The oldest state pensions, already underfunded, were rocked by a worldwide crash in investment markets last year.
They are in greater danger of draining their reserves and forcing the state to pay retirees directly from the state treasury, State Actuary Matt Smith said Tuesday.
Retirees are guaranteed their benefits, but the health of the pension plans is at risk, and taxpayers certainly will have to pay more in the future for the benefits of long-retired workers, Smith said.
“You have a risk of going to pay as you go … the most expensive way to fund pensions,” he told the Select Committee on Pension Policy.
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From investment returns as good as 21 percent a couple of years ago, the multibillion-dollar state pension fund saw a 25 percent drop last year, Smith said.
And lawmakers facing a budget shortfall opted to reduce funding for the pension plans now in exchange for bigger contributions in the future, making the drop in funding deeper.
The strategy also helped local governments weather the recession, noted committee member Corky Mattingly, an auditor.
“I know Yakima County appreciates the cut, but we’re terrified of the increase in ’11,” she said.
The retirement systems used by most current public teachers and state employees, Plans 2 and 3, were 126 percent funded in 2007, according to a report by the Office of the State Actuary.
That means they had more money on hand than needed to pay for the benefits that workers had earned.
Under a pessimistic assumption of 5.6 percent return on investments over the next 15 years, the plans would drop to 80 percent funding before recovering, Smith said.
“The good news is that it isn’t going to go down too far, but these plans have never been below 100 percent funded,” he said.
The older plans – closed in 1977 – were 67 percent funded in 2007, during the good times.
Under the pessimistic market scenario, they would drop to 36 percent funded and would not recover to 2007 levels by 2024 – when they were supposed to be fully funded.
“You were unhealthy to begin with, and now you’ve gone though a period of dramatic period of loss,” Smith said.
The scenario shows how much the markets affect pensions, he said, noting that the pessimistic assumption was not a worst-case scenario, and better returns could help the older plans recover fully by 2024.
Smith recommended that lawmakers stick by the plan to increase payments in future, and that they offer additional money if it’s available. The sooner the money is invested, the less money will be needed in the future, he said.
But Rep. Barbara Bailey, R-Oak Harbor, noted that the older plans were underfunded because lawmakers had not put in enough money in the first place, and they didn’t fill the gap completely during good budget times.
“Now we are again putting those plans out into the future,” she said. “I just think if we learn from the mistakes in the past, I hope we can have a better future.”
Adam Wilson: 360-753-1688