – o Be polite and respectful o Build coalitions and educate the public o Anticipate objections o FRAME THE DEBATE – o Translate the data into tangible tradeoffs o Tailor the message to each different group o DEMAND THE DATA – o Demand comprehensive, long-term financial modeling from pension actuaries o Reality is NOT negotiable – let the data do the work 34

It’s time! It’s time!