State pensions take a dive

Investment fund for public employees falls victim to tough market

By Adam Wilson | The Olympian • Published January 30, 2009

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The investment fund that pays for the pensions of 453,000 public employees in Washington has taken a massive hit, losing 22 percent of its value in 2008.

The economic crisis that has spurred layoffs, government budget cuts and a state hiring freeze also has taken a large toll on the fund, which was worth $57 billion in September and was down to $51 billion in December.

Since its peak value in September 2007, the fund has lost almost $15.6 billion.

Joe Dear, executive director of the Washington State Investment Board, said the global credit crisis has damaged virtually every type of investment the board can make.

"Credit in our economy is like the air supply. And when the air supply is poisoned, there is no place to hide," he told lawmakers Thursday.

The benefits paid to retirees are not in danger. The state and other governments are legally required to pay workers what was agreed to during their careers.

But investing early takes much of the burden away from taxpayers, allowing legislators to invest some now for — they hope — a large return later.

The state plans on an 8 percent return on investments, and in recent years, it has seen returns double that. But with the extraordinary losses of the past 15 months, the average rate of return for the past 10 years combined has dropped to 5.4 percent.

Looking forward

Meanwhile, the recession has opened at least a $5.7 billion hole in the next two-year state budget. Gov. Chris Gregoire has suggested using a new way of paying into pension funds that will save $386 million but require more money be added later.

"The observation I would make is that if we don't have the money, we can't invest and get a return on it," Dear told representatives.

He added that the markets are bad enough now that the board must sell some investments in order to purchase others.

And State Actuary Matt Smith, who tracks whether enough money is being invested into the pension fund, told lawmakers that the market losses make two situations worse.

Most importantly, losing money in the fund means a significant expansion in the unfunded liability in the oldest pension plans — money that should have been put in earlier and is needed to pay future benefits, Smith said.

And the drop will mean the share of salary that employees pay into the newer pension plans will have to go up in the next several years to recoup the losses, Smith said.

"Will this air become less poisonous? We continue to see erosion in employment and dramatic falls in employment. Is it your opinion that we will find a solution to what ails us?" asked Rep. Steve Conway, D-Tacoma.

"Until the credit markets return to more normal functioning, until house prices stabilize, the problems will continue. We've not seen the end of the bad news," Dear said.

But he stressed that the investment board has taken a long-term strategy in investing that accounts for ups and downs.

"It's a difficult situation, but if we have the courage of our convictions, we can get through this," he said.