New Utah State Auditor John Dougall made a campaign promise to start "performance audits" of how well government programs perform. He released his first one Tuesday and it attacked the Utah Retirement Systems for public employees.
It says URS is too optimistic in estimates about the rate of return on its investments potentially putting pensions for its 190,000 members at risk and increasing the likelihood that taxpayers eventually might have to provide a bailout.
Dougall also said URS improperly claims it is exempt from state open records and open-meetings laws, so few policymakers and employees have understood the risks and assumptions being used by URS.
"More transparency is needed," he said.
So in one of his first major acts, Dougall suggested amending the Government Records Access and Management Act (GRAMA) to force URS to be more open which is notable because Dougall, as a legislator in 2011, sponsored the now infamous HB477 that critics say would have gutted GRAMA. Massive public protests led lawmakers to repeal it shortly after passage.
URS disagrees with the findings of the audit and complained that making it subject to GRAMA could force it to dump about a quarter of its current investments. It said that's because those investments gave URS access to their inner workings, strategy and assumptions, and would not want such data disclosed publicly so they would likely force the state to stop participating with them.
"We believe the assumed rate of return is optimistic," Dougall told the Retirement and Independent Entities Appropriations Committee as he presented the audit. It says URS currently assumes it will receive a long-term 7.5 percent rate of return on its investments. State auditors, however, figure there is only a 43 percent probability returns will be that high.
The audit said URS estimates were based on an average of what six different groups had figured for the URS investment portfolio. However, one of those six groups had estimates that were far above the other five. When that outlier is excluded, auditors said a 6.8 percent return is more likely.
Dougall says that makes a big difference in how much the state, as an employer, needs to contribute to pension funds to keep them solvent long term.
The audit says, for example, that if a 6.75 percent rate is assumed instead of the current 7.5 percent, the state would need to kick in $168 million more a year to keep funds solvent. Even if just a 7.25 percent return rate is assumed, it would need to contribute $54 million more a year.
"Our recommendation is that the URS Board lower its assumed rate," Dougall said, "because we think it's riskier than the policymakers anticipate."
URS disagrees. Its executive director, Robert Newman, testified that it relies on professional actuaries to make its projections, which are reviewed annually, and it feels comfortable with them.
Sen. John Valentine, R-Orem, a member of the committee, said that based on medium and long-term forecasts, a 7.5 percent rate of return is "on the conservative side," and lawmakers weren't in a hurry to spend the tens of millions of dollars it would take to adopt a more conservative figure.
"It's hard for us to second-guess the actuaries, but it probably appears we're still within the realm of reason with the 7.5 percent," Valentine said.
The audit also noted that public retirement system boards in all other Western states have open board meetings, and their actuarial reports and assumptions are all open to the public. Neither is the case in Utah. Dougall said that should change.
"When you look at how many employees are relying on the pension, and that the taxpayers have to backstop that pension, I think it's critical that policymakers understand the risks of the pension," Dougall said. He added that URS is probably already subject to open-records and meetings laws, but the Legislature should clarify that because URS disagrees.
Sen. Curt Bramble, R-Provo, said he has asked URS for five years to provide suggestions on how to make itself more open and still protect some critical information from disclosure but it never has. Bramble had considered an amendment making URS subject to Utah's open-records law, but decided not to add it to a bill that passed the Senate Tuesday.
URS officials pledged to work with him to see if a compromise approach could be made to allow some public access but not to information that could jeopardize its investing.
Sen. Todd Weiler, R-Woods Cross, chairman of the retirement appropriations committee, said he would oppose Bramble's move, or seek a delay in it. He said if making URS subject to GRAMA indeed does lead it to drop a quarter of current investments, that could hurt its assumed rate of return even more.
The committee voted to study the condition of the retirement system and any unresolved GRAMA and open-records issues during interim meetings throughout the year.
House Speaker Becky Lockhart, R-Provo, said she doubts the Legislature needs to take immediate action based on audit results. "I'm not sure we need to make adjustments this session. We will begin to evaluate that, given this information."