On Thursday, November 12, 2009, the Office of the Legislative Auditor General, presented a Performance Audit of the “Cost of Benefits for Reemployed Retirees and Part-time Employees” to the Utah State Retirement and Independent Entities Committee. The Consultants and Actuaries of Gabriel Roeder Smith & Company presented their findings and recommendations of projections for overcoming the shortfalls incurred in 2008. UAGE Staff and members were present for this presentation.

The Salt Lake Tribune reported on this Audit in their November 12, 2009 issue of their newspaper. KSL News reported on this meeting as well and here is their link http://www.ksl.com/?nid=148&sid=8650995 . UAGE will now present to you the details of that Audit and the specific recommendations to the Utah Retirement System and the Committee as well as a summary of the report presented by Gabriel Roeder Smith & Company.

It must be understood there are two separate issues being discussed. The first issue is the cost of post retirement employment of retirees by a public entity and the second issue of how to recover the losses incurred by the loss of investments in 2008.

Furthermore the information being presented is not an indicator of what direction or recommendations the Committee will make to the Legislature. This is a discussion of the data that was presented to the Committee as they requested be done so that they could make their recommendations.


The audit points out that significant costs have been incurred by the Utah Retirement System (URS) since 1995. Changes to Utah’s post-retirement reemployment statutory provisions allowed more than 4,311 public employees to retire and return to public work where they collected a salary, their pension and an employer paid 401(k). Of these employees, 2,166 were working full time at the end of December 2008. The audit states that it is their belief these costs will increase the contribution rates in the near future that are paid to the URS for employee retirement benefits.

Actuary estimates show that from 2000 to 2008 there was a financial impact of $401 million with a projected additional liability of $897 million over the next 10 years to the URS. In 1995 125 public employees retired and rehired. By the end of 2008 2,166 retirees worked in a rehired status with almost half returning to work within six months of retirement.

A statutory requirement requires employers to contribute to a 401(k) account for rehired retirees which have cost $61 million from 1995 to 1998 and $14.6 million in 2008 alone. It is estimated that by 2018 the cost will be $91 million.

The audit found where some retired employees inflated their retirement benefits by working most of their career in a part time status and just before retirement worked full time which allowed them to receive the same benefits at retirement as if they worked full time their entire careers.

The State of Utah has approximately 700 part time employees who are receiving health care coverage who pay the same biweekly premiums as full time state employees. The audit points out that if the Legislature prorated these health care premiums for the part time employees, the State would realize a savings of $2.6 billion annually.

These are the specific recommendations made in the Performance Audit:

  • The audit recommends the Legislature eliminate the current post-retirement reemployment provision and implement the following steps: suspend the pension for those who return to work full time, allow retirees to return to active membership in the retirement system and continue to earn service credits, and resume pension payments when the member ultimately retires.
  • The audit recommends that if the Legislature does not implement the above recommendation, they prohibit any work, inclusive of part time and contract work from qualifying as part of the six month waiting period to return to full time employment.
  • The audit recommends the Legislature consider amending the post retirement reemployment statute to require employers to make contributions to Utah Retirement Systems’ defined benefit plan instead of making contributions to the personal 401(k) accounts of reemployed retirees.
  • If the Legislature chooses not to amend the post retirement reemployment statute discussed in the above recommendation, the audit recommends the Legislature eliminate the 401(k) requirement for reemployed retirees.
  • The audit recommends the Legislature require Utah Retirement Systems to monitor, track and report on any future post retirement reemployment.
  • The audit recommends that the Legislature require the Utah Retirement Systems to study and make recommendations to the Legislature regarding ways to prevent part time employees from inflating their retirement benefits.
  • The audit recommends the Legislature consider prorating health care premiums for part time state employees.

(Link to the actual audit – http://www.le.state.ut.us/AUDIT/09_17rpt.pdf)


The Actuary, Gabriel Roeder Smith & Company, provided long term projections of key actuarial results under various scenarios to the Retirement and Independent Entities Committee. These projections are very detailed and somewhat complex. They are based on the State and School Divisions and not the whole URS. These two divisions are the largest representative bodies of employees in the URS and it is assumed the data will be similar for local and other government entities.

The projections were based on the results of the January 1, 2009 actuarial valuation and projected forward for forty years. It was assumed the “fund will earn 7.75% net of all expenses each year in the future…. This projection also assumes the State of Utah will contribute the actuarially determined contributions each year as set by the Board of Trustees under its current policies.”
The URS is currently funded at 86%. The “URS Board of Trustees has a policy… of not allowing a contribution rate decrease unless the funded ration is at least 110%. Once the funded ration reaches 110%, the contribution rate becomes the normal cost.”

Various exhibits were presented to the Committee with the first exhibit projections being based on a constant 7.75% return on market investments to a constant return of 6% per year, 7% per year, an up and down projection assuming a 15% return in 2009, a -20% return in 2010, a 15% return in 2011 and then a constant return of 7.75% in subsequent years. The final exhibit showed what would happen if the fund earned an 8.5% return in each year.

These scenarios are only projections of what might occur with the funds based on the assumptions of what the market will or could do, which is anyone’s guess. It is from these scenarios that the Committee will make their recommendations to the Legislature as to what the contribution rates will be with the goal in mind of bringing the URS fund to 110%.

Further discussion was presented as to what would happen if the State chose to permanently freeze its contribution rate at its current level of 13.25% and assuming a constant 7.75% investment return. The result was that by the end of the year 2048 the assets of the trust fund are exhausted. In the FY 2035 the contribution rate of employers would be 103.75% and then decreasing to 11.72% in subsequent years.

The actuary then presented to the Committee what could be expected to happen if the current retirement plan was closed to future members with future hires going into something completely different. The different plans could be a 401(k), a new defined benefit plan or some kind of a hybrid. In their analysis, the actuary assumed a total cost of 8% of payroll for the future hires.

The results of this scenario were negative with the “average rate being charged employers reaching 24.37% of combined payroll in FY 2015…” The rate would decrease after FY 2015 as the number of new hires increases in the new plan.

Discussion continued as to what would happen if there were a reduced defined benefit for future retirees or if there was a combination of a smaller defined benefit plan and a defined contribution plan. In this scenario the employer contribution rate of 8% would be applied to the new hires and the contribution rate for those in the closed defined benefit plan would rise from 13.25% to 23.09% by the year 2020 not seeing a decrease until after 2040.

The final scenario presented dealt with the possibility of the defined benefit plan being closed and future hires going into a defined contribution plan costing 8% of payroll. The result would be the employer having to pay an additional 8% for the future hires for a total of 16% with half being used to defray the costs in the closed plan. The overall costs would be similar as to those expected in the scenario where the plan was frozen to future hires and a different less expensive plan implemented for them.

As you can see, this is complex and not easily understood other than to say there is no perfect solution to this problem we are currently in as it applies to bringing the system into a more healthy state.

The actuary then returned to the first scenario they used as a baseline which shows the contribution rates going from 13.25% for FY 2010 to 23.10% for FY 2016 and discussed ways to decrease the increase of 9.85% of payroll without increasing taxes. The actuary pointed out that they believe that some employer contribution rate increases will be required which will mean lower take home pay for active members, reduction in other benefits or a reduction in force of employees.

The State could eliminate the current 1.5% 401(k) contribution for current State employees to save costs. Benefit packages could be reduced for future hires modeled after the Federal Employees Retirement System which has a defined benefit plan and a thrift savings plan. The actuary went on to recommend benefit reductions for current active members by phasing in a retirement requirement from 30 years to 35 years depending on where you currently are in your career. The definition of final average compensation could be changed from final three years to final five years average. Finally, active members could be required to contribute to the system with its own set of pluses and minuses to the system.

The actuary concluded that employers might reasonably count on reducing total employer contributions by four or five percent of payroll by implementing one or more of these recommendations even if the plan is left noncontributory.

In a nutshell then, we have presented the two major issues the Retirement and Independent Entities Committee will be considering as they pertain to the status of the Utah Retirement System fund and in preparing their recommendations to the Legislature for further action.

We highly encourage you to become familiar with the issues and to contact the members of the Committee and your Legislators about your feelings on this issue as we progress towards the 2010 Legislative session.

Members of the Committee are:

Sen. Daniel R. Liljenquist, Senate Chair Rep. Melvin Brown, House Chair
Sen. Curtis S. Bramble Rep. Neil A. Hansen
Sen. D. Chris Buttars Rep. Wayne A. Harper
Sen. Gene Davis Rep. Bradley G. Last
Sen. Brent H. Goodfellow Rep. Merlynn T. Newbold
Sen. Jon J. Greiner Rep. Bradley M. Daw
Rep. Stephen E. Sandstrom
Rep. Christine F. Watkins
Rep. Susan Duckworth
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