State legislator warns of potential funding crisis
As if the lingering effects of the recession weren’t challenge enough, the state of Washington faces a looming unfunded pension liability crisis.
The question is whether the 2010 Legislature, confronting a projected $2 billion budget deficit, will once again punt on addressing its long-standing pension woes.
If it does, warns Sen. Joe Zarelli, the state could one day find itself having to write pension checks to some retirees directly out of its general fund.
For most of the past decade, the Legislature has failed to fully fund its pension liability. Now, facing a projected decline in its pension investments, Zarelli says, it may have to ante up.
Six weeks ago, the state Pension Funding Council on which Zarelli sits rejected a recommendation from state actuary Matt Smith that state and local government employers nearly triple their contributions to the state’s pension system over the next six years, from $1.74 billion in the current biennium to nearly $4.8 billion in 2013-15.
The council rejected the recommendation on the advice of Victor Moore, the governor’s budget director.
Smith said dramatically increased contributions were necessary to offset an expected decline in the state’s return on pension investments, from 8 percent to 7.5 percent, over the next several years. The State Investment Board endorsed that assumption.
Moore didn’t agree that the state should expect declining interest rates on pension investments, said his spokesman, Glenn Kuper.
“Looking at long-term historical averages, they’ve typically been well above 8 percent,” Kuper said.
According to the actuary’s report, the oldest retirement systems for teachers and public employees, known as TRS 1 and PERS 1, “are now at risk of running out of assets before all benefits get paid.”
Newer plans are in better shape but are also “now at risk of becoming unhealthy,” the report said, and the level of contributions will need to be “dramatically higher over the next 10-20 years” to keep those plans falling into the unhealthy or “at-risk” category.
Accepting the recommendation would force the Legislature to boost state contributions to its pension funds in the next biennium, which begins July 1, 2011.
Zarelli said he will push for the 2010 Legislature to override the council and endorse the actuary’s new assumptions.
“To accept the actuary’s advice and long-term economic assumptions might present political challenges, but it would make complete sense fiscally,” he said in a statement. “In the short term we are about $6 billion shy.”
The Legislature should have caught up on its pension funding contributions when the state was enjoying fat surpluses, Zarelli said. Instead, it skipped payments on its unfunded pension liability in 2003 and 2005 and failed to catch up on those skipped payments in 2006 and 2007, when the state was enjoying its largest-ever budget surpluses.
To help balance a $9 billion budget deficit for 2009-11, the Legislature changed its assumptions about when the state’s unfunded pension obligations would be paid off, Kuper said. That resulted in a net savings of about $400 million, he said.
”Taxpayers are ultimately on the hook for satisfying the state’s pension obligations,” Zarelli said. “It’s hard to believe things could deteriorate to the point that pension checks will have to be written directly out of the general fund, which would take money away from other public services.”
That would be a worst-case scenario, Kuper said, but one way or another, pensioners will be paid.
Zarelli plans to reintroduce two bills in 2010 to help resolve the situation. One would change the way fully funded pension funds are invested; the other would close enrollment in two underfunded plans and switch to defined contribution plans instead of defined benefit plans for new employees.
“Our situation is very desperate,” he said. “By 2013 we will be making payments directly from the general fund. Part of the solution is to close up those plans now.”
Kathie Durbin: 360-735-4523 or kathie.durbin@columbian.com.
