Washington state's public pensions are among the best-funded in the nation. Guest columnists Steve Hill and Theresa Whitmarsh dispute criticisms and the idea that public pensions should be valued in the way that private pensions are.
IN a recent guest commentary, a researcher from the other Washington argued that our state pension programs are in trouble because elected officials make promises without paying for them. Andrew G. Biggs reaches this conclusion by ignoring both the way our public pensions are managed and the investment returns achieved from pension funds ["State's pension hole deeper than estimates," Opinion, Sept. 14].
Washington’s pension plans are among the best-funded in the nation, with assets sufficient to pay the benefits earned. Thirteen of the state’s 15 plans are fully funded. Only two, known as PERS 1 and TRS 1, closed to new employees more than three decades ago, are currently underfunded.
In 2011, Gov. Chris Gregoire and the Legislature took action to deal with the underfunding of these two plans by removing a cost-of-living increase in PERS 1 and TRS 1. Further, the full recommended biennial contribution was made to all the plans, despite unprecedented budgeting challenges.
Biggs questioned the method of valuing the state’s public-pension plans. He believes public-pension plans should be valued in the same way as private-sector pensions.
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Along with most industry experts, we disagree. Private-sector pensions and public-sector pensions are valued differently for good reason.
Private plans must account for the risk that the company will go out of business, which could result in a shorter time frame for plan funding and require an immediate need for cash to pay benefits. There is also the risk they may terminate their plans and transfer the obligation to the Pension Benefit Guarantee Corporation.
This is not the case with public plans, which have a longer time frame to account for the inevitable ups and downs of investments. Public plans also guarantee their own contractual obligations.
Valuing public plans in the same manner as private plans would not only significantly increase the cost of public pensions, but it also would make those costs highly volatile, swinging wildly from one year to the next as interest rates vacillate. In fact, this is exactly what private-sector pensions have experienced and it is the primary reason so many private-sector employers have abandoned their defined-benefit pension plans.
Biggs uses what he calls “arcane” accounting issues to argue that public pensions should be converted to defined-contribution plans. He ignores the innovation that occurred in 1996, when Washington was among the first states in the nation to introduce a “hybrid” pension plan, in which the employer’s contribution goes toward a smaller guaranteed (defined) benefit and the employee’s contribution goes toward a benefit dependent on investments and earnings, much like a 401(k) plan. Similar plan structures have since been, and continue to be, adopted in other states.
In addition, Biggs’ analysis implies it would be better to fund public pensions with a “risk-free” investment portfolio. This approach would also significantly, and unnecessarily, increase the cost to taxpayers and retirement system members.
The Washington State Investment Board, which invests the public-pension money, is considered one of the top institutional investors in the country — earning, since 1992, an overall return of 8.75 percent per year with a successful balance of risk. As roughly 75 cents of every dollar currently paid out in pension benefits comes from investment returns, this level of expertise plays an important role in the affordability of our public-pension plans.
Going forward, we will take necessary steps to preserve the sustainability of our plans. This is what we have done and will continue to do, and it is why other states look to Washington to learn from our best practices with public-pension plans.
Steve Hill, left, is director of the Washington State Department of Retirement Systems. Theresa Whitmarsh is executive director of the Washington State Investment Board.