Washington predicted to end year with no public pension debt, new study reports

(The Center Square) – Thanks to smart fiscal decisions made decades ago, Washington state is one of only two states – the other being New York – predicted to end 2023 with no public pension debt.

That’s according to a recently released forecast by the Reason Foundation’s Pension Integrity Project.

The Evergreen State’s good news stands in stark contrast to a study that found total unfunded liabilities for state-run pension systems across the country in 2020, 2022 and now 2023 to be around the current level of $1.3 trillion, the highest total state pension debt ever seen.

Public pension debt allowed to balloon out of control will begin to require larger portions of government tax collections. Some states spend upward of 20% of their annual budgets on pension payments. Some pension funds are paid for by local property taxes, leading to services not matching up with what taxpayers must give.

Assuming a 7% return for the 2023 fiscal year, on a funded ratio basis, the Pension Integrity Project found Washington is projected to be in the black by $8 billion – or 107% – by the time 2023 comes to a close. (New York is projected to have a surplus of $8.7 billion at year’s end.)

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“In good news for taxpayers, governments and public workers, Washington’s public pension systems are in better shape than just about every other state in the country,” Ryan Frost, Reason pension policy analyst, emailed The Center Square. “Unlike many states, Washington has done an especially good job of making the full contributions required to fund retirement benefits and has a governance structure that divides responsibilities and provides greater oversight than almost all of its peers.”

Frost said Washington’s surplus is largely thanks to changes made nearly five decades ago to put new hires and future workers in more cost-efficient plans with somewhat less generous benefits, as well as the consistency with which the state’s pension assets have hit their assumed rate of investment return.

“Washington recognized back in the mid-1970s that the pension benefits the state offered to public employees, teachers and public safety employees were fiscally unsustainable,” he said.

He went on to explain, “New public workers hired post-1977 have been placed in ‘Plan 2s’ which increased the retirement age, increased employee contributions, required 50/50 cost sharing between employees and government employers on all public pension costs, including debt payments, and removed employer-paid retiree medical benefits for retired public safety officers.”

Frost noted Washington’s record of consistently funding the contribution rates recommended by the state actuary.

“The only time in the state’s history where the Legislature failed to pay the required contribution rates was in the early 2000s when the Legislature took a ‘contribution holiday’ from funding the closed Plan 1s,” he said. “The state has been trying to make up for that mistake for the past 20 years through added debt payments placed on employers and taxpayers.”

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Frost pointed out that Washington spreads out the governance of its public pension system among many different entities: the Department of Retirement Systems, the Washington State Investment Board, the Select Committee on Pension Policy and the Pension Funding Council.

“Most public pension systems contract their actuarial services to outside private actuarial firms,” he observed. “The level of oversight Washington state has is highly unusual compared to other states.”

Frost said Reason’s projections about Washington’s pension plans generally align with those of the Office of the State Actuary, which expects the state’s public pension system to be fully funded by 2027.

At a meeting of the Select Committee on Pension Policy last month, it was reported that the total funding for all plans now sits just above 95%.

“One key difference between Reason Foundation’s State Pension Tracker forecasts compared to the Office of the State Actuary’s current figures is that Reason’s tracker only uses the open pension plans … which is why Reason project a 107% funded status for Washington compared to OSA’s projection of the state being 95% funded,” Frost explained.

Washington’s public pension fund is on solid footing, he concluded.

“Reason Foundation’s tracker assumes a 7% investment return rate for 2023 (matching Washington’s assumption),” Frost said, “which would mean there would be neither an increase nor a decrease in the overall funded status this year.”

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