The State Retirement Fund took huge hits in the stock market/recession of 2008-2009, losing hundreds of millions of dollars.
The good news, retirement executive director Robert Newman told legislative leaders this week, is that the fund’s investments are coming back.
Even better news is that down the road the fund should be fine in meeting its obligations to retired and soon-to-retire state employees and school district workers.
Just before the Great Recession, the Utah Retirement System was funded up to 94.9 percent of its future obligations, Newman pointed out in a new report to the Executive Appropriations Committee.
Compared to other states, many of whom are in crisis in funding their over-promised state employee pension programs, that was a great number.
Plunging stock values, however, dropped that funding percentage to 78.4 percent by this year.
The GOP-controlled Legislature several years ago reacted to the recession – and the falling pension fund assets – by creating a new, and less generous, retirement program for new state hirers starting July of 2011.
This so-called “second tier” retirement plan will cost the state less money in the future.
“If your funding status has gone done, you need to understand why,” said Newman.
There are two reasons: New benefits are given to workers, costing the plan more money. Or the investment earnings have gone below what was estimated.
In Utah’s case, it was the later.
Not only did the Legislature create a new retirement system for new hirers, fund managers lowered the estimated investment returns, bringing the fund in the future closer to reality.
In 2007, for example, fund managers thought their huge billion-dollar investment would grow by 8 percent.
In fact, they grew by 7.15.
In 2008, managers dropped their expected growth rate to 7.75 percent.
The fund, instead, lost value by 22.30 percent. Ouch!!
Managers then lowered their estimated growth to 7.5 percent.
And, as the stock markets recovered, the funds investments grew by 12.88 percent in 2009 and by 13.73 percent in 2010.
“We are further ahead today than we expected to be,” said Newman.
While the fund is now expected to earn just 7.5 percent a year, Newman said actuaries believe it will grow, on average, by 9.63 percent over the next 30 years.
Bad times economically can, as has been seen, harm the fund’s investments.
But bad times also can help the fund.
For example, because there was a downturn in tax revenues, legislators didn’t give state workers pay raises for several years. No pay raises means less of a retirement package (since pensions are based on the last few years of an employee’s pay).
Bad times also means fewer retirements, so the fund isn’t paying out as much now or in the near future.
Because of less generous retirement packages for new hirers, Newman figures future Utah state workers’ retirements will save the fund 16 percent a year.
“We think we can earn 7.5 percent a year,” said Newman. “But I can’t guarantee what the financial markets will do” in the years ahead.
Senate President Michael Waddoups, R-Taylorsville, said he and three other GOP and Democratic leaders recently returned from a special meeting in Rhode Island concerning state pension plans.
Waddoups said while the main topic of the conference is what Rhode Island (run by Democrats) has done to fix that state’s pension plan (too many financial obligations, not enough money), in fact the Utah Legislature (run by Republicans) has gone further and fixed its pension fund in a more comprehensive manner.
While, actuarially speaking, Utah’s fund is still underfunded, Newman said the good news is that “we don’t have to pay all” of the obligations today.
He compared a pension fund to buying a house. You may owe $300,000 on your mortgage. You don’t have $300,000 sitting in the bank, so you couldn’t pay off your mortgage.
But you don’t have to; you only have to keep up with the monthly mortgage payments.
And the Utah retirement fund can easily keep up with the monthly pension payouts that state retirees deserve.