The Seattle City Council is looking to reform the "high-benefit, high-cost" pension system for city employees.
Seattle’s generous employee-pension system, underfunded by $1 billion over the next 30 years, will require larger infusions from the city treasury or reduced benefits for newly hired workers, a study team told the City Council on Monday.
The $1.8 billion pension fund hasn’t fully recovered from its $616 million loss during the 2008 financial crisis and is facing additional strain from the longer life spans of retirees.
The city has stepped up its contributions to the plan, as directed by actuaries, diverting millions of dollars from city utilities and the general fund, the Retirement Interdepartmental Team reported.
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This year’s diversions into the pension fund are $5.5 million higher than last year, and 2014 diversions are expected to be $20.6 million higher than in 2011.
“That becomes sort of a budget driver like health care and other budget drivers,” council staffer and retirement-team member John McCoy told the council. “Money going for pensions is not available for benefits or other spending.”
Employee contributions, at 10 percent of pay, are higher than the national median of about 5 percent for public-sector pension plans, the study group reported.
It isn’t clear whether the city’s current assumption of 7.75 percent annual investment returns on the pension fund are achievable, retirement-team member Tom Kirn said. Returns totaled only 3.7 percent between 2001 and 2010, after two decades of 11 percent-plus gains.
“The current plan is clearly not sustainable,” City Council Budget Committee Chair Tim Burgess said after the briefing. “It requires the city and our employees to contribute too much, so we need to explore alternatives for new employees going forward.”
Burgess said the council hopes to adopt revisions to the plan — which must be negotiated with unions — by the end of the year. Several union representatives could not be reached Monday afternoon.
Seattle’s pension plan pays more to retirees than most public-sector plans, the retirement team reported. With a formula that pays 2 percent of salary for every year of city employment, a worker who retires after 30 years can expect to receive 60 percent of his or her salary.
For middle-income workers with that many years, combined pension and Social Security benefits would amount to 94 percent of their full salary, the committee reported. Burgess called it “a high-benefit, high-cost system.”
Many private employers have replaced “defined-benefit” pensions, such as Seattle’s with employee-controlled 401(k) accounts, while many public agencies have scaled back their defined-benefit plans or adopted hybrid plans with contributions split between traditional pensions and worker-controlled accounts.
City of Seattle employees now pay 10 percent of their salary into the retirement fund, and the city pays 11 percent, an amount expected to reach 13.4 percent in 2014.
The study group offered five options for stabilizing the fund, all of which involve increasing the retirement age. Workers now can retire at 65 or earlier if their age plus years of service equal 80, meaning a 25-year worker can retire at 55.
Three options would continue a defined-benefit pension, while increasing the penalty for early retirement and in two of the three options reducing the amount paid per year of employment.
The fourth option would be a hybrid of a conventional pension and an employee-controlled “defined-contribution” account. The fifth option would replace the pension with an employee-directed account.
City officials envision the new rules affecting only employees hired after the rules are changed. Each option would save the city $1.1 billion to $2.8 billion over 30 years.
Keith Ervin: 206-464-2105 or firstname.lastname@example.org