In a 3-3 vote, the state Pension Funding Council rejected a motion at a Sept. 30 meeting to lower the assumed rate of return for the public pension systems and correspondingly increase the state’s contribution to the pension plans. Although recommended by State Actuary Matt Smith, council members opposed to the move.
Currently, the state’s unfunded liabilities total $11.2 billion, with the rate of return used by the state at 7.5 percent. The unfunded liability is a decrease from the $12.6 billion unfunded liabilities from the previous year.
In his report to the council, Smith recommended lowering the assumed rate of return to 7.4 percent, although in the past five years the actual returns have been 7.85 percent. His recommendation was based on investment returns by the Washington State Investment Board (WSIB).
“We do take on higher risk to get a higher return,” WSIB Executive Director Theresa Whitmarsh told the council. “One of the philosophies of the WSIB has been because we’re such a long-horizon investor, if we’re disciplined and don’t overreact to short-term market trends, we are able to essentially harvest that response.”
However, the 20-year return has been 7.1 percent, which Smith told the council is because the investments were “hammered by the Great Recession. It kind of gives you an idea of the challenge of looking at historical returns when trying to figure out what the future’s going to look like. The period that you select really does matter. You want to be sure you’re looking at a complete market cycle. The returns of the last ten years and shorter do not represent a complete cycle.”
Sen. John Braun (R-20) indicated he would support the motion: “It absolutely is about priorities in the budget….In all these cases, these are promises already made….I think it is very important that we put a priority on paying this pay this bill before we take on other new costs within the state budget”. Braun said he understood the challenge for budget writers to cover the cost, but said it would create needed “downward pressure” on other new spending.
Also in favor was Senate Ways and Means Committee Chair Christine Rofles (D-23). She told colleagues: “we’re in the good economic times, and for me going from 7.5 percent to 7.4 percent is still fairly optimistic in terms of the market.”
Rep. Drew Stokesbary (R-31) vocalized his opposition. “It’s impossible for me not to take a holistic view. This change in assumption will have immediate impacts on both our state budget and our local government. I do think a market correction is coming, but I think that if a market correction comes that the short-term difference…isn’t going to be that big. However, the hit to the general fund is going to be pretty big. If we do have a market correction….and also obligated ourselves to fund a 7.4 percent investment or assumption, that will be a double whammy that’ll make our jobs…even that much more difficult.”
State Office of Financial Management (OFM) Director David Schumacher said “we don’t need to make a decision today, because this will not go into effect until the budget a year and a half from now. We’ll have plenty of time to make that decision.”