Starting in 2017, Seattle will give many new city employees a slightly less generous retirement plan than existing workers receive. Officials estimate the move will save the city about $200 million over 30 years.
Starting next year, Seattle will give many new city employees a less generous retirement plan than existing workers receive.
Officials say the move will trim Seattle’s pension expenses over time, saving the city an estimated $200 million over 30 years. They say it will also reduce the city’s exposure to investment losses while maintaining good support for retired workers.
“We believe this accomplishes all of those things,” said Glen Lee, finance director.
The changes aren’t drastic: Like the plan for existing employees, the retirement plan starting in 2017 will be a defined-benefit pension with guaranteed monthly payouts.
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The new plan is part of a tentative agreement on contract terms reached late last year between officials and the Coalition of City Unions. The agreement also includes annual wage increases of 2 to 2.75 percent in 2016, 2017 and 2018 for most workers.
The agreement covers more than 4,000 workers with 20 unions. Some bargaining units have yet to ratify their individual contracts, but others have. Contracts for police officers, firefighters and some other employees are being negotiated separately.
The City Council is expected to vote Mondayto approve contracts for four unions, including Professional and Technical Employees Local 17. The council’s labor-relations committee has already signed off on the deal, Councilmember Tim Burgess said.
“This is a very good thing because it maintains our retirement system while taking some prudent steps to make sure that system remains financially strong,” he said.
The new retirement plan is a long time coming. The Seattle City Employees’ Retirement System (SCERS) was in healthy shape at the beginning of 2008, holding $2.1 billion in net assets — enough to cover 92 percent of its pension liabilities.
But the system was rocked by the 2008 market crash — by 2010 it held $1.6 billion in net assets, covering just 62 percent of its liabilities; 80 percent is considered safe.
Nor was the long-term trend promising. SCERS averaged an annual return of just 2 percent from 2000 to 2010, lower than in previous decades, despite growing costs.
Seattle increased retirement benefits to its employees in 1975, 1998 and 2001, and workers are living longer. The city is spending more on SCERS administration, as well.
So officials committed to spend to close the gap between the system’s assets and its liabilities over 30 years, and the council set out to make Seattle’s next generation of retirement benefits more affordable, sustainable and able to withstand crises, Lee said.
The council ordered a $250,000 report. Completed in 2012, it laid out several options, ranging from modest changes to a defined-contribution plan like the 401(k).
Those options, the report said, would reduce pension contributions by Seattle and its employees by $1.1 billion to $2.8 billion over 30 years.
The agreement between officials and the coalition calls for a defined-benefit plan with modest changes, Lee said. Employees hired starting in 2017 will average smaller pensions than workers now, because of an adjustment in how their benefits are calculated.
Furthermore, the minimum retirement age for most workers will be 55, rather than 52, and employees will be allowed to retire with benefits when their age and years of service add up to 85, rather than 80, with slightly higher penalties for early retirement.
Under the new plan, called SCERS II, workers will contribute about 7 percent of their salaries to retirement, compared with about 10 percent now, he said. The city’s base contribution rate will be about 5 percent of payroll, versus 6 percent now.
That means a combined drop from 16 percent to 12 percent, which Alicia Munnell, director of Boston College’s Center for Retirement Research, called significant.
“This is not just a tweak,” she said.
SCERS I is a very generous plan compared with other public-employee pension plans, so the changes don’t mean new hires will struggle in retirement, said Munnell.
“This is moving close to the national average,” she said. “I don’t think anything bad is being done. This is probably good policy.”
SCERS II will reduce employee contributions by about $750 million over 30 years in addition to reducing the city’s costs by about $200 million, according to Lee.
PTE Local 17 didn’t return a request for comment. Gabriel Roeder Smith & Company, paid consultant on the 2012 report, also didn’t return a request for comment.
Seattle isn’t unique in making changes. Many states and cities have revised their retirement benefits and most private employers have abandoned the pension model.
That’s something Seattle elected officials have vowed they won’t do, Lee said.
“There are trade-offs to being a public employee versus the private sector and one of them is a pension plan,” Mayor Ed Murray said.
Some U.S. cities are or have been in worse straits, said just-retired Councilmember Nick Licata, who sat on the council’s labor-relations committee until this month.
Detroit declared bankruptcy in 2013, while the assets of Chicago’s retirement plans covered just 34.3 percent of their liabilities, leaving $20.1 billion unfunded. SCERS I’s liabilities were 66 percent funded in 2015.
“We’re not in hot water but we’re not in great shape, either,” Licata said. “We’re not like Chicago and Detroit. We’ve done a pretty good job managing our system. But we took a big hit with the Great Recession.”
SCERS II won’t save the city much right away because most employees won’t be new hires, Lee stressed. The savings will be as little as $3 million in the first five years.
Seattle will continue to spend well above its base contribution rate to deal with its unfunded liabilities, Lee said. That commitment is what makes the city unique, he said.
Seattle spent more than $165 million on SCERS I benefits in 2014, nearly double what it spent in 2004. In 2016, the city’s overall contribution rate will be about 15 percent of payroll. SCERS I covers about 16,000 current and former employees.
The city has a AAA bond rating, in part thanks to its plan to manage its unfunded pension liabilities, said Jason Kelly, a spokesman for Murray.
“I’m happy with this,” the mayor said. “This has been something people have known for decades we needed to do in Seattle.”