Salt Lake's growing gap in pension funding may cost taxpayers
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SALT LAKE — Salt Lake City may need to increase taxes or cut expenses to cover an $83.6 million gap in future city employee pension costs.
Assets for the city's pension fund will only cover 70 percent of future liabilities, according to the city’s financial statements for the fiscal year ended June 30, 2011. Since 2000, that figure has dropped 11 percentage points through 2010.
The Pew Center on the States' report on widening pension gaps in the U.S. said healthy cities should cover at least 80 percent of future liabilities.
Unfunded liabilities are a statewide issue because Salt Lake funds its retirees through the Utah Retirement Fund, said Gordon Hoskins, financial director for Salt Lake City. The fund declined with the stock market when the recession hit in 2008. By comparison, in 2007 a healthy stock market helped the city cover 85 percent of its future liabilities.
“The stock market has come back a little bit, but not anywhere near the $2 billion that the retirement account lost,” Hoskins said. “They are underfunded, and they are now having to make it up in the next few years.”
The Utah Retirement Fund collects fees from municipalities, which are used to pay retirees.
“Those investment losses that happened in 2008 are being spread out over the next five years,” said Robert Newman, executive director of the Utah Retirement Fund, in a phone interview. “We have a very systematic plan in place where, over time, we’ll bring that funded status back up.”
Utah plans to have a 100 percent funding ratio in 23 years, Newman said. To do that, the fund’s investments will need to grow by 7.5 percent each year. By comparison, the S&P 500 Index has grown by an average of 5 percent each year since 2002. If the investments don’t improve the fund will collect additional fees from the cities, said Newman.
Any amount of unfunded liability represents pensions that will need to be paid for by future generations, said Andrew Holmes, chair of the Department of Finance at the BYU Marriott School of Management, in a phone interview with the Deseret News.
“You can point to a number of state and local governments that ignored it, and then it’s too late,” Holmes said. “It gets so big that you can’t do anything but file for bankruptcy and cut services.”
Stockton, Calif., recently filed for Chapter 9 bankruptcy protection, and some experts blame pensions on the city’s economic troubles.
“Union pensions wrecked Stockton,” said Mike Shedlock, investment advisor at Sitka Pacific Capital, in an article for Business Insider. “The only way to escape the death-grip of inane pension promises is bankruptcy.”
The northern California city now plans to default on $10.2 million in debt.
In neighboring Oakland, Calif., city officials have voted to issue $201 million in municipal bonds to cover a $426 million shortfall in its pension funding.
Holmes says issuing bonds to pay pensions is like getting a credit card to pay off another credit card.
The state of Utah was 82 percent funded in 2010, but still had a $5 billion funding gap, according to the Pew study. Though there are no serious concerns with Utah’s pension program, the system is in need of improvement, the study says.