State Actuary Matt Smith’s latest report on the financial health of Washington’s public-employee pensions says the outlook is for continued improvement despite a financial dip over the past few years. But Smith still thinks the state needs to ratchet down its investment return assumptions to 7.5 percent by 2021-23 – a move the Legislature has only half-accepted.
Smith’s biennial report on pension health also cautions that state and local governments face a potential $1.3 billion financial hit in 2015-17 if two legal challenges to legislative reforms are overturned by the State Supreme Court.
The Supreme Court, which already is up to its neck in the Legislature’s school funding issue, is hearing arguments in the pension cases on Oct. 24. At issue are two of the Legislature’s decisions in recent years: one, to repeal automatic cost-of-living increases for participants in several first-generation pension plans; and two, to repeal a law that once let employees share in stock gains when investment returns on pensions were red hot over several consecutive years.
Smith gave a verbal version of his report Tuesday to the Legislature’s Select Committee on Pension Policy, a bipartisan committee chaired by Democratic Rep. Timm Ormsby of Spokane and that also has members from government agencies and retirees.
Overall, Smith said the outlook is for continued improvement in pension health as investment climate recovers and as the Legislature’s changes in pension policy play out in the future. But he is asking lawmakers to reconsider his recommendation from 2011 – to lower the state’s assumed earnings from pension investments to 7.5 percent by 2021-23.
Lawmakers previously accepted only a portion of that recommendation, agreeing to lower it two notches to 7.7 percent by 2017-19. Ormsby said the pension committee and the Pension Funding Council that acts on its recommendations have backed the 7.5 percent rate previously, but members have not discussed it this time around.
“I don’t anticipate it being controversial” for the committee, Ormsby said, calling the 7.5 percent target a good one. “I’d like to land on the side of more conservative.’’
About three-fourths of pension benefits are paid out of investment earnings, so investment assumptions are important. Higher assumptions means lower contributions by the state, local governments and workers.
But a decade ago the state went to an 8 percent per year return goal or assumption that has proven hard to match as the country moves out of the Great Recession (Smith’s report says it’s been an average 2.95 percent over the past five years).
Smith’s report offered other projections for inflation, wage growth, and population growth, which guides growth in the pension plans. The actuary said he assumes inflation at 3 percent a year, wage growth at 3.75 percent, and plan growth at less than 1 percent a year – which he said were his recommendations in 2011, too.
Smith’s assessment of the pension system’s fiscal health comes as many states are far from fully funding them.
Most of Washington’s plans are more than fully funded, but it has two major funds for which there is unfunded liability – and the state lost ground since 2010. The Public Employees Retirement System Plan 1 has gone from 74 percent funded in 2010 to 69 percent funded in 2012, and the Teachers Retirement System slipped from 84 percent funded to 79 percent funded.
But a Washington Post report on Monday said Washington and five other states are the only ones with pension systems that are on balance at least 90 percent funded, while three states are less than 50 percent funded and 26 states’ plans are less than 70 percent funded. The average among all states is 73 percent, according to the report based on the Morningstar firm’s analysis that said Wisconsin has the strongest plans at 99.9 percent funding.
UPDATE: This post has been corrected to change references to the budget years in which the COLA and gain sharing impacts are calculated (2015-17) and in which the investment gain targets fall to 7.7 percent (2017-19). as well as the rate of return on investments during the past six years (2.95 percent).