MY job as state treasurer is to get the best value at the lowest possible cost for taxpayers. This is why I oppose recent efforts to replace Washington’s successful and affordable public pension system with a defined-contribution plan. If implemented, this solution in search of a problem would undermine one of the nation’s most successful public pension systems, expose taxpayers to higher costs and create future unfunded liabilities.
National news stories and editorials about strapped state budgets often point to public pensions as a serious challenge for state and local governments — but this is not a problem here. Washington ranks fourth-highest in the country for funding our pension programs. Our ongoing pension plans are funded at 113 percent of future liabilities based on independent actuarial analyses that determine the value of benefits, the assets available to pay them and plan-funding rates.
Hypothetically evaluating public pensions with “risk-free” municipal or Treasury bond interest rates can help measure the risk embedded in a pension fund’s investment portfolio. But this is the wrong way to assess the funding status of a public pension system or the contributions necessary to offset future liabilities, unless the intent is to force the pension fund to invest exclusively in Treasury or municipal bonds. The State Investment Board’s legal mandate is to invest pension funds “at maximum return for prudent risk.”
Private companies must use “high-grade” corporate bond rates to evaluate their pension plans because they can be acquired, merge with another firm or go bankrupt during the long course of a defined-benefit system. In contrast, because state governments can’t go bankrupt, won’t go out of business, and aren’t going to be merger or acquisition targets, we can and should invest over a longer time horizon for higher returns. Ignoring this fundamental difference and forcing public pension plans to use a “risk free” rate to fund pensions could nearly double taxpayers’ costs for funding the cost of pension benefits that are currently considered well-funded by all actuarial standards.
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Washington excels at all three key factors in running a cost-effective, well-managed defined-benefit program:
Benefits are modest and predictable. Our plans cover more than 293,000 employees and 138,000 retirees. More than 95 percent of these retirees get annual benefits below $50,000. People in the PERS/TRS1 plans that were closed in 1977 average $25,690 per year. Most public employees today are in plans where they can only retire with full benefits at age 65 to get an average of $24,051 per year.
Contributions are shared and well-funded. Unlike many other states, contributions to Washington’s public pensions are shared equally by employees and employers. About 8 cents of every dollar in benefits paid today come from employers (taxpayers), and another 8 cents from employees. The remaining 84 cents comes from pension fund investment returns.
Investment performance is excellent. The State Investment Board invests more than $66 billion in its pension fund by accepting a prudent level of risk while maximizing returns for both retirees and the public. The board has regained all the value lost in the 2008-’09 financial crisis. Through smart, long-term investing the board averaged more than an 8.5 percent annual return over not only the past year, but also over the past 3, 10 and 20 years — performance that distinguishes Washington’s pension fund as one of the nation’s top performing funds.
Replacing Washington’s well-funded defined-benefit pensions with a defined-contribution system would dramatically change the liquidity requirements of our $66 billion investment fund, and force the State Investment Board to invest over shorter time horizons at lower returns — a massive shift out of longer-term/higher-return investments. With lower expected returns, these well-funded plans would then be actuarially underfunded by billions of dollars — raising real costs for state and local governments and school districts — costs that are contractually obligated.
We have a highly successful investment fund that pays for 84 percent of pension benefits and returns $2 billion each year to the state. We provide modest and predictable benefits for public employees that the Legislature has helped keep in check over the years. This works well for public employees and for taxpayers, so why make an expensive mess by trying to fix a problem that doesn’t exist?
James L. McIntire is treasurer of Washington state.