As Washington’s political leaders scour the state budget for ways to cut spending in the face of continuing multi-billion-dollar budget deficits, an idea borrowed from the private sector is getting traction:
Transition the state out of the employee pension business and put state workers in charge of their own retirement savings, with pension plans similar to the Individual Retirement Accounts and 401(K) plans held by millions of private-sector workers.
The idea is to shift away from defined benefit plans, which guarantee retirees a fixed payment every month, and toward defined contribution plans, under which employees contribute to their retirement accounts, receive a state match, and manage their investments on their own.
Sen. Joe Zarelli, R-Ridgefield, introduced a bill in the 2010 legislative session to begin the discussion. It failed to pass, but he’s continuing the discussion by other means.
Zarelli discussed the merits of the idea recently in a video clip on the Senate Republican Caucus “Reset Washington” website. He said it’s time for policymakers to take the long view.
“As we talk about reform issues, it’s important that we don’t get tunnel vision,” Zarelli said. “We talk about what’s in front of us, what do I need to do to get through this biennium. … But what the Legislature seldom thinks about is how do we sustain our spending patterns over a period of time, 10 or 20 years down the road? It’s important to look at what we can do to help the future of this state.”
Moving from defined benefit plans to individual accounts is one thing the Legislature could do, he said.
The current system “puts the taxpayer on the hook,” he said — especially when the Legislature fails to fully fund annual payments on its unfunded pension liability, as it has every year since 2001.
State Treasurer Jim McIntire issued a report last month that contained both good news and bad about the state’s pension program. Washington’s 10 ongoing public employee pension plans, which cover state workers, teachers, other school employees, judges, police officers and firefighters, are fully funded. But two older plans, Public Employees’ Retirement System Plan 1 and Teachers’ Retirement System Plan 1, both closed to new enrollees in 1977, have been historically underfunded.
That has caused an unfunded pension liability of $6.9 billion, McIntire said, with the state on the hook for $3.8 billion and local governments for $3.1 billion.
This is not an issue of excessive pensions, McIntire said. “The average public pension is just under $20,500. More than 96 percent of retirees get an annual benefit of $50,000 or less.”
It’s not an issue of underperforming investments, either, he said. The state investment board’s combined returns exceed 8 percent annually. The performance of the state’s pension funds has been among the top 1 percent of public pension funds in the country for 20 years.
Yet Zarelli said forcing the state’s taxpayers to bear the risk when investments tank, instead of putting retirement savings in the hands of state workers, is risky as the state forecasts diminished revenue growth in the years ahead.
“It puts the taxpayers on the hook when the Legislature hasn’t made its payments,” he said. “It creates a huge burden not only on the employer but also on the taxpayer to have to supersize those payments. Not too long down the road, we could be obligated to pay $3 billion under the current system.”
A better approach, Zarelli said, would be to emulate the private sector by phasing in a single defined contribution system for all new state employees, with the state matching workers’ contributions up to 6 percent of salary through purchase of its own insurance policies.
Current employees would continue under their existing pension plans, he stressed.
“We need to remember that we are contractually obligated to pay existing employees per the system they came into under that contract,” he said.
State looks at options
Gov. Chris Gregoire is open to considering a shift to defined-contribution pensions as she looks for ways to make structural changes in state spending, said Glenn Kuper, spokesman for the state Office of Financial Management.
“We are looking at some different options as far as pension systems go,” Kuper said. “Sen. Zarelli’s option is one. It would also be possible to just make all new employees go into (PERS) Plan 3, which is kind of a hybrid — half defined-contribution, half defined-benefits. “
Tim Welch, spokesman for the 40,000-member Washington Federation of State Employees, says his union would oppose moving to a defined-contribution system.
“We believe we ought to make the current systems work,” he said. “The last pension system they created is a hybrid, and we’re already having problems with it.” For one thing, he said, enrollees “have to be up on Wall Street” to handle their investments, and many are not.
However, Welch added that public employee unions have little control over changes in the state pension system.
Since 2002, it has been illegal for the state to bargain pension benefits as part of collective bargaining negotiations with public employee unions.
“It really is up to the Legislature,” Welch said.
The federation does have the ability to lobby legislators, however, and did so over the enrollment of new employees in the new PERS 3 plan, Welch said. “We convinced enough legislators that the new pension system should not be a default system, that new enrollees should have a choice” between PERS 2, a defined benefit plan, and the new hybrid plan, he said.
If Zarelli’s plan or something like it comes before the Legislature, “we would fight to do what we do in a lobbying situation. That’s the only option we have,” Welch said.
State Rep. Jim Moeller, D-Vancouver, has deep reservations about moving from state pension plans to some form of individual retirement savings plans.
“I think everything needs to be put on the table,” he said. “But pensions are basically insurance programs. If you always have a defined contribution but you don’t have a defined benefit, that seems like it puts all the risk on the employee rather than the insurance carrier or the people who control the pensions.”
Zarelli said public employees might actually prefer a defined-contribution plan because it would be portable, and workers themselves could decide how much to contribute. Already, employees of four-year colleges and universities can choose such a plan, he said.
“The situation now is that the only one on the hook for bad management of assets is the taxpayer,” he said. “In this approach, you could wrap some kind of insurance around it. You put yours in, we put ours in and you can take it with you. No one is in the middle of it.”
Kathie Durbin: 360-735-4523 or kathie.durbin@columbian.com.
