WA bill’s changes to public pension funding could cost taxpayers, critic warns

(The Center Square) - For years, Washington state’s public pension system has been considered one of the best funded in the nation. However, one critic of a new bill passed by the state Legislature warns that it could undermine the system’s solvency in the long term and at the expense of taxpayers.

One of the key factors in actual assumptions is determining the assumed rate of return on investments that fund the system, which in turn determines how much the state Legislature must contribute. The higher the assumed rate of return, the less contribution the Legislature must make to ensure it is fully funded.

According to the Office of the State Actuary, “over the past 20 years across all plans, investment returns have comprised roughly 70% of the pension fund’s total income. If investment returns are lower than expected, it often results in an increase to member and employer contribution rates to offset the lower than assumed investment assets.”

Prior to the passage of Senate Bill 5237 this session, the assumed rate of return was 7%. However, the bill raised that rate to 7.25% for every plan in the state except the Law Enforcement Officers’ and Firefighters’ Plan 2. The bill was sponsored by Sen. Steve Conway, D-Tacoma, at the request of the state Office of Financial Management.

The bill passed unanimously in the Senate and passed in the House on a 80-17 vote.

In 2023, the Office of the State Actuary reported that the system would be fully funded by 2027. Driving much of the unfunded liability are two retirement plans that were closed in the 1970s, The Public Employees' Retirement System Plan 1 and the Teachers' Retirement System Plan 1. TRS Plan 1 is projected to be fully funded by the end of the 2025 fiscal year.

Testifying at the bill’s Jan. 24 public hearing, Gov. Bob Ferguson’s Budget Assistant Marcus Ehrlander told the Senate Ways and Means Committee that “the bill gives the state more response time to address reaching 100% funding. The goal is to get to 100% funding and to stay at 100% funding, and so the bill strikes the balance between those priorities.”

While the altered rate of return will save the state an estimated $1.1 billion over the next four years, Reason Foundation Managing Director Ryan Frost warned in an article that the Legislature is taking a huge gamble.

“If that bet fails — even slightly — the plans will face serious funding gaps,” he wrote. “Washington’s choice to swim against this national trend by adopting a more aggressive return assumption significantly increases the likelihood of future shortfalls.”

In the bill’s fiscal note, OSA warned that lowering contribution rates “will increase the likelihoods that future contribution rates exceed the above risk thresholds. Put another way, a reduction in short-term pension funding means the retirement systems will have fewer assets to weather negative economic environments in the future.”

OSA did not testify in favor or against SB 5257. In an email to The Center Square, Deputy State Actuary Lisa Won wrote that OSA “is an independent and non-partisan legislative agency that provides pension analysis on bills introduced during the legislative session. We do not take positions on any pension legislation.”