New legal precedent set for public pension policy

New legal precedent set for public pension policy

The Washington Pension Funding Council recently voted to maintain a 7.5 percent assumed rate of growth for pension investments to ease financial pressure on the state and public employers which must both contribute to those plans. In Oregon, state lawmakers last year adopted a radical new approach to addressing its financial obligations by taking a portion of employee defined contributions in hybrid plans and using it to cover part of the employer-funded side.

The 2019 state law was challenged by several Oregon public employees, but was upheld by the Oregon State Supreme Court this month, setting a new precedent regarding public pension policy. The move by the Oregon state legislature also reflects the health of its public pension system compared to Washington state’s, though some analysts say that could change.

Under the 2019 Oregon state law, employees making $30,000 or more a year and enrolled in a Public Employees’ Retirement System (PERS) plan must contribute 2.5 percent of their salary to a stability account to offset unfunded parts of the employer contributions. Their remaining 3.5 percent salary contribution would still pay for their individual plan.

Ryan Frost is a policy analyst for the Reason Foundations’ Pension Integrity Project. In an email, he wrote that the new Oregon high court ruling “seemingly created a court-validated playbook for any state that has underfunded pensions, and is currently using a hybrid benefit design for current members. That playbook is to steal contributions made by members to their DC (defined contributions) accounts to cover the rising costs of DB (defined benefits) pension debt.

The policy is intended to help curb the costs for 906 Oregon public employers that must contribute to pension funding. While most of Washington’s pension system uses a 7.5 percent assumed rate of growth, Oregon currently uses a 7.2 percent rate. Oregon’s unfunded liability is also much greater than Washington’s, which dropped from $12.6 billion in 2016 to $8 billion. Oregon’s unfunded liability is currently at $27 billion and isn’t expected to reach Washington’s level until 2037.

Washington State Deputy Actuary Lisa Won told Lens that the organization doesn’t comment on other state’s pension policies, but noted that the only unfunded liabilities currently in Washington state’s system are for PERS Plan 1 and Teachers’ Retirement System (TRS) Plan 1, legacy retirement plans that were closed in the 1970s. Washington was the first state to offer hybrid plans, where both the employee and employer put money into the pension.

However, Washington’s unfunded liability could go up if the long-term growth rate was below 7.5 percent, or if the state adopted lower growth assumptions without increasing employer contributions. State Actuary Matt Smith has twice recommended lowering the rate to 7.4 percent. Last month he told the Pension Funding Council that the state can either increase investments into the system now or have an even greater financial liability in the future.

“While WA’s pensions are relatively healthy outside of the legacy Plan 1’s, the continued budgetary pressures exacerbated by Covid-19 could lead to this type of scenario playing out in the future,” Frost wrote. “We have already seen cost-saving measures enacted this month by the Pension Funding Council, who failed to adopt an accurate investment return assumption to save the state and employers money this upcoming biennium.”

The effects of the ongoing recession and economic shutdown due to COVID-19 also won’t be known until the 2023-25 biennium, when a 1989 state law requires TRS Plan 1 and PERS Plan 1 be fully funded. Employer contribution rates are also scheduled to decrease for all but two pension plans starting in the 2023-25 biennium.

The financial burden of the pension system could also grow if the ratio between active employees and retirees changes, though the State Actuary’s Office projects it will remain between 1:3-1:15 through 2050. Currently, there are 330,000 active employees in Washington’s pension system compared to 190,000 retirees.

State Office of Financial Management Director David Schumacher declined to comment for the story. Pension Funding Council members Sen. Braun (R-20), Rep. Drew Stokesbary (R-31) and Sen. Christine Rolfes (D-23) did not respond to requests for comment.

TJ Martinell is a native Washingtonian and award-winning journalist. Born and raised in Bellevue, he’s been involved in the news industry since working at his high school newspaper.

His investigative reporting for various community newspapers in the Puget Sound region has been recognized by the Washington Newspaper Publishers Association and the Society for Professional Journalists.

A graduate of Eastern Washington University, he has a B.A. in journalism and was the news editor of EWU’s student university newspaper.

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