(The Center Square) – As Washington state is forecast to run out of money by 2027 despite a historic tax increase during this year’s legislative session, that fiscal crisis could be exacerbated several years later if new actuarial assumptions for the pension system don’t pan out.
During session, state lawmakers enacted Senate Bill 5357, which altered the assumed rate of return for pension investments from 7% to 7.25%. That quarter of a percent changed allowed the state to avoid $453.5 million in pension contributions and an estimated $635.8 million in the 2027-29 biennium, according Ryan Frost, managing director of the Pension Integrity Project at the Reason Foundation.
“We should just be honest about why they raised it to 7.25%,” he told The Center Square. “They did it because they have no money and they didn’t want to make the payments to the pension system. I’m sure the actuaries have justification for raising the assumed rate of return, but let’s be honest.”
Considered one of the best funded pension systems in the nation, the percentage of unfunded liability has decreased in the past decade. In 2015, the system was 85% funded and had a $10 billion unfunded liability. By 2024, it was 95% funded, driven by increased state contributions. In 2023, the pension plan was expected to be fully funded in 2027. A 2024 Office of State Actuary report states that “In our professional judgment, that expectation remains reasonable given the results of this actuarial valuation.”
At the same time, that expectation “assumes all assumptions are realized and all actuarially determined contributions are made when due.”
The bulk of unfunded liability has been due to Public Employees’ Retirement System (PERS) Plan 1 and Teachers’ Retirement System (TRS) Plan 1, which were closed in the 1970s. The current retirees in those plans make up 95,337 of the total 180,448 retirees on TERS and PERS plans. Although both plans are now 90% funded, in prior years they were only 70% funded.
“We didn’t get here by accident,” Office of State Actuary Senior Actuary Luke Masselink told the Select Committee on Pension Policy at its Tuesday meeting. “A big part of this steadily increasing graph [funded percentage] is through the contributions from employers’ members and the state. So now we’re really feeling the benefits of this hard work and this dedication to paying those higher rates.”
However, he added that “just because a program reaches 100% funding, that doesn’t mean contribution stop for the open plans. Their members are still earning additional benefits with each year of service, and so it follows that for open plans, funding will continue even after they reach 100%.”
Masselink estimated that for the current fiscal year, pension contributions makes up 3.5% of the state budget compared to 6% in the fiscal year 2020.
Frost noted that the increased contributions over the past decade came after the state took a “rate holiday” in the 2000s, which was then exacerbated by the dot-com bubble and the Great Recession.
“We’re still feeling the ramifications from that,” he said. “Now they’re doing it [rate holiday] again. They’re the only plan in the country that has raised their rate of return. It doesn’t inspire a lot of confidence, especially when they’re really well funded.”
