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State actuary defends pension fund accounting

September 30, 2011
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Washington State Actuary Matt Smith believes the state's pension system is basically well-funded, but understands concerns based on the difficulties other states are experiencing.

Is Washington’s pension system well-funded and secure, or does the accounting system it uses simply overstate strengths while minimizing weaknesses?

According to the state’s actuary, the truth is a combination of both.

Matt Smith, appearing on Thursday night in a town hall meeting at the University of Washington, told attendees the state uses a variety of methods to look at its pension system depending on what  it wants to see.

“Both sides are right,” he said. “There are different measurements for different purposes.”

Smith was responding to a report prepared earlier this month by American Enterprise Institute scholar Andrew Biggs for the Olympia-based Freedom Foundation, which sponsored the gathering on Thursday night.

In his analysis, Biggs said the state is only funded at 52 percent — a level that would earn it a shaky status if Washington were a private business.

“Judged by private-pension standards, Washington state’s public pensions aren’t fully funded,” he wrote. “For context, the U.S. Department of Labor rules that any private pension under 65 percent funding is considered ‘critical’ and must immediately move to fix its problems. And the burden of truly fully funding pensions on Washington’s budget won’t be the 3 to 4 percent the state is currently putting aside, but several multiples of that.”

The main problem, Biggs said, is that the state reports the value of its pension system based on the 8 percent return it hopes it can earn via riskier investments in the stock market rather than the 4 percent it is guaranteed to earn with safer instruments like Treasury bills.

“Just because you say you’re going to get 8 percent doesn’t mean you will,” Biggs told the town hall crowd. “On paper, risk solves the problem. In real life, it doesn’t always work that way.”

Smith, however, insisted the state wasn’t being overly optimistic in its accounting.

“Over the past 20 years,” he said, “the state has averaged a return of 8.2 percent on its investments. If you’re looking for an accurate number, does it make more sense to base your projections on history or worst-case scenarios?”

Smith said the state also calculated its pension funding according to Biggs’ more conservative standards, and that both sets of numbers were on the Actuary Office‘s website for everyone to see.

“We’re as transparent as any state in the country,” he said. “We’re not trying to hide anything. Compared with other states, Washington is much more open and much better funded.”

Biggs agreed Washington wasn’t in as precarious a position as other states like California, whose unfunded pension liability has been estimated at $500 billion.

But that doesn’t mean the state doesn’t have a problem.

“Being one of the better-funded states these days is being like the prettiest hog in the slaughterhouse,” Biggs said.

Freedom Foundation founder Bob Williams said the issue isn’t a partisan one, noting that he’s currently working with governors of both parties around the country to heighten awareness about the ticking pension time bomb.

“I can tell you what someone who is definitely not a conservative thinks about this problem,” he said. “Bill Gates Jr. has been quoted as predicting state and local governments will have to lay off 100,000 people over the next few years, and he attributes that to fraudulent accounting methods.”

It’s not uncommon already, he said, for Washington cities to be paying for three policemen — one active and two retired.

“A day of reckoning is coming,” Williams said. “It’s a real problem.”

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