State lawmakers carved some $7 billion in long-term pension costs last year by putting a freeze on cost-of-living-adjustments in two older retirement plans. New ideas this year could further trim the state’s long-term liabilities.
Republican Sen. Joseph Zarelli has floated a bill that would force new hires in state and local governments into what are called hybrid pension plans, which are optional now. Hybrid plans are split – one half providing a traditional pension payment in a worker’s retirement years, the other half providing a contribution to an investment fund much like an IRA or 401(k) that the worker would manage.
“Going to a hybrid pension system for all new employees means the government has less liability and more stability in the long run, and that should make for significant savings overall,” Zarelli said in a news release last week to announce several proposals to cut state obligations and firm up the budget.
“It isn’t the sweeping sort of reform the pension system could use,” he said, “but it is a step the Legislature should be able to take this year.”
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Zarelli’s pension idea, Senate Bill 6378, gets a hearing at 3:30 p.m. Thursday in the Senate Ways and Means Committee. The bill has two other pieces: letting the state skip a $130 million payment in the Plan 1 retirement accounts next year, and eliminating the early retirement benefit for newly hired workers.
He says the three elements of his pension bill could save the state $2.3 billion over 25 years.
State budget director Marty Brown says that a year ago, Gov. Chris Gregoire proposed ending the early retirement benefits for new government hires. Brown said House Bill 1742, which Democratic Rep. Ross Hunter of Medina sponsored, offered the biggest savings of the ideas Zarelli is talking about.
But Brown said his office has not yet seen what savings might accrue from shifting all new workers into a hybrid system. The state started offering optional hybrid plans a decade ago under then-Gov. Gary Locke.
Going further – requiring all workers to go to a defined contribution or 401(k)-style plan – would save state and local governments even more. Zarelli’s plan falls short of that.
State employee groups are likely to testify against any watering down of benefits, including pensions.
Last year, unions fought the bill that ended automatic COLAs for the Public Employees’ Retirement System 1 and Teachers Retirement System 1 plans, which are the state’s oldest, and least financially solvent, pension funds.
State Actuary Matt Smith says that PERS 1 and TRS 1 already have a 27 percent risk of going onto a pay-as-you-go footing, under current law. He says if the plans run short, there’s about a 1-in-20 chance the state will be on the hook for $1.5 billion.
Skipping a payment, as Zarelli proposes, would increase that risk, despite cutting the state’s short-term obligation. However, the other provisions of the bill also could lower the state’s longer-term risk, and Smith said this week that his office is still calculating the likely financial impacts of Zarelli’s proposals.
Smith also said in an interview that closing the various Plan 2 options to newly hired state workers could drive up contribution costs for the state and local governments that pay into the system.
Passage of House Bill 2021 last year ended the automatic cost-of-living increases for about 109,000 retirees in the TRS 1 and PERS 1 plans, which have the biggest unfunded liabilities of several state-run pension funds.
That bill saved the state about $400 million in pension contributions for 2011-13. This cut unfunded liabilities by $7 billion over 25 years.
The State Actuary’s Office lists the PERS 1 and TRS 1 as the only plans with unfunded liabilities. However, it says Washington’s various retirement systems taken together rank No. 3 nationally for financial soundness.
Updated to correct references to the Teachers Retirement System Plan 1 as TRS 1.