The recession has had a major impact on the retirement plans and funds of many people. I know it has personally been very depressing to watch the balance in my 401(k) drop precipitously while I recalculated how long it would be before I could retire. Fair or not, the Great Recession has rewritten the rules of retirement, 401(k)s and pensions in the middle of the game.
The Utah Retirement System (URS), which houses the retirement funds of teachers, police officers, firefighters, judges and public employees, has been just as deeply impacted as its private counterparts, if not more so. Two thousand and eight was a devastating year for the URS fund, which posted a negative 22.3 percent return on investment.
A negative return of this magnitude is completely unprecedented in the history of URS and has created a $6.5 billion unfunded liability. Since the Legislature is required to fund URS on an actuarially sound basis, this deficit has created quite a problem, especially when combined with the $640 million we are short in our general government spending.
The actuaries who determine at what level we are required to fund the URS system informed the Retirement & Independent Entities Interim Committee last November that the state would need to increase contributions up to $400 million plus 4 percent growth for 25 years to pay off the losses and keep retirement benefits at the current level. The actuaries have advised us that the instability of the fund will not self-correct over time. Unless we make some changes to the system we will have a $400 million ongoing hole to fill at a time when we are already short millions in our overall state budget.
I have been working with several legislators, actuaries and stakeholders on a package of bills to address the problem of the unfunded liabilities. The existing structure of the URS fund is based on a series of assumptions including the level or benefits, retirement and mortality rates, and an assumption that the retirement funds will earn a 7.75 percent rate of return annually. We never anticipated a perfect storm of financial calamity like we have recently experienced. But now that we have, we know the fund can't continue to operate under the existing assumptions and remain solvent. It is my goal to hold harmless retirees and current employees, but there will have to be changes for future hires in order to keep the promises that have already been made.
Therefore, a series of changes to URS are being considered. Current employees and retirees will see no changes to their benefits. The biggest changes will be for any employees hired after July 1, 2011. State and local employees will have the option of choosing between two different plans that direct 10 percent of their salary to either a traditional defined contribution plan or a hybrid defined benefit/defined contribution plan with a 35-year work requirement or retirement at age 60.
Public safety personnel and firefighters hired after July 1, 2011 will be able to choose between two plans that direct 12 percent of their salary to either a traditional defined contribution plan or a hybrid plan similar to state and local employees with a 25-year minimum retirement or retirement at age 60, and a 1.5 percent service credit per year. The public safety/firefighter plans will also include a line of duty death and disability benefit that includes volunteer firefighters.
Changes to the so-called "double-dipper" segment of the URS population will also see some modifications. Effective July 1, 2010, retiring employees must take a hard one-year separation before being rehired. Once rehired into full-time positions, they will not have a second bite at the retirement apple. Instead, they will have an option to come back into the system and earn additional service credits or continue to draw pension benefits and their salary with no double-dip into a retirement system or 401(k).
These changes will save nearly $900 million for the retirement system over the next several years.
To me, the most important component to all these changes is that we fulfill our promises to retirees and existing employees and I feel the package of bills does that.
In order to fulfill those promises, changes for future hires will have to be made and that is a trade off I am willing to accept.
Rep. Dee is the majority whip in the Utah State House of Representatives. He represents House District 11, which covers portions of Davis and Weber counties.