Politics & Government

Pension committee looks for middle-way on rising retirement costs for state, local government and employees

A key state pension advisory board took the first steps Tuesday toward accepting a new fact of government life: As public employees live longer in retirement, the cost of their pension benefits will grow faster and require bigger investments by both taxpayers and workers.

How fast the state takes on the new costs is still a big question. State Actuary Matt Smith outlined the problem last month in a report to the Legislature’s Select Committee on Pension Policy. The report also noted the state’s assumed return on investments is dipping over time.

The upshot is potentially a $1.2 billion bill next year for state and local government employers for the coming two-year budget cycle, and employees could be on the hook for $408 million more – if most of the costs are eaten in one budget cycle.

But both Smith and state budget director David Schumacher have said a phase-in of payments is possible.

Sen. Barbara Bailey, the Oak Harbor Republican who chairs the Select Committee, steered the diverse group toward a middle ground Tuesday that avoided endorsing any particular hike in the contribution rates paid by government or workers. At the same time, she won a unanimous vote to forward to the Pension Funding Council the full actuarial report and assumptions that state payments must go up by some amount.

“The time for using outdated formulas and skipping payments has passed. We need to get real with taxpayers about how we plan to fully fund state pensions and meet our obligation to retirees,” Bailey said in a statement after the meeting in Olympia.

The Pension Funding Council meets July 28 and has the formal job of setting rates paid by state workers, teachers and local government workers, as well as governments in 2015-17. The funding council is staffed by budget writers for the House and Senate, Schumacher and Marcie Frost, director of the state Department of Retirement Systems.

But lawmakers are divided on how fast to proceed.

Some members of the Select Committee, including Senate Republican Leader Mark Schoesler of Ritzville, wants the Legislature to pay all of the new costs now, saying delays will be even more expensive. He was joined by Republican Rep. Bruce Chandler of Granger and Teachers Retirement System representative Gene Forrester in wanting to avoid a “phased-in” approach.

Others led by Democratic Sen. Steve Conway of Tacoma were leery of moving too quickly to adopt the new cost formula Smith has outlined, and he warned that it is important to have rate stability for workers and local governments that participate in the system.

Under Smith’s most aggressive scenario that has the state paying down the new costs in just two or four years, employer rates could jump from 9.03 percent of pay to as high as 12.29 percent for those covered by the Public Employees’ Retirement System plans and from 10.21 percent of pay to 14.47 percent in the Teachers’ Retirement System.

Meanwhile, employees’ rates would rise from 4.92 percent of pay to 7 percent for members of PERS 2 and from 4.96 percent to 6.79 percent for members of TRS 2. Each plan would have different rate changes based on its actuarial needs.

Last year, Smith’s analysis of funds showed the state’s retirement plans collectively had a $544 million overall surplus despite two first-generation plans that were still underfunded by several billion dollars. His new report says extra money is needed to erase what now amounts to a net $4.4 billion in underfunding across all plans. The TRS 1 and PERS 1 plans alone account for about $7.3 billion of unfunded liability, while the position of better-funded plans reduces the net shortfall.