Innovators in Action (September 2013 edition): Designing and Implementing Pension Reform in Utah

The latest interview in Reason Foundation’s Innovators in Action 2013 series focuses on a major issue facing state and local governments today: the massive unfunded liabilities accrued by public employee pension funds. Estimates of the aggregate, unfunded state and local pension liabilities range anywhere from $757 billion to over $4 trillion, and the overwhelming scale of the problem has prompted a growing number of policymakers to seek reform.

Utah became an early leader in the pension reform movement when it passed Senate Bill 63 and Senate Bill 43 in the 2010 legislative session, which together shut down the state’s existing defined-benefit pension plan to new entrants, created a defined-contribution style retirement plan for new state employees, ended the practice of retiree “double-dipping,” and other critical reforms.

As the sponsor of Senate Bills 63 and 43, former Utah State Senator Dan Liljenquist has become known across the nation as the architect of Utah’s pension reform efforts and one of the foremost experts on the subject. He recently authored a new report—Keeping the Promise: State Solutions for Government Pension Reform—that outlines principles and concepts that policymakers can use to advance pension reform in their jurisdictions.

I recently interviewed Liljenquist on what prompted him to take on the issue of pension reform in Utah, how he made the case to policymakers and stakeholders to enact their landmark reforms, the specifics of the reforms enacted, and more. Here’s an excerpt:

Gilroy: How much of an understanding of the pension situation did your legislative colleagues have when you started talking to them to make the case for reform? What convinced them to ultimately support your efforts?

Liljenquist: Pensions are a tough issue. When I went into the legislature, I knew absolutely nothing about pensions, and I had to educate myself first. And this is a complex issue, and it took some time to understand what actuarial rates of return are, for example, or what actuarially required contributions are, what the different rules around smoothing gains and losses are, et cetera.

But by the time we got to the fall of 2009 though, I felt like I had a pretty decent understanding of it, and we began to lay out—with some allies, including the Utah League of Cities and Towns—some principles for reform.

Our first goal was to make sure that every penny would be paid to current employees and retirees. And we weren’t entirely sure we could do that if we had another year like 2008, which could cripple the pension plan and make it very difficult to operate state and local governments while still providing the committed benefits that our public workers were counting on. So our first goal was making sure that we meet every penny of the commitment we made to current employees and retirees.

Our second goal was in line with that, and it was to reduce and eliminate the pension-related bankruptcy risk over time. We saw just how much of a risk that actually was and that there was far more uncertainty than we realized.

So those were the two broad principles we laid out. The first thing we did in explaining the situation to legislators was to explain that this is going to get very expensive very quickly, and we need to take action to make sure that this doesn’t happen again. The seeds of the pension problem that we were facing were sewn decades ago when these programs were set up, and while we needed to make sure that we could come up with the money to pay for the existing liabilities and existing required contributions, maybe we should also look at a new system for new workers that didn’t put us in that spot down the road.

Those are the ideas that we started bringing forward, and those two principles—to meet every commitment we’ve made for current employees and retirees and to reduce and eliminate the pension-related bankruptcy risk—naturally led to a discussion on how we should provide for retirement. Where we came down was that we had to have predictable costs—that’s the policy objective that’s worthwhile.

So we went forward with those principles to find a way to close the old system down in terms of new enrollment and create a new system with predictable employer costs that provided adequate retirement security for future public employees. And then we went legislator by legislator to explain the situation and some ideas for how to proceed. Before we actually proposed any policy recommendations, I went and met with every member of the House and Senate in various caucus meetings over the summer and fall to explain the situation and why we needed to make some changes, laying the foundation by really helping them understand what the problem was.

So by the time it came to December 2009, that’s when I moved forward with my proposal to close down the defined-benefit pension system to new employees and begin a new retirement system for the state with a statutorily-prescribed contribution into the system, allowing new employees the option to choose to invest their retirement compensation in either a 401(k) plan that was professionally managed—but which also does not allow borrowing against the plan—or in a hybrid defined benefit/defined contribution plan where they could pool their retirement resources together with other employees, with the understanding that the state’s commitment toward that hybrid retirement plan was set and defined. And if the actuarially required contributions for that plan exceeded the amount that the state had budgeted per individual, then the individual employees would have to automatically pay the difference.

We moved forward with those principles as we engaged the political process.

Check out the full interview here. Other articles featured in the Innovators in Action 2013 series are available here.