In 2009, Utah‘s public employees‘ pension program was, like that of many states, a defined benefit program. Generous benefits to current retirees, combined with the 2008-09 stock market crash, resulted in a drastic increase in Utah‘s future liabilities. According to Josh Barro:
Utah was about to drown in red ink. Without reform, the state would see its contributions to government workers‘ pensions rise by about $420 million a year—an amount equivalent to roughly 10 percent of Utah‘s spending from its general and education funds. Moreover, those astronomical pension expenses would continue to grow at 4 percent a year for the next 25 years, just to pay off the losses the fund had incurred in the stock market.
Responding to the crisis, Utah‘s leadership went the route of Michigan and opened up a 401(k) plan to all employees hired after June 2011. Unlike Michigan‘s reform, which eliminated any defined benefit option, Utah‘s plan gives new employees a choice between a 401(k) plan and a significantly scaled-down defined benefit plan that caps taxpayer liabilities. Regardless of the plan a new employee chooses, state contributions are capped at 10 percent.
Time will tell how Utah‘s recent pension reform plays out politically and what returns its participants earn, but Utah‘s radical response to a serious liability gap is a sharp contrast to the reform attempts underway in struggling states like California, New York, New Jersey, and Illinois. While the chief architect of Utah‘s reform, Sen. Dan Liljenquist, has been gaining recognition for his reforms, Utah still faces an unfunded liability gap somewhere between $3.6 and $18.6 billion. The move to a defined contribution program is a giant step in the right direction, but the need for deeper cuts—cuts that target current retirees—may still be needed in the near future.