State actuary Matt Smith’s latest report on the financial health of Washington’s public employee pension projects continued improvement despite a financial dip during the past few years. But Smith still thinks the state needs to ratchet down its assumed investment return to 7.5 percent by 2021-23 — a suggestion the Legislature has yet to fully heed.
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 court is hearing arguments in the pension cases Oct. 24. At issue are two of the Legislature’s decisions in recent years: to repeal automatic cost-of-living increases for participants in several first-generation pension plans, and 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 Rep. Timm Ormsby, D-Spokane, that also has members from government agencies and retirees.
Overall, Smith said the outlook is for continued improvement in pension health as the investment climate recovers and as the Legislature’s changes in pension policy play out. 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 the assumption to 7.7 percent for 2017-19. Ormsby said the pension committee and the Pension Funding Council that acts on its recommendations have previously backed the 7.5 percent rate, 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 mean lower contributions by the state, local governments and workers.
A decade ago, the state bumped its assumed return to 8 percent, a goal that has proven hard to match as the country moves out of the Great Recession. Smith’s report said actual returns have been an average 2.95 percent over the past five years.
Most of Washington’s plans are fully funded, but it has two major funds for which there is unfunded liability.
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, when looked at them as wholes, are at least 90 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.
Brad Shannon: 360-753-1688 email@example.com theolympian.com/politicsblog
CORRECTION: This story has been revised 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).