New estimate: Pension perk may cost state much more
There's more troubling news about the state's pension funds. New projections show taxpayers could be on the hook to pay billions of dollars more than previously thought to fund the system.
The estimates, which deal with the cost of a pension perk that shares stock-market profits with retirees, predict a tab of more than $9 billion over 25 years if the benefit is kept. That's about four times what state officials were contemplating in December.
"It's a much bigger price tag than people realized," said Senate Majority Leader Lisa Brown, D-Spokane, referring to recent research done by the state Actuary's Office.
Late last year, state officials estimated the cost of the benefit, called gain-sharing, at about $2.3 billion. However, at the time, lawmakers were focused on one plan in the pension system, a plan that covers mostly workers who have already retired. The projected cost of gain-sharing ballooned after a new state study took a thorough look at how the benefit affects the entire pension system.
"I didn't have any idea. It was a huge eye-opener," said Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee.
Sticker shock has lawmakers working on bills that would replace gain-sharing with less-expensive benefits. Those alternatives, backed by teacher and state worker unions, a powerful lobby in Olympia, would save the state money but would still cost billions of dollars.
It's not clear whether there are enough votes to move any legislation on the matter this session. Brown would say only that the bills are still in play: "There is a desire on the part of many legislators to ... come up with something to replace gain-sharing."
House Majority Leader Lynn Kessler, D-Hoquiam, said House Democrats are mixed about whether to tackle the problem this session or wait until next year. "There's a concern with some folks that we haven't had enough time to cook it and figure out what to do," she said.
Quick action urged
Zarelli argues the Legislature should do something now. Lawmakers, he contends, basically have two options: get rid of gain-sharing entirely or replace it with something cheaper.
"I just encourage them to make a decision. Let's not keep putting this off," he said.
When lawmakers approved gain-sharing in 1998, they thought it wouldn't cost the state any money. The stock market was booming, and double-digit returns from pension-fund investments seemed commonplace.
The Legislature approved a plan that increased retirement benefits for government workers when investment returns exceeded expectations. Basically, the law says that when the average rate of returns exceeds 10 percent over four years, half of that excess profit goes to workers through enhanced retirement benefits.
For example, some workers get cash payments into individual retirement savings accounts. The other half of the excess profit gets plowed back into the pension fund to help protect against future downturns in the market.
Gain-sharing created several problems for the state pension system, but the biggest one is that it effectively reduces the rate of return from state investments over time.
When the stock market is hot, gain-sharing skims off cash that could otherwise offset future losses.
The new report on gain-sharing, requested by lawmakers a year ago, projects state and local government could have to pump about $7.8 billion into the pension system over the next 25 years if the benefit is kept.
That projection, combined with the fact that the state has already committed to paying increased benefits of at least $1.4 billion because of past gain-sharing, puts the total potential cost of the benefit at more than $9 billion.
The kicker is that the state actuary's estimates assume the government starts paying into the system by next year to cover the projected shortfall. The longer the Legislature waits to deal with the problem, the worse it gets.
State Actuary Matt Smith said that compared with most state systems, Washington's pension system is in good shape. Gain-sharing presents a potential long-term problem. But, "In the short term it does not present any significant risk to the benefit security for current retirees," he said.
The Legislature, when it approved gain-sharing, reserved the ability in state law to get rid of it later. An opinion issued by the state Attorney General's Office last year reaffirmed that right.
However, leaders in the House and Senate aren't talking about dumping gain-sharing without a replacement benefit.
2 plans under review
They are discussing two key measures that would replace gain-sharing with less-expensive benefits.
Senate Bill 6795 would authorize a pension cost-of-living increase for some workers and a guaranteed rate of return on certain investments for others.
Preliminary estimates by the state actuary indicate the bill could cost the state around $900 million over 25 years. The estimated total cost to state and local governments combined could be close to $2 billion over the same time period.
Another measure, Senate Bill 6445, commonly referred to as the "rule of 90" bill, would let workers combine their age with the number of years they've worked in government service. If the total reached 90, they could retire with full benefits. That would let some longtime government workers retire in their mid- to late 50s.
That measure would cost the state an estimated $1.3 billion over 25 years. The total cost to state and local government would be a little over $3 billion.
The Washington Education Association, the state's largest teachers union, and the Washington Federation of State Employees, which represents 38,000 state workers, want the Legislature to pass both measures.
"We think the Senate should move forward with this," said Charles Hasse, president of the WEA. "It will save the state money. It's good policy and it's good politics."
Andrew Garber: 360-943-9882 or agarber@seattletimes.com
Pension system at a glance
Compared with that of most states, Washington's pension system is in pretty good shape, according to the state Actuary's Office. But it has its problems. Here are key facts about the system and the troubles it faces:
Pension-plan facts
• Assets: more than $40 billion.
• People covered: About 403,000 active and retired government workers.
• Types of workers covered: teachers, state employees and city and county workers.
Basic funding gap
Current retirees are in no danger of losing pension benefits. But one of the state's oldest pension plans, commonly referred to as Plan 1, has a $4 billion hole in its funding. The plan covers 121,000 teachers and government workers, most of whom have already retired.
Part of the gap was created because the state grew reliant on large stock-market returns and sharply reduced the amount of tax money it was putting into the pension fund in the late 1990s. When the market plummeted after the dot-com bust and the 2001 terrorist attacks, the state didn't make up the shortfall.
A costly perk
Lawmakers exacerbated the problem by increasing benefits for government workers in Plan 1.
Gain-sharing is the top example. The costly perk beefs up benefits for retirees when the stock market is hot. As a result, it skims off cash that otherwise could help make up for low market returns in later years.
The state has already committed to paying out more than $1 billion in gain-sharing benefits so far.
The biggest potential problem with gain-sharing, however, has yet to hit. Other workers, beside those covered in Plan 1, are eligible for gain-sharing benefits. The state actuary estimates state and local government will have to pay almost $8 billion into the pension system over the next 25 years to make up for lost stock-market returns, if gain-sharing is kept.
With the money already committed through gain-sharing, the total long-term cost is estimated at more than $9 billion.
Looking for solutions
Lawmakers this session are debating whether to replace gain-sharing with a cheaper pension benefit. They are also talking about paying off some of the existing $4 billion shortfall in Plan 1.
Andrew Garber