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October 2013 Policy Study, Number 13-6

   

Iowa Legislature and Governor Need to Focus on Pension Reform

   

Impediments to Reform

   

 

An important factor to be aware of in discussing government-employee pensions and pension reform is that in most cases the DB pensions promised to current employees cannot, legally, be changed or revised downwards.

 

Courts have ruled that the promises made by elected officials, including Legislators and Governors from 5, 10, 15, or even 20 years ago, must be upheld today. This is not the case with private companies, who are generally free to change their pension plans. This also does not apply to DC plans, where as long as the promised money is paid in, the final pension money paid out in retirement is based on the actual returns of the investments made.

 

This issue has been especially difficult in states such as California, where many city governments are at risk of default and bankruptcy because of large pension liabilities, huge numbers of new retirees, and a declining tax base.

 

Following successful votes in San Diego and San Jose, California in 2012 to change benefit payouts, government pension reformers are attempting to implement statewide changes through their referendum process. Proposed changes could include allowing voters to approve new pension plans and plan changes, as well as addressing pension-spiking and other governance reforms.[18]

 

Additionally, if a DB pension plan is actually closed down, there are significant financial implications on how the state must ensure the last employees to retire under this plan receive their promised money.
Utah addressed this by not actually closing their DB plan but providing a hybrid option. The state continues to allocate money on behalf of the current employees, while allowing new employees a very strong 401k option. Utah now contributes 10 percent of every employee’s salary to the 401k, a high percent in both private sector and public sector plans.[19]

 

Pension reform has supporters on both the left and right sides of the political spectrum. In California, one “outspoken liberal Democrat” who is the San Francisco Public Defender was quoted as saying, “Today, we spend $1 out of every $7 on pension and benefits costs for city employees; by 2018, it will be one out of every $4.”[20]

 

Even well-funded plans became unstable and unsupportable following the 2008 stock market crash.

 

For example, Utah reformed their pension system after the 2008-2009 recession, when Utah Legislators realized that even though they had done everything recommended by the actuaries, including funding the pension plan 100 percent every year, only one year of investment losses (minus 22 percent) resulted in a 30 percent long-term shortfall of millions of dollars and would require a 75 percent increase in state contributions for 25 years to make up the difference, even if investment returns remained strong every single future year.[21] This represents 10 percent of their total state budget and would have resulted in significant tax increases and a significant risk to the state economy.

 

Now in Utah all new state government employees will have a private-sector type 401k plan to invest in, controlling their own funds and removing a long-term risk and debt from the state government. At the same time, the current employees have received a guarantee that their pensions are safe and will be paid.

 

   

 

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