March 21, 2013 | Vol. 116 -- No. 48

State should honor pension agreement before making changes

In our opinion

Funding education isn’t the only headache Legislators are taking extra-strength Tylenol for these days. Funding of the state employee’s retirement pension system is also eliciting consumption of a few tablets.

Senate Bill 5851 would create another retirement plan the state could offer its workers, but one not based on defined benefits as the other three plans, two of which are active, are but on defined contributions.

Like the current plans, employees and employers would be required to make contributions, the difference being that the new plan – Public Employees Savings Plan (PESP) – would be a 401(k) type similar to what private employers are able to offer, but it would not be a guaranteed benefit as the current plans provide.

State employees hired after July 1, 2014 would have a choice between the PESP and current Plans 2 and 3, defaulting to PESP if they didn’t make a decision within a 90-day window. Current Plan 2 and 3 employees can transfer their contribution amounts to the PESP between Jan. 1 through July 1, 2015.

Proponents of SB 5851 cite a report from the state actuary noting implementation of the PESP could result in $469 million in savings to state employers over 25 years. That same report also has a caveat, noting the actuary numbers are “sensitive to the number of members joining the PESP, the assumed long-term difference between the costs of the DB (defined benefit) and the DC (defined contributions) plans and the rate of return on the remaining DB assets.”

Varying those numbers could mean the difference between a $1 billion savings over 25 years or a cost to the state of $300 million or greater. That’s a lot of dough, especially if it turns out costing the state, or savings relied upon but not realized.

Opponents of 5851, including the Retired Public Employees Council of Washington, claim the state’s current pension plans, of which, Plan 3, is a hybrid of defined benefits and contributions, are fine, don’t need reforming and would be doing better if the state lived up to its end of the bargain to fund it as employees have consistently done.

The Legislature voted in 2011 to cease making yearly cost of living payments to the public employees plans. Public employees sued (nothing new when it comes to our Legislature) claiming the move was unconstitutional and last month Thurston County Superior Court Judge Chris Wickham agreed, noting “Our Supreme Court has held that modifications to vested pension benefits after employment has started impairs the employment contract.”

The state is appealing and the case is being fast-tracked to the Supreme Court.

Public employees contend there are other issues why 5851 should not become law. RPEC president and Medical Lake resident Howard Jorgenson told the Cheney Free Press editorial board there is no requirement in the bill for the state to fund its portion, potentially leaving paying for retirement benefits solely up to the employee.

There is also the fact that removing money from the current plans, through transfer of existing employees or new employees joining PSEP, weaken the current plans return on investment power, which Jorgenson said is currently earning 8 percent and has been more in the past. The new PESP would be an individual plan, which while carrying greater flexibility and control also carries greater risk of financial failure.

Jorgenson contends the bill is more political than fiscal, allowing legislators to tell their constituents that they did something about streamlining waste in government and reigning in state employee’s fat pensions. Jorgenson and others also claim legislators aren’t talking with the experts – in this case the state insurance board – and are making their decisions based upon misunderstanding and lack of knowledge of how the state’s pension system works.

It’s a complicated subject, one worthy of a half bottle of Tylenol or more. But before the state jumps in with another level of bureaucracy needed to manage the PESP, it might want to think about taking steps to uphold its end of the pension bargain first, and see how that works out.

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