Pension-Plan Paradox

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 in 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 of 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 Cost of Living Increase (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 3 percent increase is paid on the base amount plus COLA each year. This means the average pension in the Fire A plan would be higher than the average pension in the judge plan, currently at $55,507, after five years. (Recall: of the eight state pension plans, only Fire A receives a COLA.) In the case of a simple COLA, the 3 percent is paid on the base amount and added each year. In that case, the retiree receiving an average pension in the Fire A plan would have a higher pension than a judge receiving an average pension by year six. In the case of 2.1-percent simple COLA, it would take seven years before the average pensioner in the Fire A plan was making more than a retired judge earning the average pension amount. 

FireA Cola Table

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4 Responses to Pension-Plan Paradox

  1. Phillip Regeski says:

    All of the state and local employees should have retirement pay that is created by a defined contribution system. This would not only take the burden off the taxpayers for future funding of pensions, but it also gives the government employee the opportunity to change jobs and take their pension with them. Unfortunately, since the employees help to fund their pensions (except Fire A), it is not practical to make a sudden change to a defined contribution system from the current defined benefit system. The only way to make that change, without overburdening the taxpayer, is to create and implement a hybrid system that allows the employees to choose the system that works for them.

    • Maureen Bader says:

      Thank you for your comments Phillip. You are right, the state must move to a defined contribution plan for new employees. It is a fallacy, however, that state employees pay much into their own retirement plan. At the moment, although it would appear state employees pay 7.12 percent of their salary into their plan, in fact they pay only 1.68 percent as the taxpayer not only picks up the “employer” contribution but most of the “employee” contribution as well. I hope to publish an article on this soon.

  2. Scott B says:

    The CAFR repoert from Jan 2013 lists the main pension fund of the state has an unfunded liability of $1.569B not the $2.1B you quote here. Just wondering where your figures are being drawn from?

    • Maureen Bader says:

      Thank you for your comment Scott. In January, 2013, the unfunded liability of the state plan (the big plan) was $1.569 billion, as you say. In the September 2013 Wyoming Retirement System report to the Joint Appropriations Committee, the plan’s unfunded liability is listed as $2.1 billion for 2013. You can find that document here: http://retirement.state.wy.us/publications/index.html The board changed some of its assumptions in February 2013, which changed the funding ratio – you can find out about those in the Fall 2013 newsletter in the same link.

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