Categorized | 2007 Enterprise Articles



Utah Should Switch to a Defined Contribution Retirement System

by Howard Stephenson

It’s past time the Utah Legislature switched its defined benefit
(DB) retirement plans to a defined contribution (DC) system. The
positive benefits of such a change would be significant for both
state employees and the taxpayers who employ them, while enhancing
the professionalism of state workers.

Through a defined benefit plan the state guarantees a certain
retirement income – usually a percent of final years’ salary – and
guarantees inflationary adjustments throughout retirement for the
employee and spouse. This puts taxpayers at risk in case of
economic downturns when contributions to the system must be
increased to keep the system actuarially sound.

A defined benefit plan becomes a sort of “golden handcuff” to
entice workers to keep their employment with the state until
retirement. It induces career government employees and punishes
the cross-pollination which occurs when workers move in and out of
the public and private sectors. A defined benefit plan is not good
if we want people to make a contribution in their government job
and move on to other opportunities. It potentially results in dead
wood hanging on until retirement. It is a holdover of the days
when the worker “owed his soul to the company store.” Unions tend
to like defined benefit plans because they provide stability in
union membership and therefore, stability of union dues.

The benefits of a DC plan

A defined contribution plan, on the other hand, provides the
employee with true professional portability of his retirement
account which follows him to new places of employment. The worker
also gets to choose the type of investments his account is held in
and can pass the assets to his heirs after he and his spouse are
deceased.

The defined contribution plan also ensures that taxpayers can pay
their contribution toward employee retirement in the pay period
the worker is actually employed rather than 30 or more years later.

In state government there is no greater example of the inmates
being in charge of the asylum than in Utah’s refusal to move to a
defined contribution plan. All kinds of scare stories are drummed
up whenever the legislature looks at making the switch. But the
biggest enticement for legislators not making the change is a
claim that we’re currently getting the short-term employees to
fund something they won’t get.

State Representative John Dougall says all public employees should
have a choice of a defined contribution plan, so that they are not
forced to stay in a government job their entire career. He’s
pushing legislation which would give employees a greater choice
about all of their benefits, to give them the opportunity to be
wise consumers rather than counting on government to be their nanny.

State defined benefit retirement: 30% or 100% taxpayer funded?

The unions and the Utah Retirement System officials are adamantly
opposed to setting employees free through a defined contribution
retirement plan. Their longstanding opposition is often bolstered by
misinformation. For example, while Utah taxpayers cover 100% of the cost
of state/local government employee retirement benefits (some employees
on the older system chip in some of their own funding). The Utah Public
Employees’ Association claims differently. In their August/September
2007 newsletter, the UPEA states:

/Contributions into the retirement system are only funding 30% of the
cost; 70% of the cost of the retirement system is funded by investment
earnings. Put another way, for every $1 of benefit paid out by [Utah
Retirement System], only 30 cents is being funded by the employer
(taxpayer)./

Obviously, I disagree. The other 70% should also be considered taxpayer
funded as well since investment earnings are derived from taxpayer
contributions in the first place. If the fund which pays retirement
benefit falls short due to economic downturns in the stock market, the
taxpayers are required to pick up the tab to make retirees whole and
keep the fund actuarially sound.

Courts uphold shift to DC plan

The Heartland Institute reports that the Mehlville, Missouri Fire
Protection District (MFPD) board of trustees has won a victory for
fiscal responsibility when a judge ruled the district may switch
employee retirement benefits from a defined benefit to a defined
contribution plan.

The August 27 ruling by St. Louis County Circuit Court Judge Thea A.
Sherry struck down a lawsuit by the local firefighters union challenging
the MFPD’s decision to terminate its defined benefit plan and put every
employee, current and future, in a defined contribution plan.

It was the first legal challenge of its kind in Missouri. Other entities
have made the switch from defined benefit to defined contribution plans
for their employees, but none had been challenged in court.

Important Precedent

Aaron Hilmer, a member of the Fire District board, writing in /Budget &
Tax News /reports that the ruling sets a precedent for government bodies
that hope to reduce pension costs and give employees more control over
and flexibility in their retirement programs.

“The court is not persuaded that there was credible evidence that the
directors breached their fiduciary duty by modifying the
retirement/pension plan under the facts presented to the court,” Judge
Sherry wrote in her ruling.

“The MFPD board decided to make the change after Bonnie Stegman and I
were elected to the three-member commission in 2005,” Hilmer said. “We
decided to run for the board because of the abuse of taxpayers the prior
board had been inflicting. The district’s defined pension/disability
plan provides an example.”

Huge Payouts

Hilmer said MFPD employees were retiring with 100 percent
taxpayer-funded lump sum pension payouts in excess of $750,000. The
board also was allowing abuse of the disability plan. One MFPD
firefighter received more than $430,000 in disability payments from the
district while employed at another fire district!

All the while, the plans’ unfunded liability grew to more than $5.8 million.

“After ousting two union-backed incumbents, Bonnie and I went to work to
reform the pension and disability plan. We hired a disability insurance
provider to take over the disability portion, and after two years of
union-filed lawsuits against that move, the change became final earlier
this year when the Missouri Supreme Court declined to hear the case,”
Hilmer said.

“We then voted to change the defined benefit pension plan to a defined
contribution plan. We did this to bring financial stability to the
district and the taxpayers who fund it. Firefighters sued over that
change, culminating 17 months later in Judge Sherry’s ruling in the
board’s favor. However, the union could appeal the ruling”, Mr. Hilmer
wrote.
‘Coming Storm’

Hilmer says there is no doubt that public pension excesses and
underfunding of pensions are the coming storm in state and local
government, yet few elected officials are doing anything more than
giving lip service to the issue.

“The largest reason is the powerful lobby and political influence of
public-sector unions. As union influence in the private sector wanes,
public-sector unions are flourishing and using their muscle to elect
union-friendly legislators and board members,” Hilmer said.

Utah’s Representative John Dougall knows what he’s up against in
changing Utah’s retirement system. Taxpayers should get behind him and



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