Don’t splash it around, lawmakers
Last week’s announce- ment Washington can expect an additional $450 million in revenues over the next two years will ease the pressure on the state budget, but not by much.
The same review projects increases in various entitlement caseloads that apparently will consume about $100 million of the found money. And state reserves that were bled to close past budget gaps could use a recharge. But Washington’s public pension funds may have the greatest need.
Like many other governments and businesses, Washington has shorted payments into its retirement plans in order to pay for ongoing operations. Although plans open to new members are fully funded, the combined unfunded liabilities for two plans closed in 1977 stand at $3 billion. Those plans cover 30,000 employees. To close the gap, the state is supposed to appropriate $175 million per biennium until 2024, when the plans should be whole. But for two budget cycles now, the Legislature has chosen to skip those payments. That’s a potential $350 million that will have to be made up in the future.
And another thing.
Investments backing the state pension plans were extraordinarily good before the stock market turned tail in 2001. For 1998, 1999 and 2000, earnings were 14.2 percent, 11.9 percent and 16.6 percent, respectively. Most actuaries assume a return of 8 percent. So in 1998 lawmakers decided to split with state employees any returns in excess of 10 percent. The so-called gain-sharing obligation reached $1.5 billion before the market tanked. Fortunately, the bill authorizing gain-sharing includes a provision that allows the state to suspend or cancel that obligation. So far, it has been suspended, but that cannot go on forever.
Rep. Helen Summers, the Seattle Democrat who has been a pension watchdog, says gain-sharing should be cancelled. “Our budget is unsustainable,” she says.
True, but cancellation may be easier said than done. That provision in the gain-sharing legislation has never been tested in court.
Washington lawmakers have done taxpayers one favor. Since 2003 they have twice rejected efforts by governors Gary Locke and Christine Gregoire to implement a new method of calculating pension obligations that would have saved the state money upfront, but increase costs later.
So, back to that $450 million. Late this year or early 2006, Gov. Gregoire will draft a supplemental budget. She has said she would try to dedicate half of any revenue above and beyond what was budgeted for the next fiscal year to backfilling the pension funds. Staff comments indicate that is still her intent. But they note two more revenue estimates from the Revenue Forecast Council will be released before the 2006 Legislature convenes. Unless those reports reverse the optimism of the two released so far this year, pension system repairs should be in order.
The tale in Idaho is much happier. Three years ago, the state’s pension plans were only about 85 percent funded, down from 116 percent in mid-2000. The decline, obviously, courtesy of Wall Street. At the time, officials said ongoing contributions by state and local governments and their employees would not have restored full funding for 40 years, instead of the 25 years set by state law. So a 1 percent increase in the combined state/employee contribution was implemented last July 1. Additional 1 percent increases were set for July 1 this year and 2006, with each bump expected to generate an additional $21 million.
Well, check that. The Public Employee Retirement System of Idaho this spring said the 2005 increase will be delayed until 2006. The increase for 2006 will also be pushed back. The reason; a bodacious 18.1 percent on pension investments for the fiscal year that ended June 30, 2004. That performance boosted reserves back over 90 percent. Returns will be in the double digits again this year.
That news affects 63,000 state and local workers and the 680 jurisdictions that kick into the fund. For 26,000 retirees, it means a 2.7 percent cost-of-living increase this year, as well as a smaller retro increase for last year.
Idaho also gives employees a 401(k) option.
Washington has some problems, but none that a little fiscal discipline cannot correct. Wise use of that $450 million, or whatever, would be a start.