The Legislature is currently considering major pension reform (SB 6378) to help bend the cost curve and improve the affordability of the state’s pension system. The following is from the Washington Policy Center’s 2010 Seattle Times op-ed discussing the need for pension reform:
“Long-term projections show pension costs accounting for nearly $4 billion of state spending by 2025. This makes pension obligations one of the largest cost drivers lawmakers will face over the next decade.
While Washington made significant pension reforms in 1977, closing to new hires the two most expensive defined-benefit plans (the ones running the large liabilities), recent failure by state officials to prioritize pension payments has exacerbated the current problem.
From 1991 to 2000, the Legislature consistently made required state contributions to these plans. Since then, however, lawmakers have on average made just 58 percent of the required contributions.
The legislature compounded these shortfalls by significantly expanding pension benefits, including a $2.3 billion increase in 2000 (early retirement for those with 30 years experience) and a $2.5 billion increase in 2007 (gain-sharing replacement).
This led the state actuary to the common-sense recommendation that legislators make 100 percent of the actuarially required pension contributions and avoid large benefit improvements until the risk and affordability problems of the current pensions improve.
Unfortunately, as evident by the recent failure of state officials to make the required pension contributions while at the same time increasing benefits, it has become clear that additional constitutional safeguards are needed.
To help avoid kicking the pension liability can further down the road while putting the state’s credit rating in jeopardy, it may be time to pass a constitutional amendment that forces state officials to make the required pension payments and creates a higher threshold to provide enhanced benefits. While funding these past pension promises may crowd out other spending, the alternative puts taxpayers in a worse position.
Meanwhile, legislators must stop enhancing retiree benefits until all the state’s pension plans return to healthy status. Exacerbating taxpayer exposure while billions in unfunded liabilities exist is the height of irresponsibility. It may also be time for additional reforms to help minimize future pension liabilities.
For future pension benefits, the state should switch solely to a defined-contribution model, akin to a 401(k) model, for new hires. This will help prevent the unfunded-pension liability problem from worsening while we climb out of the $7 billion hole already present in the two closed plans.”
The ideal state pension reform would:
- Not result in any skipped payments
- End early retirement
- Close Plan 2
- Direct all savings to pay down the state’s unfunded pension liabilities
- Place new hires into a defined contribution plan
- Enact constitutional provisions requiring the actuarially recommended pension payment and creating a supermajority threshold to enact new benefits.
[Reprinted from the Washington Policy Center blog; feature photo credit: Stéfan]
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