Audit questions long-term viability of state pension fund

SALT LAKE CITY — Retirement benefits for Utah's public employees could be in jeopardy without increased contributions from the state to make up for an overly optimistic rate of return on investments, the state auditor said Tuesday.

But Utah Retirement System attorney Dan Andersen said the state's more than 80,000 active and 40,000 retired employees have no need to worry about losing their pensions.

"We're in a solid position and it's looking better going forward, is how I would characterize it," Andersen said.

John Dougall, a former state legislator, also suggests in his first audit since being elected state auditor that the retirement system become subject to Utah's open meeting laws and the Government Records Access and Management Act. Currently, its seven-member board and its actuarial reports are exempt from those laws. Utah is the only Western state that allows its retirement system to conduct business behind closed doors.

Sen. Curt Bramble, R-Provo, intended to include a provision in a bill this session to apply open records and open meetings laws to URS but has now decided to study that over the next year.

Dougall said lawmakers should know the risks on URS investments to ensure the pension system is appropriately funded.

"If you look at how many employees are relying on the pension and that taxpayers have to backstop the pension, I think it's critical that policymakers understand the risks of the pension," he said.

The current 7.5 percent assumed rate of return on investments is overly optimistic, according to the audit. It found there is less than 50 percent likelihood that the investment could generate the projected returns.

If the returns don't meet that assumption, the state would have to make "significant" contributions to protect the solvency of the $23 billion fund, according to the audit.

"It appears to us there is a risk in term of rates of return. Policymakers need to be aware of that. As they don't meet those rates of return, increased funding may be needed to make up for that," Dougall said.

The auditor suggests lowering the rate, noting that if it were lowered 0.25 percent, lawmakers would have to come up with $54 million to make up the difference.

"If the pension is underfunded, yes, there is risk to benefits," Dougall said.

Andersen said there are mechanisms in place to keep the pension fund healthy, such as reviewing the rate of return in investment annually. He said there are no plans to drop the rate of return or for the Legislature to put more money into the system.

"Even if we started messing up now, there are no solvency issues on the table. Solvency isn't even a concern," Andersen said. "It would take years and years of not meeting the assumed rate of return."

URS maintains that the return rates have not been overly optimistic, citing a preliminary return rate of 12.3 percent for 2012 and 9.5 percent over a three-year period, according to URS. But over a five-year period beginning in 2008 when the economy declined, the return rate plummeted to 2.9 percent.

The pension fund lost $6.3 billion in 2008, prompting state lawmakers in 2010 to make sweeping changes to ensure its long-term viability, including boosting the government contribution by 25 percent.

"We haven't had time to build our way out of it," Andersen said of the down year. Still, he said, "I think we're on a pretty good trajectory in terms of maintaining a really solid system for public employees."

Senate leaders say the retirement system should undergo periodic reviews, but they don't see any urgency to lower the current rate of return or commit additional tax dollars to the pension fund. The 7.5 percent rate is actually on the conservative side, said Sen. John Valentine, R-Orem.