The Pension Crisis & Utah’s Response

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

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

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

6. Background on Utah Retirement System

7. Utah’s Retirement System was 100% funded in 2007 Utah’s Actual Funded Ratio – 2000 to 2007 Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31

8. Utah’s pension funds lost 22.3% of their value in 2008 Investment Income (in Millions) Source: Utah Retirement Systems Comprehensive Annual Financial Reports - 2000-2009 - for year ending Dec. 31

9. Pension Reform Steps Step 1: Demand the Data

10. Unanswered questions… • What impact would the losses have on Utah’s budget now and in the future? • How would the losses impact employer contribution rates? • How long would it take for the pension system to recover? • Would the market recover the losses? • What would happen if Utah had another year like 2008?

11. Unanswered questions… • Forty year actuarial projections, with market returns of 6%, 7%, 7.75%, and 8.5% • Modeled scenarios included: • Standard option (increase contribution rates) • Do-Nothing option (freeze contribution rates at existing levels) • Delay options (freeze contribution rates for 3 or 5 years and then increase contribution rates)

12. Utah’s pension system still appeared to be in excellent shape, however… 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

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. Message #2 - 2008 crash is like a “Chemical Spill” • First, you have to contain the situation • Second, you have to work over time to clean things up

20. Message #3 - 2008 crash will devastate public education • Approximately 8,000 teachers kept out of classrooms for 25 years • 100% of public education growth for the next five years, increasing class sizes by up to 8 children per class • Increased contributions will equate to 19% of current state public education funding

21. Message #4 – We cannot afford another year like 2008

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

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

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

25. Thousands of Utah public employees protested the reforms

26. Be Polite and Respectful 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.

27. Build Coalitions

28. Educate through the Media

29. Anticipate Objections Argument Resolution

30. Other keys to the pension reform process

31. Utah’s New Retirement System

32. Utah’s New Retirement System Defined Contribution 401(k) Plan Hybrid Pension / 401(a) Plan • Employer contribution: • 10% of salary • 10% of salary • Employee contribution: • N/A • Employee pays all pension related contributions: • If > 10%, then automatic payroll deduction • If < 10%, then balance goes into 401(k) plan • Vesting period: • 4 years • 4 years • Restrictions: • 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

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

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

35. It’s time!