The Washington State Select Committee on Pension Policy voted unanimously on Tuesday morning to downgrade assumptions about how much money the state will make on its investments — meaning the state may have to assume a larger share of the funding burden in order to keep the public employee pension system solvent.
Washington State Actuary Matt Smith last week issued a report projecting the state would likely fall short of its traditional 8 percent rate of return due to lingering softness in the U.S. economy.
Consequently, he recommended the state phase in a 7.5 percent of return over 10 years.
The good news, he said, is that matters could have been worse.
“The recovery from the Great Recession is well under way,” Smith said. “We’re not back all the way yet, but we’ve made back quite a bit of what we lost when the economy went bad.”
In 2009, he explained, the difference between what the state expected to make on its investments and what it actually did was around $9 billion. This year, that number was reduced to just $3 billion.
“Making up $6 billion in just two years gives you some indication of how volatile the markets can be,” Smith said. “Because we haven’t caught up completely, and because we don’t expect to make 8 percent going forward, the state’s contribution rate will go up. It just won’t go up as much as we had anticipated it might.”
“The changes will improve the long-term health of the system,” said Select Committee staffer Aaron Gutierrez. “But it will have significant short-term budget impacts.”
Assuming the Legislature agrees to a reduction of its pension investment rate projections, the state would be obligated to increase its share of the funding by a corresponding amount.
Smith’s plan calls for moving from 8 percent to 7.5 percent over 10 years, starting with a 7.9 percent rate of return for the 2013-15 biennium.
Using the phased-in approach, Washington is looking at an increase of $27.4 million from the General Fund and $10.7 million from other budget areas in the first biennium.
Without phasing in the change — if state jumped from 8 percent now to 7.5 percent immediately — its contributions to the pension system would increase by $261 million from the General Fund and another $101 million from other budget areas in just the first biennium.
“One thing to remember is that our current employer contributions were at historically low levels to begin with,” Smith said. “We couldn’t sustain those levels indefinitely, so we were going to have spend more at some point anyway.”
The Select Committee’s recommendations will be forwarded by the end of the month to the joint House and Senate Pension Funding Council, which will vote on whether to forward them to the Legislature for formal approval.