Newly elected State Auditor John Dougall isn't getting a lot of traction with the first audit his office produced, which casts doubt on the Utah Retirement System's overly optimistic estimates for the market rate of return on its investments and calls the system to task for operating in secret.
Retirement System attorney Dan Andersen simply said there is no need for either active or retired state workers to worry, and lawmakers, while indicating they may some day visit the system's exemption from open meetings and records laws, seem utterly uninterested in doing so before the current session ends.
This is an interesting reaction, considering the havoc unfunded pension obligations have unleashed in many other states. Unlike many states, Utah passed a pension reform law during the Great Recession to make up for the loss of more than $6 billion. But even that painful measure will have little meaning if the funds continue to rely on unrealistic assumptions about market performance. And all Utahns should be demanding transparency from the system, which is a prerequisite for accountability. Utah is the only Western state that allows its retirement system to operate behind closed doors.
Dougall's auditors said there is only a 43 percent probability the system's assumption of a 7.5 percent annual return on investments will come true. Estimating a lower rate of return would, of course, require the state to infuse more taxpayer funds to make up the difference.
Questioning such an assumption isn't a wild-eyed proposition. An analysis of state retirement systems nationwide, published by the Reason Foundation in 2011, said states would be better off assuming rates of return similar to the yield of a 15-year treasury bond, which currently is less than 3 percent. Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, wrote that states generally understate their liabilities. Private pensions use the market value of their liabilities for accounting purposes. States calculate their liabilities based on the returns they expect to get from investing the assets of their pension funds.
She recommends changing accounting methods to show the true market value of liabilities. "Otherwise, taxpayers will discover too late that the tooth fairy of their dreams is actually the wicked witch of the West."
She also recommends states move away from defined pension benefits, something Utah already did when it reformed pensions during the recession.
Her recommendations may be a bit too drastic for Utah's purposes. The state auditor's report does not recommend an ideal level of assumption for a rate of return. However, it notes that the secretive nature of the retirement system means the general public is unaware of the risks involved in assuming a 7.5 percent rate. It recommends the system regularly provide the public with a probability estimate tied to its assumptions.
The audit's strongest points concern the need for openness. Ten Western state retirement systems were studied; all were found to have open board meetings and to make minutes available to the public. There is no reason Utah's system cannot comply with the state's open meetings and record laws, which provide common-sense exceptions for matters that ought to remain private. There is no reason Utahns should have to blindly trust that these funds are properly managed.
And there is no reason lawmakers should seem so disinterested in the results of this audit.