Merging two of Washington State’s eight public employee pension systems could save taxpayers almost $2 billion over the next 25 years, without reducing pension benefits. That is one of the key findings of a December, 2016 report to lawmakers by the Office of the State Actuary. The report modeled potential outcomes of a 2016 Senate pension merger bill, if it had been approved. Some legislators say that would be a beneficial two-fer: reforming costly state pensions for public employees, while freeing up state revenue. A merger bill is expected to be introduced in the Senate this session, but significant opposition is anticipated.
The study for the Select Committee on Pension Policy was mandated through the 2016 supplemental operating budget. It analyzed the legal and actuarial impacts of last year’s SB 6668, which would have merged the Law Enforcement Officer and Firefighter Fund (LEOFF) Plan 1 with the Teachers’ Retirement System (TRS) Plan 1.
The bill’s sponsors included the late State Senator Andy Hill (R-45), the new Ways and Means Committee Chair Sen. John Braun (R-20), and Sen. Doug Ericksen (R-42).
Statehouse sources say that exactly how a pension merger reform bill is crafted will be important. One possibility is that the legislation could stipulate some portion of the likely savings be used to restore the Public Works Trust Fund, which has been swept of monies in order to shore up the state’s General Fund. The deal could have appeal for local governments that oppose the trust fund sweeps, and have helped to fund LEOFF Plan 1.
The “Lowest Hanging Fruit”
The merger is “the lowest hanging fruit of pension reform” proposals being considered, said Ericksen. Although the money could go into the Public Works Trust Fund, he told Lens it could also go toward fully funding K-12 basic education. “We’re looking to put every dollar we can into the classroom,” he said. “It (the pension merger) makes even more sense this year.”
Closed to new enrollees since 1977, TRS Plan 1 has $3.2 billion of the state’s $12 billion in total unfunded public pension obligations. The plan’s unfunded liability is virtually the same as it was in 1991. LEOFF Plan 1, also now closed to new enrollees, is projected to have a $1.1 billion surplus after providing vested benefits to all plan members or beneficiaries.
Merger Could Save State Almost $2 Billion
The State Actuary’s report says the envisioned merger would direct that surplus to the “future contribution requirements of the merged plan,” yielding “an expected long-term total employer savings of about $1.9 billion through reduced contribution requirements over the next 25 years.”
In a January 16 presentation to the House Appropriations Committee, Office of Program Research Pension Counsel David Pringle underscored the financial burden that pension obligations place on the state.
“The amount of money the state pays in contribution rates…represents a big portion of total pension costs,” he said.
A similar pension merger study conducted in 2011, as part of the 2011-13 operating budget, looked at combining LEOFF 1 and LEOFF 2 into a single plan. It concluded this would save local government employers and the state $1.85 billion over 25 years.
The merger proposed by SB 6668 also appears relatively safe from a legal challenge. An analysis in the study found that “mergers of qualified plans are not generally prohibited, but must be consistent with certain requirements.” One of those is that the merger not reduce member benefits. The study concluded that SB 6668 as drafted would have had no such effect.
“There’s very little downside to this plan,” Ericksen said. “It’s very hard to make a case against this proposal.”
“Tough Sledding” Ahead For Merger
However, any such pension merger “is going to be in for some tough sledding,” State Sen. John McCoy (D-38) told Lens. He is a member of the Senate Rules Committee, where SB 6668 died last year after clearing Ways and Means.
Critics may highlight the possibility of an even larger unfunded liability caused by the merger, should an economic downturn occur. The Office of the State Actuary assumes a 7.7 percent projected annual growth rate for pension investments. This helps determine state pension debt obligations.
However, if the actual growth rate turns out to be four percent or less, the study estimated that a merger could cost the state up to $3.2 billion over 27 years. Although this pessimistic scenario occurred in only a small handful of the study’s simulations, four percent growth is still greater than the private sector’s “risk-free” assumed rate of return, of less than three percent.
State Sen. Christine Rolfes (D-23) told Lens she was concerned that the 7.7 percent projected growth rate used by the state actuary may prove too optimistic. A member of Ways and Means, Rolfes voted against SB 6688. She told Lens any new proposal must ensure the solvent LEOFF Plan 1 is protected from harm if actual growth rates are lower than assumed. The merger must be more than a “one-time gimmick” to come up with new money, she added.
The new report says that fiscal risks in the pessimistic scenario can be mitigated in two different ways, through fine-tuning of merger legislation.
No Legal Claims On Surplus
Feedback to the Select Committee for Pension Policy on the merger concept from members of both pension plans was negative; 87 percent of 1,500 written responses expressed opposition. Ericksen said there is a belief among some beneficiaries that the LEOFF Plan 1 surplus belongs to them.
However, a December memo from the Office of State Attorney General Bob Ferguson stated that although pension members and beneficiaries have a “vested contractual right” to guaranteed benefits, they do not have a legal claim to any surplus monies. The memo also offered recommended amendments to SB 6668 such as clarifying the legislative intent of the bill.