The Pension Funding Council voted 4-2 at its July 29 meeting to keep a 7.5 percent assumed rate of growth for investments a week after the state Select Committee on Pension Policy voted to lower it based on the recommendations from State Actuary Matt Smith.
This represents the second time since September that the council has gone against Smith’s recommendation for a slightly more modest growth assumption, but one that would also require greater employer contributions from the state and public agencies.
Although the public pension systems’ unfunded liabilities have dropped substantially since last year, that is due to previously unrecognized gains. The system is currently 92.3-percent funded and has an $8.5 billion unfunded liability.
Meanwhile, the effects of the economic shutdown due to COVID 19 this year won’t impact the pension asset value until the 2023-25 biennium, according to Smith. At the same time, maintaining the 7.5 percent rate means that state and public employee contributions to the plans will go down, creating a potential shortfall.
Smith recommended a 7.4 percent assumed rate of growth for pension investments even before the COVID-19 pandemic was a factor. However, he now says that the lower rate could save the state money in the long-term but would require greater investment up front to offset lower gains.
“If the choice is to pay more later, the ultimate costs are going to depend on…the magnitude of the funding shortfalls,” he said.
Smith’s 7.4 percent recommendation is based on a 2019 economic experience study, though he said “a lot has clearly changed since.” New studies are planned for the next two years, and Smith said that those are likely to result in an even lower recommended growth rate than 7.4 percent.
Yet, local government advocates providing public comment at the meeting said it’s difficult for public employees to put even more money into the system during an economic recession. Association of Washington Cities Government Relations Director Candice Bock told the council: “we don’t want to do something now that will result in much higher rates down the road. With that being said, we are on course in an economic crisis that is hitting cities just as hard as it is hitting the state’s budget right now,” adding that keeping the assumed rate of growth at 7.5 percent “gives us perhaps a little more breathing room.”
State Office of Financial Management Director David Schumacher also favored maintaining the 7.5 percent assumption. “Even if we’re in a situation where a slightly higher assumption now means slightly more spending four or five or six years from now, I think that’s a kind of tradeoff that we should probably take pretty seriously as we’re beginning to build this next budget.”
Rep. Timm Ormsby (D-3) also voted for 7.5 percent, though he voted for a 7.4 percent rate during the state Select Committee on Pension Policy’s July 21 meeting. “All things being equal that (7.4 percent) would be a good policy, but we find ourselves in unpredictable times.”
In favor of 7.4 percent were Senate Ways and Means Committee Chair Christine Rolfes (D-23) and Ways and Means Ranking Member John Braun (R-20). Rolfes told colleagues the council should heed Smith’s advice, adding that she prefers going into the legislative session “knowing that… our i’s were dotted and our t’s were crossed.”
Braun said that the 7.4. percent rate presents a “unique opportunity to reduce our rate and reduce our risk in the future and still have savings. I don’t think we can continue to push potential costs, and therefore risk, into the future when we have an opportunity for us where both plans offer the state and local governments significant savings.”
The state legislature has the authority to change the rate adopted by the council. The next economic experience study will be completed next spring.