HOUSE BILL REPORT

SHB 1661

As Passed House:

March 12, 2019

Title: An act relating to the higher education retirement plans.

Brief Description: Concerning the higher education retirement plans.

Sponsors: House Committee on Appropriations (originally sponsored by Representatives Chandler and Ormsby).

Brief History:

Committee Activity:

Appropriations: 2/7/19, 2/25/19 [DPS].

Floor Activity:

Passed House: 3/12/19, 98-0.

Majority Report: The substitute bill be substituted therefor and the substitute bill do pass. Signed by 19 members: Representatives Ormsby, Chair; Bergquist, 2nd Vice Chair; Robinson, 1st Vice Chair; Cody, Dolan, Fitzgibbon, Hansen, Hudgins, Jinkins, Macri, Pettigrew, Pollet, Ryu, Senn, Springer, Stanford, Sullivan, Tarleton and Tharinger.

Minority Report: Do not pass. Signed by 12 members: Representatives Rude, Assistant Ranking Minority Member; Caldier, Chandler, Dye, Hoff, Kraft, Mosbrucker, Schmick, Steele, Sutherland, Volz and Ybarra.

Minority Report: Without recommendation. Signed by 2 members: Representatives Stokesbary, Ranking Minority Member; MacEwen, Assistant Ranking Minority Member.

Staff: David Pringle (786-7310).

Background:

State institutions of higher education are authorized to offer the Higher Education Retirement Plan (HERP) to faculty and other employees whose positions are designated as eligible by their respective boards. The HERPs are administered by each institution, unlike the other state retirement systems that are administered by the Department of Retirement Systems. The HERPs provide defined contributions, typically 5 percent of pay from both the employer and the employee until age 35, 7.5 percent of pay from each until age 50, and the employer matching up to 10 percent of pay from age 50 until retirement.

For members that joined before July 1, 2011, the HERPs also have a guaranteed defined benefit, called the HERP Supplemental Benefit (HERPSB), which pays a monthly supplemental allowance to ensure that the HERP member receives a total benefit worth about 50 percent of the average of the member's highest two consecutive years of salary. The value of the member's defined contributions, calculated as if they had been invested in a model portfolio, are subtracted from any HERPSB obligation. The HERPSB costs are paid out of institution operating budgets and are largely not pre-funded.

In 2011 the Legislature enacted changes to the HERPs, including closing the HERPSB to new members, bringing the plans under the review of the Select Committee on Pension Policy, and instituting regular analysis of the funding status of the Supplemental Benefits by the Pension Funding Council (PFC).  Pursuant to the legislation, since July 1, 2013, higher education institutions have been required to contribute 0.5 percent of pay as an employer contribution into a HERPSB Fund.  The Pension Funding Council is authorized to make changes to the 0.5-percent contribution rate and to recommend legislation that, upon accumulation of sufficient funding in the HERPSB Fund, would transfer responsibility for benefit payments from the higher education institutions to the HERPSB Fund.

In 2016 the Office of the State Actuary completed the first actuarial valuation of the HERPSB, and the PFC passed a resolution to develop options for funding methods that finance the HERP benefits on a more level percentage-of-pay basis, with contribution rates and pay-as-you go benefit payments combined.  A partial draft was reviewed by the PFC in 2018.

Summary of Substitute Bill:

The single 0.5-percent HERPSB contribution rate is replaced with institution-specific contribution rates.  The HERPSB Fund is established as a dedicated fund, using similar language as for the funds of the other State Retirement Systems.  The relationship between the new fund creation language and the HERPSB Fund created in 2011 is established, permitting investment of the HERPSB Fund along with the funds of the other retirement systems. The bill identifies a biennial schedule for the PFC to review and revise the institution-specific contribution rates based on future actuarial valuation results prepared by the Office of the State Actuary.  Supplemental benefits will not be paid from an institution's HERPSB Fund until the PFC determines the fund has collected sufficient assets.  Once the PFC makes that determination, administration of the HERPSB will transfer from the institution to the Department of Retirement Systems.  The bill targets 2035 as the approximate year when the funds are expected to begin paying benefits.

Appropriation: None.

Fiscal Note: Preliminary fiscal note available.

Effective Date: The bill contains an emergency clause and takes effect on July 1, 2019.

Staff Summary of Public Testimony:

(In support)  This bill is an important step to bring stability to the funding of the Higher Education Retirement Plan Supplemental Benefits program in the future.  The setting of rates and the separate accounting for each institution is appreciated.  The setting of dates, allowing the State Investment Board to invest these funds for future benefit costs, is important, as is the system to eventually transition to paying the benefits out of these funds.  There is value in this being done, and done well.  The amounts contributed by institutions, if left over, should be returned to the institutions.  It is also important that the institutions can use these funds for accounting purposes to offset the benefit liabilities that must be disclosed on accounting disclosures for bond rating purposes.

(Opposed) None.

(Other) Please match the contribution rate for Central Washington University to the State Actuary's analysis and ensure that unspent funds are refunded to the contributing institutions.

Persons Testifying: (In support) Representative Chandler, prime sponsor; Antonio Sanchez, Central Washington University; and John Boesenberg, State Board for Community and Technical Colleges.

(Other) Joe Dacca and Dan Schaaf, University of Washington.

Persons Signed In To Testify But Not Testifying: None.