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In Our View: Paying for Pensions

With underfunding projected, it's time to revisit how they are formulated

The Columbian
Published: June 26, 2014, 5:00pm

Good news for public employees in Washington could mean bad news for taxpayers and, especially, lawmakers in the state.

The good news? That comes from State Actuary Matt Smith, who has revised his assumptions of how long public employees will live following retirement. Men turning 65 today are expected to live to an average age of 84.1 years, and women to an age of 86.4 years. The life expectancy grows by about another year for those retiring 20 years from now.

The bad news? Well, that also comes from Smith’s numbers, because those estimates show greater life expectancy than the state’s pension model has assumed — and that means the pensions are underfunded. Smith delivered the news last week to the Legislature’s Select Committee on Pension Policy, a bipartisan group that includes lawmakers and representatives of governments and labor.

A year ago, committee members believed the state’s pension plans had a total surplus of $544 million. But Smith’s new projections suggest that the funds are facing a $4.4 billion shortfall in the long term. “I think the general consensus on the committee was ‘wow.’ I guess we’ll have to study this for a while,” said state Sen. Barbara Bailey, R-Oak Harbor, chair of the pension commission. “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.”

Smith’s report is preliminary, and the final version is due in August. But it likely will add to the burden being hoisted by next year’s Legislature as lawmakers piece together the biennial budget. That burden is weighted by the state Supreme Court’s decision in McCleary v. Washington, which will force the Legislature to add an estimated $3 billion in K-12 education funding by 2018. Asked recently by The Columbian’s Editorial Board whether the state can meet the McCleary mandate without raising taxes, Gov. Jay Inslee said: “We need to look for some additional revenue, unless you decide to have a lot more homeless kids or a lot less for mental health. Demands on state government are growing faster than our economy.”

That assessment came before revised projections for the pension funds. The recommended down payment is $482 million for the next biennium, and $529 million for the 2017-19 budget cycle. Smaller increases will only increase the burden down the road.

Unlike some states, Washington long has taken a responsible approach to public employee pensions. The system traditionally has been fully funded, and several years ago the Legislature lowered the assumed rate of return on pension investments from 8 percent annually to 7.7 percent. The expectation of lower interest means the funds require more capital from the Legislature, local jurisdictions and employees — but it also avoids disastrous shortfalls if interest rates drop.

Governments at all levels must live up to pension commitments that have been made, but at the same time they must reconsider how public employee pensions are formulated. In an age when few private industries offer pensions, the benefits enjoyed by public employees should be brought in line with what the free market is providing. The Inslee administration is currently negotiating — behind closed doors — new contracts with state employees, and pensions likely will be a sticking point in those talks. Such pensions impact public policy for decades, and changes made now will resonate for generations.

As for the present, the revised view of public pensions adds one more item to a weighty list for next year’s Legislature.

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