Each year various groups analyze the health of state pension plans across the country. It is a very important analysis to pay attention to, since the vast majority of the funding of those plans and benefits are provided by taxpayers. Deeply underfunded pension plans can lead to ruinous consequences in the form of bailouts or tax hikes to the tune of hundreds of millions of dollars if not billions. The Utah Legislature wisely (and very bravely) examined the health of Utah’s pension system roughly a decade ago and made badly needed changes to shore up the health of the system in order to protect Utah taxpayers and the fiscal health of the state long into the future.
Pension plan structures vary from state to state, but historically, most states have provided some form of defined benefit plan that promises retirees a lifetime annuity. Similar to what Utah did back in 2010, some have transitioned to a defined contribution plan for new employees, with employees controlling their own accounts and employer contributions funded by the state. Other states have shifted to a hybrid plan that combines elements of a defined benefit and a defined contribution plan. The shift from defined benefit plans toward more fiscally responsible alternatives can help states better manage future liability, but many states still face years of underfunded obligations that will need to be fulfilled.
As you can see from the map provided by the Tax Foundation in Washington D.C., Utah currently ranks at #10 out of the 50 states when it comes to how well funded Utah’s system is. Essentially, it is an indication of how much money the state has saved and reserved in order to pay for the benefits it has promised to future and current retirees. Utah currently has a funding ratio of 84% of obligated benefits. Utah is outranked by several states, including our neighbor to the north, Idaho, at 94% and the top states of Wisconsin and South Dakota at 96% and 99% respectively.
On the other end of the spectrum, you have states like New Jersey and Illinois that are in a deep hole with funding ratios of only 36% and 39%. That means that they only have .36 to .39 cents saved away for every dollar of pension obligation that they owe to retirees. The amount of tax revenue that those states would need to generate in order to fully fund the promises they have made would be a staggering figure in the multiples of billions of dollars. There really is no light at the end of the tunnel for them.
Thankfully, the changes Utah has made have our state on solid ground. In the 2019 report from the American Legislative Exchange Council (ALEC) titled “Unaccountable and Unaffordable”, that examines state pension obligations, Utah is ranked #1 in the entire nation from 2012-2018 when it comes to the improvement of Utah’s pension funding ratio. During that time period, which directly followed the reforms Utah put in place in 2010, Utah’s funding ratio skyrocketed 40.55%.
Clearly the reforms put in place by the Legislature in 2010 have had an enormous impact on the health of Utah’s pension plan. Utah was on the cutting edge of pension reform then as it moved to a defined contribution plan (similar to 401K type plans private citizens typically have now) instead of a defined benefit pension plan. State after state has followed in its footsteps as they have seen the wisdom of that move. Generous retirement benefits can still be offered to employees in a defined contribution plan without burdening taxpayers with the enormous obligations that haunt them for decades that accompany the old defined benefit pension type of plan. The Utah Legislature must remain vigilant in protecting those changes.