Fallout from the Wall Street meltdown last year is blowing a bigger hole in the state pension system, and the state now must double its yearly payments to keep its oldest plans solvent.

That�s the latest from state Actuary Matt Smith, who delivered his message this week to the Pension Funding Council, which includes lawmakers and budget writers.

If the state falters on its pledge to invest about $650 million this biennium, and then fails to double that investment for 2011-13, the state could see its PERS 1 and TRS 1 plans run out of money in 2015. That would force cash-strapped lawmakers to pay costs from current revenue as they try to make up for loss of investment earnings.

�State workers will see their contributions go up. � The employers will see their rates go up significantly,� said state budget director Victor Moore, who chaired the council�s meeting.

The briefing took place during committee days, when House and Senate lawmakers are in town for hearings and meetings to prepare for the 2010 legislative session.

The Public Employees� Retirement System is the state�s largest retirement system serving state and local-government workers, and the Teachers� Retirement System serves teachers. The PERS 1 and TRS 1 plans cover workers with the longest service, and both closed to new members in September 1977.

PERS 1 now serves about 10,000 active workers and about 54,000 retirees or survivors who receive benefits, according to the state Department of Retirement Systems. Overall, the state retirement system has about 130,000 retirees or survivors who receive benefits in all state-run plans.

How much employee and employer contribution rates will climb is not clear, but employer rates would double. Smith is working with lawmakers� Select Committee on Pension Policy on a risk assessment to see if the state can afford the steeper contributions that the situation would seem to require.

Sen. Margarita Prentice, the Renton Democrat who chairs the Senate Ways and Means Committee and also serves on the council, said she had expected a $1 billion shortfall in the system. She said she thinks lawmakers just have to find a way in 2011 to claw the money loose to cover the payments.

�It�s going to be gruesome, but we�ll just have to look at where we can cut� to free up the money, Prentice said. �But I�m not going to panic.�

Sen. Joe Zarelli, R-Ridgefield and another member of the council, said Smith �put it kind� in his presentation. He said the State Investment Board has done a good job delivering an 8 percent gain over the past decade, but the Legislature�s failure to make contributions during the good market times has meant the state lost out on earnings potential.

He called it �a huge problem� if the state has to adopt a pay-as-it goes approach to funding the Plan 1 system.

Rep. Kelli Linville, D-Bellingham, and the top House budget writer, said the pensions are guaranteed so retirees are not facing cuts in benefits.

Smith said the state Plans 2 and 3 are healthy.

Under a scenario that the Actuary�s Office put out in early September, it looks as though Plan 1 members would see their contribution rates hold steady at 6 percent of pay through 2015, while employer rates climb. Plan 2 and 3 members now pay rates that range from about 3 percent to more than 5 percent of pay.

Theresa Whitmarsh, executive director of the State Investment Board, also addressed the council. She said total retirement trust fund returns of the past decade averaged 8.08 percent, just above the 8 percent goal or assumption for the system. But losses over the past year were nearly 22.9 percent, and the total assets in the system remained roughly the same over the past decade.

Whitmarsh said the state system performed better than any other such fund in the nation and all of the state�s funds had performed in the top 25 percent of peer funds. The 8 percent return assumed by the pension system in the future is still possible, she said.

Budget director Moore said he hopes to have an estimate of the size of the shortfall the state faces for its 2011-13 budget cycle, but it is clear that this adds to what is widely assumed to be a shortfall.

�Losing the $3 billion of federal recovery funds will put a lot of pressure� on budget writers next time around, Moore said Thursday. �There is no way to lose this much federal money and not be projecting a shortfall.�

State workers presumably would be hit two ways � by higher contribution rates and possibly lower pay raises, if they get any. Tim Welch of the Washington Federation of State Employees said lawmakers and interested parties �need to look for creative solutions that don�t immediately penalize state employees.�