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Editorial: Checkup on state pension plans finds state in a pinch

Wed., June 25, 2014

Washington has been able to crow somewhat about the financial health of its state pension plans, most of which have been more than 100 percent funded. Last week, state Actuary Matt Smith told legislators that is no longer true.

With the possibility the Legislature may have to dedicate an additional $2 billion to K-12 education funding when lawmakers reconvene in January, Smith’s message was an unhappy surprise. The last time estimates were run, the state was $554 million to the good, although the two oldest funds remained in the red.

Now, Smith told the Legislature’s Select Committee on Pension Policy, making all the funds whole will cost an estimated $4.4 billion. Instead of an overall funding level of 101 percent, the plans are only 94 percent funded, the lowest level going back at least as far as 2000.

The recommended down payment in the next biennium: $482 million, and $529 million in the 2017-2019 budget cycle. Smaller amounts will only increase the burden later.

The Office of Financial Management was inputting $339 million into its 2015-2017 preliminary budget. That welcome $241 million in additional revenue projected last week? Poof!

The local government contribution necessary to fulfill its obligations is higher still: $556 million.

What happened?

Retired state workers, like other Americans, continue to live longer. Smith’s math assumes men retiring in 2034 will live almost one year longer than men retiring this year. Women’s life expectancy increases by about one-half year. State retiree mortality is less than that of the general population.

The other contributing factor is the Legislature’s prudent decision a few years ago to lower the assumed rate of return on pension investments from 8 percent to 7.7 percent by the end of 2017; still a rather rosy expectation. If you expect less interest, you have to put up more capital – from the Legislature, local jurisdictions and from the employees themselves.

And two big shoes have yet to drop. The state Supreme Court has yet to decide whether state employees are entitled to cost-of-living increases and the sharing of gains on state investments pre-2008. The Legislature rescinded both. Employees sued.

If the court rules for the workers, the pension liabilities could increase $10 billion over the next 25 years. This is the same court holding legislators’ feet to the fire on K-12 funding.

Smith’s report to the legislative commission was preliminary. The final version, due by Aug. 1, will be ugly if he has to plug COLAs and gain-sharing into his calculations.

Meanwhile, Gov. Jay Inslee is negotiating – behind closed doors – new contracts with state employees that the Legislature cannot modify, only accept or reject.

The workers are restive after several years without raises, which is understandable. But unmanageable pension obligations are forcing other liberal states like California and Illinois to make reforms. Washington’s funds are still relatively strong. It will take responsible action by the governor, Legislature, court and employees to keep it that way.