State and local pension increase

By Jason Mercier
Members of the state Select Committee on Pension Policy met today to approve one of three options concerning assumptions for government pensions in Washington. Instead the committee adopted a consensus proposal to merely forward to the state Pension Funding Council reports by the State Actuary showing a change in life expectancy for public employees and the impact that funding the required actuarial rates would have on the state and local budgets.
Accepting the actuarial recommended rates could increase the funds required for pensions in the 2015-17 budget by $1.2 billion (including local government - $482 million for just the state's general fund).
There was a lot of discussion by committee members about not repeating the mistakes of the past (underfunding pensions) and instead approving the actuarially recommended pension contribution rate. In the end, however, the Select Committee on Pension Policy did not approve one of three options staff had provided (the fiscal impacts of options two and three were not calculated or available for today's meeting). The staff provided options were:
1. Recommend adoption of best estimate rates
o Actuary's best estimate of future pension costs
o Opportunity to 'pre-fund' expected costs and maximize plan health
o Does not manage budget impacts; may not be affordable for employers or Plan 2 members
o Largest short-term budget impacts; opportunity for most-long term savings
2. Recommend Pension Funding Council not adopted calculated rates
o Not consistent with best estimate calculation
o Potential to provide additional considerations for PFC
3. Recommend phase-in
o Not consistent with best estimate calculation
o Not fully prefunding the expected costs of the system under current funding policy; does not maximize plan health
o Allows time to manage budget impacts
o Smaller short-term budget impacts; higher long-term costs
While implementing option 1 would have a huge impact on the state and local budgets, kicking the can down the road would cost taxpayers even more long-term as noted by staff.
The Pension Funding Council meets later this month to determine what pension assumptions it will adopt.
Another potential pension bombshell is currently sitting at the State Supreme Court as justices consider a union lawsuit that could add another billion plus in pension costs.
Washington Policy Center recommends that effective state pension reform should be based on the following principles:
• Do not skip any pension payments;
• Close the current defined-benefit plan to new hires;
• Direct all savings toward paying down unfunded pension liabilities;
• Enroll new hires into a defined-contribution plan;
• Constitutionally require the actuarially-recommended pension payment and require a supermajority vote to enact new benefits.
It is important to note there is no life expectancy impact on the funding ratio for defined-contribution plans.
The private sector has been moving steadily away from defined-benefit plans for decades, instead offering employees defined-contribution pensions that provide retirement payments to an employee’s pension while helping companies accurately project future pension costs.
Part of what has contributed to the state’s nearly $6 billion unfunded pension liability is that legislators and past governors have not made the required actuarial contributions over the past decade so that lawmakers could spend that money on other programs. Washington’s multi-billion dollar pension problem was not created overnight, so it will take time to pay off these unfunded liabilities.
Step one toward the goal of addressing the state's unfunded pension liability is not making the problem worse while enacting additional reforms (such as defined contribution plans) to control costs and limit taxpayer exposure for public pensions.