State Workers

State retirement might change

Although it's just one quarter of one percent, a change to the state's retirement system proposed Tuesday would soon mean big costs for public employees and taxpayers.

Not making the change could cost even more.

At issue is how much the state should expect to earn on its massive retirement investments.

The Pension Funding Council should move down the expected rate of return on the pension fund to 7.75 percent per year, State Actuary Matt Smith suggested Tuesday.

The switch would require an extra $87 million in payroll contributions from public employees in the next two-year budget.

It also would require an extra $259 million in contributions to the pension fund from the state and local governments.

That's because lower expected returns on the investments in stocks, bonds, real estate and other holdings means more money must be put in now to pay for future retirements.

If the state doesn't lower expectations, however, it may have to make larger payments in the future to make up for the lost earnings. It already owes $5 billion in its oldest pension plans.

Smith's proposal didn't sell immediately with Victor Moore, head of Gov. Chris Gregoire's budget office.

The actual returns on investments have averaged 9 percent or higher over the past six decades, he noted.

"Nothing suggests that over long cycles it hits these kinds of (low) numbers," he said.

The $79 billion pension fund has been generating much higher returns in the past four years in particular, up to 21 percent last year.

Smith said the proposal was based on a lower rate of inflation: the rising costs of goods and services. He said the system now predicts 3.5 percent inflation, when 3.25 percent likely is more accurate.

Nationally, inflation has averaged 3 percent a year over the past 20 years. And it averaged 2.5 percent a year for the past 10 years, according to information Smith provided.

Inflation affects investment returns, in part because public employees are less likely to get cost-of-living raises if it is low. If workers are not given raises, their contributions to the pension plans won't increase.

Smith said it would be "cherry picking" to assume investment returns will remain high, while also using the higher inflation figure to project salaries and worker contributions to the fund will go up.

"Looking forward, we have reason to believe that returns are going to be below average for long periods of times. We would really, strongly caution against getting too optimistic," said Joe Dear, head of the investment board that manages the pension funds.

The current collapse of some mortgage lending companies illustrates the possibility of losses, he said. He also pointed to the growing federal budget deficit and the U.S. trade gap with other nations as reasons for caution.

The state's top economic forecaster, Chang Mook Sohn, said he supported the proposal to reduce inflation expectations ­- perhaps by even more, to 3 percent. He cited worldwide economic growth as one factor in keeping up demand for U.S. products.

The Pension Funding Council agreed to meet again in a month to discuss Smith's proposal to reduce the inflation and return figures.

"We're just still thinking through if that's the way to do it," Moore said.