With an eye to decisions being made in Wisconsin and California, among other places, Rep. Bryan Pedersen of Cheyenne is proposing a change to how the Wyoming Retirement System provides for the retirement of all of those enrolled in the state retirement system.
See Also: What happens when a city stops paying its retirees?
“Wyoming has the gold standard of pension plans,” Pedersen says. At 84 percent funded, it’s considered actuarially sound. But he’s concerned that won’t always be the case. Anything less than 80 percent funded is not considered to be actuarially sound, and he thinks Wyoming will reach that point in the future. The current unfunded portion of 16 percent amounts to about $1.4 billion.
In the upcoming legislative budget session, Pedersen is proposing a bill that he believes will provide the best option for Wyoming and the employees covered by its state retirement system.
A pension is a defined benefit plan, which provides a predictable benefit for retirees over time.
The Wyoming Retirement System now oversees eight pension plans; the largest is for Wyoming state employees and retirees, as well as employees of local governments, school districts, and some employees at the University of Wyoming. In all, about 41,000 current employees and 21,000 retirees are covered by the plan.
Pedersen is proposing changing to a defined contribution plan – the private sector 401(k) plan is an example of a defined contribution plan – for employees hired after July 1, 2013. Employees on the rolls and retirees at that time would continue to be covered by the defined benefit plan. Eventually, enrollments in the defined benefit plan would taper off as people age out of the system.
“I don’t want to cut benefits,” Pedersen says. That’s what’s happening in other states – Wisconsin and California are two -- and Petersen states that he doesn’t want that to happen to Wyoming. While nothing in the state law that governs state employee retirements guarantees a pension, he said he believes the state has a strong moral obligation to provide for its employees. He said he doesn’t feel the state can afford to meet the unfunded portion of the pension plan now in the face of all the other large-ticket expenditures it faces, and he fears that liability will only grow.
The catalyst for the change is the return on the investments of retirement funds over the last few years.
“We’ve seen a drop in market value,” Steve Sommers said. Sommers is the chairman of the Wyoming Retirement System Board and represents the interests of retirees in the system. “In 2008, the fund was expected to make 8 percent, but it lost 30 percent.” The 8 percent rate of return has been achieved over the last 20 years, but not over the last 10 years.
Pedersen’s proposed change would bring about a cultural shift in state retirement. A defined benefit plan delivers predictability, depending on years of service and three years of an employee’s highest average salary. A defined contribution plan delivers income at retirement that reflects the investment choices of the individual employee. In some ways, it shifts the burden and risk of managing retirement funds to the employee.
“I argue that’s not true. If the state can’t perform it will cut benefits,” Pedersen said, identifying a state risk. “And we have a lot of things to pay for, like schools and health care,” he said.
While Pedersen is concerned about the state’s unfunded pension liability, Sommers said he’s concerned about the long-term liability to the state that will be created in converting to a defined contribution plan because the ratio of retirees to active employees will be higher.
Pedersen said his bill, which incorporates feedback from the Wyoming Retirement System as well as other groups, does not include a portability provision – a feature of defined contribution programs that allows employees to take their retirement funds with them if they find new jobs. “We can’t do everything in one bill. It can be done later. The best thing that can happen is that my bill passes. The worst case is that 90 people are highly educated about pension reform.”