February 13, 2011 in Business

Caldwell: State lawmakers take aim at pension shortfalls

By The Spokesman-Review
 

Washington state Treasurer James McIntire last week followed through on a pledge made last fall: He and a bipartisan group of sponsors submitted a proposed constitutional amendment to the Legislature that would assure full funding of state pensions.

If adopted, Washington’s Constitution will impose a degree of fiscal discipline on lawmakers that they have been unwilling to impose on themselves.

That will require approval by two-thirds of their members, and a majority of Washington voters, not to mention the initial feat of getting Senate Joint Resolution 8214 and House Joint Resolution 4219 out of the two chambers’ Ways and Means committees.

Many lawmakers will balk.

Reason No. 1: Cost. There’s a $6.9 billion hole to fill in two pension plans closed more than 30 years ago. How do you backfill when money cannot be found to treat the mentally ill, for example?

Fortunately, the state’s eight other plans are more than fully funded.

Reason No. 2: The unfair demonization of public employees. Who cares if those overpaid so-and-sos don’t retire in luxury, a claim McIntire says is untrue.

As Sen. Mark Schoesler, R-Ritzville, suggests, voters are impressed when you can bring home a tax cut. Not so much when they hear the state pension fund has been fully funded.

But, like it or not, pensions are contracts, and contracts are binding. Just try and sell bonds to investors who think a government will break its word to employees. McIntire is in this fight because every year that lawmakers let payments into the pension fund slip is another year Washington edges closer to paying pension obligations out of the general fund, with disastrous implications for the state budget and bond rating.

By far the bulk of the money that goes out in those pension envelopes was put there by an astute Investment Board that has achieved long-term returns on pension investments averaging greater than 8 percent going back 20 years. But lawmakers must appropriate money far enough in advance of the day employees retiree to allow the board to work what many a small investor might consider magic.

The proposed amendment sets explicit requirements for catching up with contributions to the two closed, underfunded plans. For plans that are still open, payments must be maintained at levels that assure taxpayers who benefit from the work of today’s public employees do not pass the obligation to pay their pensions on to future generations who will not have received those services.

In other words, pay as you go.

The proposal also has an answer for overly clever lawmakers who, faced with a tight biennial budget, tinker with actuarial assumptions in a way that makes the problem go away. Go ahead, says the language, but the changes will not become effective for two years. Fudging the pension math will not help you now.

McIntire’s proposal is not the only one out there. Gov. Chris Gregoire has proposed another, partial solution to the pension problem: eliminate cost-of-living increases in monthly checks.

Schoesler calls that idea bold but problematic. Litigation involving a past change in the payout formula has yet to be resolved, he says, and the outcome could affect whether COLAs are disposable. Also, the freeze would hit retirees in their 70s and 80s who served before state salaries were inflated. They are the retirees least able to afford a change, he says.

Schoesler, the ranking Republican member of the Senate Ways and Means Committee, is optimistic about the amendment’s chances there. He and committee Chairman Ed Murray, D-Seattle, are co-sponsors, as are the co-chairs of the Select Committee on Pension Policy.

That support also has raised the hopes of McIntire, spokesman Chris McGann says, adding that the amendment “is just saying, ‘Do what you say you are going to do.’ ”

Or don’t, which has created an unfunded pension liability for all the states estimated at $1 trillion. Washington’s pension shortfall is meager compared to that of most states.

Sad that it might take a constitutional amendment to get the problem solved.

Bert Caldwell can be reached at bertc@spokesman.com or (509) 459-5450.

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