Less money earmarked for pensions

Study: Formula to calculate investments had bad assumptions

By Adam Wilson | The Olympian • Published August 03, 2008

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Most state workers can expect a drop in the cut of their paychecks going to pensions next year, under a formula adopted by the Pension Funding Council last week.

The final recommendation was based on a study of the use of the pension systems during a six-year period.

The study pointed to two assumptions that were off in the formula to determine how much money should be invested now to cover the cost of future public employee retirements.

Notably, the retirees are living longer than expected. The new plan assumes that life spans will continue to improve.

"That was not a new topic, but a significant policy change," said state actuary Matt Smith, who recommended it.

Smith also advised the council, which includes top budget writers from the state Legislature and the Governor's Office, to lower expectations for salary increases.

The council has assumed salaries would increase by 4.5 percent a year, counting both step increases based on experience and cost-of-living adjustments. But Smith recommended cutting those expectations to 4.25 percent, a move that would reduce costs to public employers by $57 million in the next budget.

But assuming longer lives tips the costs in the other direction by requiring more money to be invested now.

The combination of the two would cost the state an extra $45.5 million in the next two-year budget, as well as $31 million to local governments.

Despite an expected budget shortfall next year, the council unanimously adopted the new formula.

The rates still must be approved by the Legislature in next year's budget bill.

The changes affected the various retirement plans differently. For the Public Employees' Retirement System, for example, rates would go down by 0.84 percent to 4.61 percent of salary.

For members of the Teachers' Retirement System, however, rates would go up by 0.67 percent to 4.93 percent of salary.