A nearly $4 billion hole in the state pension system has prompted Treasurer Jim McIntire to propose a state constitutional amendment that would force the Legislature to begin fixing the problem in 2015, before it becomes much worse.
State workers are in no danger of losing benefits or having their retirement checks bounce. Most of the state’s pensions are healthy and even running surpluses.
But certain older, closed, public-employee pensions risk running out of assets in the next couple of decades, which basically would push the state into a pay-as-you-go system. Benefits for those retirees would come directly out of the state general fund.
“If we get to the point where we’re just using tax dollars to pay pension benefits, it’s incredibly costly to the state,” McIntire said. “The more you invest in the pension plan up front, the lower the cost is.”
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Typically, three-quarters of the cost of a pension, such as the closed Plan 1 pensions for state workers and teachers, comes from investment returns, and one-quarter comes from state contributions.
State investments, even with the stock-market crash during the recession, have returned more than 8 percent annually on average over the past 20 years, state actuary Matt Smith said.
The multibillion-dollar hole for the Plan 1 pensions is essentially the gap between current assets for the pensions versus the recommended amount of money the system should have to meet future obligations. The gap was created from chronic underfunding by the state Legislature and repeated, unfunded benefit increases, state officials said.
The Plan 1 pensions cover roughly 15,000 active state workers and teachers and about 90,000 retirees and survivors.
Lawmakers in recent years repeatedly have put less money into the pension system than recommended by the state actuary, even when the economy was doing well.
They also have enhanced benefits, such as cost-of-living increases, that have added billions of dollars in costs to the pension system.
“The past 20 years, in terms of benefit improvements and funding practices, really can’t continue,” Smith said. “The costs will become unsustainable.”
He has recommended that lawmakers put $1.4 billion into the pension system during the next two-year budget to keep funding on pace, roughly doubling the $770 million in the current two-year budget.
The constitutional amendment would force lawmakers to contribute at least 80 percent of the recommended amounts to the currently healthy pensions for state workers and teachers, McIntire said. That would allow lawmakers flexibility to reduce payments during downturns. But it also would require them to keep the pensions fully funded over time.
Amendments to the state constitution require a two-thirds vote in the House and Senate, and simple-majority approval by voters.
In addition, the amendment would require minimum contribution levels for closed Plan 1 pensions, until the multibillion-dollar hole is paid off.
The amendment would put the same requirements on local governments, which are running about a $3 billion shortfall in Plan 1 pensions. The Legislature sets pension contribution requirements for state and local governments.
“I look at this and say these are obligations to the state, and we need to make good on them,” McIntire said. “There’s nothing the state can do to get out of them, so we need to step up to the plate.”
McIntire said both Democrats and Republicans have expressed interest in a constitutional amendment. Given that the Legislature has to revamp the state budget anyway to deal with a $5.7 billion shortfall over the next two years, that may create a political climate more open to an amendment.
“I think there are going to be a lot of windows open this year that haven’t been there in the past,” said Senate Republican Leader Mike Hewitt, R-Walla Walla.
Sen. Ed Murray, D-Seattle, who may become the next Senate Ways and Means chairman, said he’s open to a constitutional amendment dealing with the pensions.
“It’s something we should absolutely look at,” Murray said, noting he hasn’t seen McIntire’s proposal. “Long-term reform of the pension system is something we should address.”