The Utah Pension Model?

As Illinois and New Jersey struggle to reform their broken public pension plans, we thought you might like to hear a success story for change. Witness Utah, which last March replaced defined benefit pensions with a 401(k)-style plan for new state and municipal workers.

The sponsor of the Utah reform was Senator Dan Liljenquist, who watched in horror during the 2008 stock market plunge as the state pension fund lost 22% of its assets. From nearly 100% funded in 2007, it fell to 70% funded by 2009. Utah suddenly faced a long-term $6.5 billion funding gap, and the state would have had to nearly double its annual contributions out of the current budget to make up the shortfall.

Mr. Liljenquist requested an analysis to determine the real and unvarnished financial condition of the pension fund. The state was assuming a 7.75% annual return on investment, and actuaries found that if that return fell to only 6% the system would be technically insolvent. The Utah constitution limits total state debt to 1.5% of the value of all property in the state, and the unfunded pension liability was one and a half times over that limit.

Utah's constitution bars pension changes for current workers—short of an imminent financial crisis in the fund—so the legislature created a defined contribution plan for all new hires starting this year. The state contributes 10% of each worker's salary (12% for public safety workers and firefighters), a generous amount by private company standards. If they wish, new workers can choose a defined benefit plan, but the state contribution to such a plan is no longer open-ended but is legally capped at 10%.

The reform has benefits for taxpayers and public employees. Workers own their retirement account and can carry it to another job. They also benefit because politicians can no longer steal from the pension plan to pay for other government spending. As for taxpayers, the reform will eventually slash state pension liabilities in half and they no longer bear the risk of having to pay higher taxes if the stock market declines.

Union leaders nonetheless resisted the plan, holding public rallies and threatening to defeat any legislator who dared to vote for it. But polls found that Utah voters supported reform, recognizing that the changes were fair and financially imperative. Not a single Republican who voted for the reforms lost, and the GOP picked up seats in 2010.

From now on in Utah, tax increases or spending cuts for schools, parks or roads won't be necessary to make legally required payments to retired state workers. The contrast couldn't be sharper with California, New York, New Jersey, Illinois and other states in which pension contributions are squeezing out other priorities.

We hear Montana could be the next state to adopt the Utah model, and something like a dozen more are interested in what looks to be a winner for taxpayers, workers and state budgets.

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