Skipping Pension Payments: Wrong Path to Sustainable State Budget
By Michael Mitchell As the budget debate rages in Olympia, some lawmakers are calling for dramatic changes to the pension system for teachers, child protective service case workers, parole counselors, and other public-sector employees in Washington state. Proponents of the changes argue they are needed to improve budget “sustainability.” In reality, our public pension system is on stable financial ground, and the proposed changes could lead to higher costs in the future.
Proposed Senate Bill 6378, would impose significant changes to the state pension system -- including temporarily suspending state and local pension payments to specific retirement plans for fiscal year 2013, closing a defined benefit plan, and requiring future state employees to join a hybrid defined benefit/defined contribution plan.
Those who argue in favor of these changes fail to account for the following factors:
• Public pensions are on solid financial ground: A 2010 study by the Office of the State Auditor showed that the state’s pension system is funded at a 99 percent level overall. Only New York and Wisconsin were estimated to have higher pension ratios.
• Small savings now; big costs down the line: Skipping the pension payment would result in $147 million in near-term savings. However, in the long run, the skipped payment would lead to additional pension costs of nearly $500 million over the next 25 years. This means that future pension contributions would have to be increased to make up for suspended current payments.
• Proposed changes could threaten credit rating: Pension funding levels are a key component of our state’s credit rating. In recent years, rating agencies have cited our well-funded pension plans as a major credit strength of the state while at the same time citing use of one-time budget fixes in previous biennia as a major weakness. Skipping a pension payment would reduce the system’s funding levels, which could lead to a downgrade in our credit rating. If rating agencies were to downgrade Washington’s credit rating by one notch – from AA+ to AA – the office of the State Treasurer estimates additional interest costs at over $110 million for the state over four years.
• “Hybrid-plan” may not save money: While the official fiscal impact statement for SB 6378 indicates that in total, the legislation would save the state approximately $623 million over 25 years, it also points out that if future investment returns are lower than expected or if baseline projections are altered, those projected savings could transform into future state costs of approximately $3.3 billion over the same time span.
Legislators are right to be concerned with the sustainability of our budget. However, this proposal fails to address the single most important factor in building a truly sustainable state budget: fixing Washington’s flawed revenue system. If we are to make the continued investments necessary to support the public safety, education and health structures we all rely on, legislators should support new revenues that allow us to do so.