Wyomings pension plans -- reform, ruin or bail-out

[Published by Maureen Bader, August 26, 2014]

Pension contributions to rise.

          ▪   Taxpayers now contribute $6.71 for every $1 contributed by bureaucrats.

          ▪   Taxpayers soon to be gouged at $7.08:1 before improvement to $6.21:1. 

Wyoming’s last legislative session saw movement in the direction of more government sector pension reform, and not a moment too soon. With only 77.62 cents per dollar promised available to pay retired state workers should financial disaster strike, Wyoming’s legislators recognize that the state’s pension plan contributions must rise. Fortunately, legislators also recognize that government workers themselves must contribute more to their own retirement. Problems inherent to the government sector pension plans are augmented when employees contribute little or nothing to their own retirement. Taxpayer contribution equity is the first step towards a pension system fair to both retirees and taxpayers. 

In 1979, Wyoming legislators required the State of Wyoming (read – taxpayers) to fund a portion of its employee’s pension plan contributions. By 1991, the Wyoming Legislature authorized state agencies to pay all of the employee’s contribution. In 2010, however, fiscal realities forced a change and employees began contributing what amounted to a smidgen – 1.43 percent of their salary – to their own pension plans. Of the 14.12 percent total contribution, taxpayers pick up the remaining 12.69 percent, or about 90 percent of the contribution.

Government workers already benefit from a type of plan rarely enjoyed by the people forced to fund them. Most government workers enjoy defined benefit plans, a type of plan that has mostly disappeared from the private sector because businesses cannot afford the massive future liability they create.

According to the Wyoming Retirement System’s (WRS) July 2014 report to Wyoming’s Joint Appropriations Committee, the Public Employee Plan (the largest of eight plans WRS manages), as of January 1, 2014 was 77.62 percent funded, up from 72.8 percent in February 2013. Although an improvement, it still means that if the plan closed down today, pensioners would receive 77.62 cents for every dollar promised during retirement, or taxpayers would be on the hook to bail out the plan.

To ensure the plan is around to actually pay retirees once they retire and minimize the risk of a taxpayer-funded bailout in the future, pension contributions will continue to rise.

At the moment, total pension contributions will rise from 15.87 percent of a government worker’s salary, to 16.62 percent in July 2015. The employer’s (read – taxpayers) contribution share at the moment is 13.82 percent, while the bureaucrat picks up the remaining 2.055 percent. This means taxpayers $6.71 for every $1 contributed by bureaucrats.

Nothing is ever simple in governmentlandia, however. To help bureaucrats pay for their own contribution to their own retirement, the legislature gave them a 2.5 percent pay increase. This represented a $37.5 million dollar hit to the general fund over two years, not including the $2 million in bureaucrat bonus payments. Assuming all bureaucrats got the same pay increase (an unlikely assumption, but work with me here), the net result of the increased pension contribution is a pay increase of 2.07 percent. That’s money not going to roads, to schools or staying in your pocket for you to pay for the things you want.

It gets worse. In July 2015, the employer’s contribution increases to 14.6 percent, meaning that for every dollar paid by bureaucrats, taxpayers pay $7.08. This doesn’t improve until July 2017, when bureaucrats’ contributions increase to 2.3 percent of their own salary to their own pension, and taxpayer’s contributions actually fall a bit, to 14.32 percent.

The current government pension plan is a legacy from a bygone era, holding a gold-plated promise of retirement security that Bernie Madoff would have been proud of. These Ponzi Schemes create big financial risks for organizations, retirees and taxpayers. Pension contributions must increase, but treating taxpayers like cash cows is shameful. It is time for pension contribution fairness – bureaucrats must contribute more to their own retirement. 

Citizens aren't cash cows for government pensions

[Published by Maureen Bader in the Wyoming Tribune Eagle, January 2, 2014]

           Taxpayers contribute $7.70 for every $1 contributed by bureaucrats 

Governor Mead’s recent budget announcement is potential gold for government workers. In addition to a salary increase, the governor proposes to roll back modest pension reforms that provided some relief to taxpayers.

Instead of forcing taxpayers, many of whom do not even have a pension plan, to pay more towards the pensions of government workers, government workers must themselves contribute more to their own pension plans.

Legislation passed in 1979 required the State of Wyoming (read – taxpayers) to fund a portion of its employee’s pension plan contributions. By 1991, the Wyoming Legislature authorized state agencies to pay all of the employee’s contribution. In 2010, however, the employee-contribution myth came to an end when state employees began contributing what amounts to a smidgen – 1.43 percent of their salary – to their own pension plans. Taxpayers pick up the remaining 12.69 percent.

In 2012, the legislature further reformed this contribution inequity by increasing bureaucrat’s contributions by 0.25 percent, to 1.68 percent. Taxpayers, too, took a hit and now contribute 12.94 percent into these pension plans. This means that for every $7.70 contributed by taxpayers, bureaucrats contribute $1. This remains burdensome to taxpayers, but represents a big improvement from the time when bureaucrats contributed nothing to their own retirement. 

And yet the governor wants to claw back this taxpayer relief.

The Wyoming Retirement System manages eight pension plans for government workers. As of February 2013, the Public Employee Plan (the largest of the eight plans) was 72.8 percent funded. This means that if the plan closed down today, pensioners would receive 72.8 cents for every dollar promised or taxpayers would be on the hook to bail out the plan. To reach a 100 percent funding level by 2043, the Wyoming Retirement System says contributions must go up to 17.9 percent, instead of the currently legislated 15.12 percent.

But who will pay for this contribution increase? If the governor has his way, taxpayers will bear the burden of higher contributions.

The legislature is looking at increasing employee contributions to 1.93 percent and raising taxpayer contributions to 13.19 percent. This would reduce the inequity to 6.83:1, which is a move in the right direction. 

But in an election year things rarely move in the right direction for long. The governor wants taxpayers to pick up not only the bureaucrat’s current increase, but their previous increase as well.

Government workers already benefit from a type of plan rarely enjoyed by the people forced to fund them. Most government workers enjoy defined benefit plans, a type of plan that has mostly disappeared from the private sector because businesses cannot afford the massive future liability they create.

Pension plans come in two basic types: defined benefit and defined contribution. Defined benefit plans promise a defined payment when a person retires. Defined contribution plans, on the other hand, pay out depending on how much is contributed into the plan and how well the money is invested.

Defined benefit pension plans were the norm in days gone by. They were developed at a time when relatively few retirees took money out of the plan and many workers paid in and so are, in effect, Ponzi schemes creating big financial risks for organizations, retirees and taxpayers.

Today, defined benefit pension plans exist mainly in the government sector.

According to the Bureau of Labor Statistics, in the Mountain geographical area to which Wyoming belongs, only about 63 percent of private sector workers have access to any type of pension plan at all, while about 88 percent of government workers do.

While 83 percent of government workers have access to a defined benefit plan, only 12 percent of private sector workers do. If a company in the private sector has a plan, it is most likely a defined contribution plan.

It will take years to fully fund the state pension plan as it is currently structured. Pension contributions must increase, but treating taxpayers like cash cows is shameful. If Wyoming continues to offer government workers defined benefit plans, the governor must not turn back the clock but instead require government workers to contribute equally to their pension plans.

Pension-Plan Paradox

This article was first published by Maureen Bader on November 26, 2013

Beneficiaries of Wyoming’s state pension plans received big promises from politicians who don’t seem to have put much thought into how to pay for those promises. With state pension liabilities still rising, Wyoming’s legislature is looking at another tweak to the state’s pension plans. Without substantial reform, however, another quick fix is likely to leave both pensioners and taxpayers at risk.

It is true that Wyoming’s pension plans are in less bad shape than those in other places. Pritchard, Ala., and Detroit, Mich., provide good examples of where a lack of reform leads. Former Pritchard city pensioners were left waiting for pension checks that never arrived. In Detroit, pensioners may receive only 16 cents for every dollar promised.

Neither scenario has occurred in Wyoming – yet.  But procrastination puts both our state’s pensioners and taxpayers at risk.

Wyoming has eight pension plans for government employees. The legislature passed two bills in 2012 – Senate files 59 and 97 – to tweak these plans. These adjustments did a lot to document and illuminate the weaknesses in the retirement system. Senate File 59 eliminated cost of living increases (COLA) in all state pension plans except Fireman’s Retirement Fund Plan A (Fire A), while Senate File 97 changed the number of years used to determine the level of retirement benefits for new state employees from three years to five years.

The small fixes from SF59 and SF97 are projected to save Wyoming taxpayers $1.2 billion over the ensuing 30 years and reduce the anticipated unfunded liability by $2.9 billion. But that 2012 tweak still left an unfunded liability of $1.275 billion for all the eight pension plans. Today this number sits at $2.154 billion in the state pension plan (the big plan) alone, but who’s counting?

Eliminating the COLA and increasing the number of years over which a salary is averaged should reduce the amount taxpayers will have to pay. But just how costly is the last remaining COLA in Fire A?  Fire A is so rich that, left unchanged, in five years the average pension will be higher than the average pension for judges (see note below for an explanation).

Fire A currently supports 303 pensioners and is a closed plan, meaning no new employees enter the plan. Good thing, as the seven current employees in Fire A can retire at 75 percent of their final salary and receive a 3-percent compounded COLA every year. Making this situation worse, however, is that neither current employees nor the taxpayer contribute to the plan and it is $68 million in the hole.

At the current level of benefits, the plan will have no money to pay pensions by 2028. A fix is in the works to prevent this from happening, and guess who gets burned? The taxpayer, as usual.

This timid proposal will reduce the COLA to 2.1-percent simple COLA, and force taxpayers to contribute to the plan. This proposal modifies another proposal, which would require taxpayers fund a 2.1-percent compounded COLA costing taxpayers $65 million over 10 years. The cost to taxpayers of the current proposal is unclear at this time, but no doubt lower than the original proposal because of the simple rather than compounding COLA.

What should the state do instead? It should cut the Fire A COLA to zero as it has with the other pension plans; most importantly, it should reform the entire retirement system to eliminate the liability to taxpayers. This would involve moving from the current defined benefit plan to a defined contribution plan, as I’ve noted previously.

Changing the terms of the state’s pension plans will be difficult politically, no doubt about it. Without reform, however, pensioners may be left with no pension at all.

NOTE:

Compounded vs Simple COLA

The average annual pension in the Fire A plan is $48,055 (as of Jan. 1, 2013). In the case of a compounding COLA, the increase is paid on the base amount plus COLA each year. This means the average retiree in the Fire A plan would have a higher pension than the average judge after five years. In the case of a simple COLA, the 3 percent is paid on the base amount and added each year. In that case, a retiree in the Fire A plan would have a higher pension than a judge by year six. In the case of 2.1-percent simple COLA, it would take seven years before the pensioner in the Fire A plan was making more than a retired judge.

Fireman Pension Plan A
	3% Compounded
	Yr1	Yr2	Yr3	Yr4	Yr5	Yr6
$48,055	$49,497	$50,982	$52,511	$54,086	$55,709	$57,380
	3% Simple
	Yr1	Yr2	Yr3	Yr4	Yr5	Yr6
$48,055	$49,497	$50,938	$52,380	$53,822	$55,263	$56,705
	2.1% Simple
	Yr1	Yr2	Yr3	Yr4	Yr5	Yr6
$48,055	$49,064	$50,073	$51,082	$52,092	$53,101	$54,110