In Washington, we're lucky to have one of the best pension systems in the nation when it comes to funding our liabilities. But while our funds appear healthy today, it's the health of our funds tomorrow that worries me. Lawmakers ought not turn a blind eye to promises with little chance of fulfillment.
The glaring problem is that all our pension assumptions are based upon a long-term return of 8 percent.
In the investment arena, there aren’t too many people that can find a solid 8 percent return on their investment. It turns out that in the public sector, there aren’t too many that can either.
Since the financial crisis, at least 19 state and local pension plans have cut their return targets. While we’ve held steady at 8 percent, it’s easy to see the danger in complacency. If you take that 8 percent and only receive a return of 7 percent, then we go from a once fully-funded pension system to one that is over $6 billion in the red.
This session, I’ve proposed a bill, Senate Bill 6543, that would help address our growing pension liabilities, creating a healthy pension system that won’t burden future budgets and limit our ability to pay for services.
Most state pension benefits are calculated as a set percentage, increasing 1-2 percent with each year of service. That percentage is then applied to a retiree’s average salary over the 5-year period during which the retiree was paid the most.
But a loophole has allowed state employees to take advantage of the system.
It’s become common practice now for retirees to “sprint to the finish,” racking up large sums in overtime in their last five years of service. Their pensions are then based off significantly larger salaries than the base salary averaged over their careers, ballooning pension payments to the detriment of the system.
SB 6543 would not change the benefit formula for current government employees, but would prohibit overtime in pension calculations for new employees.
The bill would also require the state actuary to calculate, and the Department of Retirement Systems to collect, supplemental pension contributions from a current member’s employer for overtime that the member works.
Not only do we need to curtail the costs imposed on our retirement system by inflated pensions, we also need to create a disincentive when it comes to the assignment of costly overtime hours in the first place. Our current system doesn’t fully account for the true costs of overtime and its impact on our pension liabilities.
We have a duty to fulfill our promises made to current state employees – and we will. The focus this year must be on reform and bending the cost curve of state government so we don’t come back year after year with another new budget deficit.
This bill gets us moving in the right direction, increasing the health of our pension system without the sacrifice of current benefits in the process.
If we do nothing, the story is likely to end like that in Vallejo, California where pretty much all the taxes are going towards past retirement obligations, leaving no money for current services. This is a situation we have a responsibility to avoid.