Weathering the pension-debt storm
A pension-debt tsunami is threatening states across the country. According to the Pew Center, states are facing nearly $1 trillion in unfunded pension liabilities including retiree health-care costs. While our situation is not as bleak as it is in some states, Washington nevertheless faces significant pension pressures that must be addressed.
According to the state actuary, two of Washington’s nine pension plans are already in the red with unfunded liabilities totaling nearly $7 billion. This does not include an additional $8 billion in unfunded post-retirement benefit liability, primarily for retiree health care. Unlike pensions, however, these other retirement benefits are not a contractual right, meaning the Legislature has the ability to make changes as necessary.
These unfunded liabilities have both short- and long-term consequences for taxpayers and couldn’t come at a worse possible time. Already our state is facing nearly a $6 billion projected budget shortfall for 2011-13. Included in these projections is the need for additional pension contributions. The state’s Office of Financial Management projects that an additional $700 million in pension payments above the base will be required in the 2011-13 biennium. These additional pension costs are expected to grow to $1.2 billion in the 2013-15 biennium.
Long-term projections show pension costs accounting for nearly $4 billion of state spending by 2025. This makes pension obligations one of the largest cost drivers lawmakers will face over the next decade.
While Washington made significant pension reforms in 1977, closing to new hires the two most expensive defined-benefit plans (the ones running the large liabilities), recent failure by state officials to prioritize pension payments has exacerbated the current problem.
From 1991 to 2000, the Legislature consistently made required state contributions to these plans. Since then, however, lawmakers have on average made just 58 percent of the required contributions.
The legislature compounded these shortfalls by significantly expanding pension benefits, including a $2.3 billion increase in 2000 (early retirement for those with 30 years experience) and a $2.5 billion increase in 2007 (gain-sharing replacement).
This led the state actuary to the common-sense recommendation that legislators make 100 percent of the actuarially required pension contributions and avoid large benefit improvements until the risk and affordability problems of the current pensions improve.
Unfortunately, as evident by the recent failure of state officials to make the required pension contributions while at the same time increasing benefits, it has become clear that additional constitutional safeguards are needed.
To help avoid kicking the pension liability can further down the road while putting the state’s credit rating in jeopardy, it may be time to pass a constitutional amendment that forces state officials to make the required pension payments and creates a higher threshold to provide enhanced benefits. While funding these past pension promises may crowd out other spending, the alternative puts taxpayers in a worse position.
Meanwhile, legislators must stop enhancing retiree benefits until all the state’s pension plans return to healthy status. Exacerbating taxpayer exposure while billions in unfunded liabilities exist is the height of irresponsibility. It may also be time for additional reforms to help minimize future pension liabilities.
For future pension benefits, the state should switch solely to a defined-contribution model, akin to a 401(k) model, for new hires. This will help prevent the unfunded-pension liability problem from worsening while we climb out of the $7 billion hole already present in the two closed plans.
Just as Washington’s multibillion-dollar pension problems weren’t created overnight, it will take time to eliminate these unfunded liabilities. Starting these reforms will require the conviction to do what is in the best interest of all citizens, not just special interests. Failure to implement benefit reforms may soon find Washingtonians facing the same pension-debt tsunami threatening our neighbors.
Jason Mercier is Director of the Center for Government Reform at Washington Policy Center, a non-partisan independent policy research organization in Washington state. For more information visit washingtonpolicy.org.