Public Safety Pensions

This year we faced a daunting problem: balancing a budget with a precipitous decline in revenue due to the ongoing recession. We made cuts to everything, including healthcare for children, public education, mental health care, and compensation for employees.

As a new budget chairman, I entered the job with a handful of principles:

  1. Nobody was getting a raise. It’s hard to argue that we should pay anyone more at the same time we are eliminating the kinds of programs we are.
  2. We were going to fund all of our obligations completely. We can no longer pretend that the economy is going to come roaring back next week, next month, or whenever and we’ll be able to make it up. This includes debt service, pension contributions, and all the other long-term commitments we are responsible for as a state.
  3. We would be thoughtful about the cuts, trying not to make reductions in places where it would cost us more money in the near future or cause irreparable damage.

Many people have written in about the level of contributions to the LEOFF (Law Enforcement and Fire Fighter) pension plans and the decisions we’re making here, and I wanted to take a moment to clarify our decision path. As they do every two years, the LEOFF board recommended contribution rates into the various plans they cover. The Legislature makes the final decision, as we do on all plans. The end result of this long email is that we funded the pensions at the rate the LEOFF board recommended. For those interested in detail, here’s the sequence of decisions:

  1. The state actuary uses a formula established in law to calculate the contributions. This formula is based on the “aggregate method” of calculating required contributions to keep plans whole. It’s a complex system designed by actuaries, and includes the age of the people in the plan, the value of the portfolio, etc. It’s designed to keep the account funded to the level necessary to pay benefits.
  2. The LEOFF board uses this information to set rates. Their adopted policy is to use the calculated rate, unless it is lower than 90% of a different calculation, called “entry age normal,” in which case they set it at that value. We call this the “floor.” This is designed to make sure we’re making contributions, even if the value of the fund grows rapidly due to stock market gains as it did in the late 90s. The calculated rate this year is lower than the floor, so the LEOFF board’s policy would have resulted in them setting the rate at  the floor.
  3. Instead, the LEOFF board decided to set the rate significantly higher, at about 110% of “entry age normal.” They have lots of rational reasons for this, but higher rates are not necessary to keep the fund solvent.

Both the House and the Senate, in looking at the cuts we had to make in services for the public proposed using the “floor” value, which is higher than the rate necessary to keep the funds solvent and able to pay benefits. This saved us $15 million over what the LEOFF board recommended and met all our legal and moral responsibilities to provide adequate funding in the account. None of us want to adopt rates that differ from what the LEOFF board recommends, but faced with difficult problems we reluctantly agreed to do so.

It’s important to remember that the benefits we have contracted to pay to retired public safety officers are exactly that: a contract. They are guaranteed, regardless of the value of the fund that pays them. The full faith and credit of the state stands behind these pensions. The contributions to the fund are a technical discussion about how best to put away the money in order to pay the benefits. Even if we had no pension fund, we would have to pay the benefits.

We sat on the bills necessary to implement this for months, trying to make things work without the change, much as we did with a number of other changes that were painful to do. In the end we got new information about the inputs to the rate selection formula that saved us most of the $15 million without changing the adopted rates. We decided to do that, instead of changing the rates the LEOFF board recommended. The end result is that we funded the pensions at the rate the LEOFF board recommended.

In a related discussion, a bill was introduced to merge the LEOFF 1 and LEOFF 2 plans. HB 2097 would have merged an older plan with the current plan. This is an amazingly complex operation that was offered as a way to save money in order to fund at the level the LEOFF board recommended. I had many concerns about the bill, including a concern that it would probably run afoul of the IRS. We did not pass this bill. Fundamentally, it’s too complex a change to make in the several weeks we had to consider it and I’m having the state actuary do a study of the issue. I am not a fan of this change, but remain open to fact-based discussions of the issue.

About the Author

Ross
I am the Director of the Department of Early Learning for Washington State. I formerly represented the 48th Legislative District in the State House of Representatives, chairing the Appropriations committee and spent many a year at Microsoft.