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Editorial: County must exercise prudence on pensions

Fri., May 28, 2010

The recession has forced many private and public employers to make agonizing choices that slapped workers with financial hardship. Thousands in Spokane County have lost their jobs, taken pay cuts and endured unpaid time off.

Meanwhile, 243 nonunion county employees were dealt a sacrifice that many in the categories listed above would gladly have taken in exchange. County commissioners canceled a 2.5 percent cost-of-living raise the employees were expecting.

But now, even that has been restored because, contrary to what state officials had led the commissioners to believe, canceling the raises would also cancel the improvement they would have made on pension calculations at retirement time.

The bad advice the county got from the state was based on a 2009 law designed to protect public employees’ retirement benefits if budget-cutting strategies reduced their wages or hours during 2009-2011. The law applied to people who experienced “reduced work hours, voluntary leave without pay, or temporary furloughs.” The county, on state advice, reasoned that not getting a raise was the equivalent of taking a cut.

Forget about the puzzling misinterpretation. We have a hard time understanding why the commissioners or their employees – or the Legislature, for that matter – would expect that a pension calculated on an employee’s final average salary wouldn’t decline along with pay levels.

The calculations that keep a pension system sound are a complex actuarial hash that has to anticipate future investment earnings, lengthening life expectancy, inflation and growth (and dare we say reduction?) in income. Benefits can’t prudently go up unless contribution rates keep pace.

We understand government leaders’ interest in keeping workers happy, but we can’t forget the decade-long disaster known as gain-sharing. In 1998, with the stock market showing gusto, the Legislature promised that public employee pensions would share in exceptionally robust earnings, but lawmakers made no allowance for the prospect that those earnings might someday decline, which they did, of course.

It was 2007 before lawmakers stanched the hemorrhaging, but by then it had cost taxpayers billions of dollars – a steep price to pay for a simple reminder that financial trends – investments, salaries, pensions – are not inexorably upward.

Pension systems are notoriously troublesome for public policy makers. They react to reality in ways that bring fiduciary responsibility and workplace popularity into conflict.