Pension report says longer lifespan means a shortfall is coming in state pension plans

Staff writerJune 22, 2014 

What is good news for Washington public employees, who can expect to live longer in retirement than past generations, is turning into bad news for state budget writers - and perhaps taxpayers.

A new report prepared by the state actuary says those retiring today are living a year longer than the state’s pension model has assumed - and the life expectancy grows by another year or more for those retiring in 2034. Men turning 65 today are estimated to live to 84.1 years under the new assumptions and women to 86.4 years.

State Actuary Matt Smith broke the sobering news last week in a presentation to the Legislature’s Select Committee on Pension Policy, whose members thought last year that the state’s pension plans collectively had a $544 million overall surplus despite two laggard plans that were still underfunded by a few billion dollars.

His report says new money needs to be paid into pension funds to erase what now amounts to $4.4 billion in underfunding across all plans over the long haul. But how much money and how soon it is needed have yet to be considered by lawmakers, who have the last word.

“I think the general consensus on the committee was ‘wow.’ I guess we’ll have to study this for a while,’’ said Sen. Barbara Bailey, an Oak Harbor Republican who chairs the Legislature’s Select Committee on Pension Policy that heard Smith’s presentation. “I think that everyone has genuine concern. We’re trying to digest this and see how we are going to work through this, and see how it is going to affect policy work that we do.”

Bailey said it’s possible the committee will try to phase in some portion over a number of budget cycles, given that Smith’s math shows the state needing $482 million from its general fund next year if it tries to bite the bullet on the problem, which has been compounded by the state’s decision a few years ago to lower the assumed rate of return on investments. Although Bailey said the challenge is “manageable,” she said it is too early to say what the bipartisan committee (which includes lawmakers and representatives of governments and labor) will recommend in July to the Pension Funding Council, which sets contribution rates for workers, the state and participating local governments.

Smith’s outline shows employees in state and local governments would need to pony up $408 million in the next budget cycle, if the state tries to fix the problem immediately. That would drive up contribution rates in many plans - with some going up less than 1 percent of pay and others going up more than 2 percent. Local governments also would face a $556 million bill if a bite-the-bullet approach were taken.

State budget director David Schumacher said his team at the Office of Financial Management already had assumed they would need to put $339 million in new money into pensions next year.

But the new report means they may have to boost that contribution by a half or even double it from the state’s general fund, while allocating additional new money from other state funds.

“It’s only bad news for pension committees and budget writers that people are living longer,’’ Schumacher joked.

A lot depends on how other problems in the two-year budget are being dealt with, and Schumacher said a phase-in might only require another $150 million, which he saw as a relatively small problem in the context of a $35 billion budget with a possible $700 million to $1 billion shortfall shaping up.

A new state revenue forecast last week showed there will be about $241 million more revenue available in 2015-17 than previously assumed, which offers some help. But Schumacher said neither the pension news and revenue forecast were enough to reshape the general budget terrain ahead. He said the budget challenge gets worse once lawmakers factor in the need to find potentially $1.5 billion to $2 billion to K-12 schools in response to the Supreme Court’s ruling in the McCleary case.

House Appropriations chair Ross Hunter, D-Medina, said the pension issue pretty much cancels out the benefit of the revenue forecast being up. But he said the Legislature will recognize the new costs. In most cases where the state has faced this kind of budget shock, it’s phased in costs, he said.

Smith said his review looked at all of the state’s pension assumptions , and of the changes he made, life expectancy has the biggest impact. He also found workers are staying employed later in life, but that didn’t cause much change in pension costs.

One other changed assumption did add some costs and that is the state’s lowered expectation for investment returns. Lawmakers decided a few years ago to shrink the target for long-term earnings - measured in decades such as 40 to 50 years - from 8 percent to 7.5 percent over 10 years, and the rate goes to 7.8 percent in the next budget cycle.

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