Proposed state hybrid pension plan criticized

A proposal to trim future outlays for state-funded pensions ran into a storm of criticism from retiree and labor groups last week, and the concept is in trouble at the Legislature.

Sen. Joe Zarelli, a budget writer for the Senate’s minority Republicans, wants to shift newly hired workers into a hybrid pension system that includes features of a 401(k) pension account – with only half the fixed or guaranteed benefit of many traditional plans.

Many state employees already are enrolled in the hybrid “Plan 3” option, which currently is an option but would be mandatory for new hires under Senate Bill 6378. Zarelli also wants to skip a $130 million payment into the state’s two oldest pension plans and end early-retirement incentives in newer ones.

Retirees and unions say the proposal would harm retirees. They also say it threatens to take away a pension option that is one of the few remaining incentives – in an era of downsizing, rising health insurance costs, lower pay than the private sector and intermittent furloughs – to embark on a public-service career.

“We have heard it said that if the Legislature were to pass it, it would only affect new employees. That is not the case,” warned George Masten, interim leader of the Retired Public Employees Council of Washington and a 19-year member of the State Investment Board.

“If the state converts to a 401(k)-type pension plan or a strict (defined-contribution) plan such as Plan 3, it will affect every public-employee retirement recipient and all other taxpayers. The State Investment Board will not be able to make long-term investments that they do now,” Masten said during a hearing Thursday before the Senate Ways and Means Committee. “They will have to rely more on short-term liquid investments, and that makes a dramatic effect on the long-term earnings that have made our retirement system one of the top three in the country.”

Some top Democrats had expressed interest in the bill before Thursday’s hearing at the Senate Ways and Means Committee. Senate Majority Leader Lisa Brown, D-Spokane, said Ways and Means Chairman Ed Murray was “willing to take a look at it and work with Sen. Zarelli. … We want to hear the public testimony before deciding whether we move forward or not.’’

Murray said Friday that SB 6378 is not moving forward in its current form.

“I don’t think I have the votes for it,” he said in a text message.

Zarelli thinks his proposals – including an end to certain early-retirement options – can save the state $2.3 billion over 25 years. And he disputed Masten’s contentions that it is a strict defined-benefit plan, explaining it is a hybrid or “happy medium” between a strict defined-benefit pension and a defined-contribution plan like a 401(k).

In Plan 2, half of the state and employee’s contribution goes into the fixed benefit and half go into the employee-directed investment account.

Zarelli told the hearing that his bill gives the state a way to better manage its pension obligations. He said defined-benefit plans often turn out to be more costly than predicted because lawmakers keep increasing the benefits.

And he said having an investment vehicle like what is in Plan 3 gives retirees a chance to cash in if investments are strong – something a fixed benefit does not allow.

Representatives of the Washington Federation of State Employees, the Washington State Labor Council, the Washington Public Employees Association and other labor groups also blasted the proposal.

Several said the defined-benefit plans offer a stable pension option for retirees, some of whom earn very little and can ill afford the losses that many workers with 401(k) plans had in 2008. Jeff Johnson of the Labor Council suggested some had been turned into “101(k)” plans.

“This shifts more risk to workers by lowering their benefits. This is not the way to deal with the underfunding issue,’’ Johnson said.

State budget director Marty Brown says Gov. Chris Gregoire, a Democrat, is open to one piece of the reform: eliminating some costly early-retirement options in the state’s retirement Plan 2 offerings. In fact, Gregoire requested such legislation a year ago, but it died in the House.

But Gregoire has not taken a position yet on Zarelli’s idea of closing Plan 2. And she opposes skipping a $130 million payment in fiscal year 2013 for the financially strapped Plan 1 accounts – the Teachers Retirement System Plan 1 (TRS 1) and Public Employees Retirement System Plan 1 (PERS 1).

TRS 1 and PERS 1 are the only plans managed by the state that have unfunded liabilities – in other words, fewer assets than expected claims. There is a 27 percent chance the state at some point would have to make pension payments directly out of tax collections, according to an analysis by state Actuary Matt Smith.

In testimony, Masten said actuaries have found that 75 percent to 84 percent of pension benefits are typically paid out of investment earnings that accrue over time. And he blamed the plans’ shortfalls on the state and local governments’ failure to adequately fund the plans.

Smith said recently that closing Plan 2 to new enrollees could lead to contribution increases for employers and employees already in the system. But he said he was still doing a full work-up on the costs of the reforms in the short and long term.

Zarelli did not respond to a request for comment on what he might do next with the bill. Some advocates said a better approach was to send the proposal to the Select Committee on Pension Policy for further work over the summer.

Brad Shannon: 360-753-1688
bshannon@theolympian.com
www.theolympian.com/politicsblog