SENATE BILL REPORT

ESHB 1321

BYHouse Committee on Appropriations (originally sponsored by Representatives Hine, Silver, Sayan, D. Sommers, Patrick, McLean, Bristow, H. Sommers, Peery, Wineberry, Rayburn, Braddock, Prentice, Leonard, Valle, Rector, Betrozoff, R. Fisher, Fraser, Basich, O'Brien, Locke, Haugen, May, P. King, Phillips, Brekke, Appelwick, G. Fisher, Spanel and Van Luven; by request of  Joint Committee on Pension Policy)

Altering pension funding.

House Committe on Appropriations

Senate Committee on Ways & Means

Senate Hearing Date(s):

Senate Staff:Charles Langen (786-7715)

AS OF MARCH 20, 1989

BACKGROUND:

The state of Washington provides direct funding for seven retirement systems covering state and local public employees.  The largest of these systems are:

      (1)The Public Employees Retirement System (PERS), Plan I and II;

      (2)The Teachers Retirement System (TRS), Plans I and II; and

      (3)The Law Enforcement Officers and Fire Fighters Retirement System (LEOFF), Plans I and II.

Smaller state funded systems include the Washington State Patrol Retirement System, three systems covering judges, and a supplementation benefit for higher education faculty.

There is considerable diversity in the statutory provisions regarding the funding of state retirement systems.

When LEOFF II, TRS II and PERS II were created in 1977, a consistent funding method was established for each of the newly created plans.  Under this new funding method:

      (1)The total cost of each of the new plans are shared equally by the employer and the employee.  In the case of LEOFF II, the state helps fund part of the employer's share.

      (2)No new unfunded liabilities can be created.

      (3)The assets and liabilities of the newly formed plans are kept completely separate from LEOFF I, TRS I and PERS I.  The unfunded liability of a retirement system can be calculated by subtracting the current value of the system's assets from the value of the benefits that have been earned to date in the system.  As of 1987, the state's three largest retirement systems had the following unfunded liabilities:

!tp2,2,1,2 LEOFF Plan I=!tr$0.8 Billion

TRS Plan I=!tr$1.9 Billion

PERS Plan I=!tr$1.5 Billion

TOTAL!tj1!tr$3.2 Billion

Four of the major sources of the unfunded liabilities are:

      (1)The state's assumption of responsibility in 1969 for the benefits owed by many underfunded local police and fire fighter retirement systems;

      (2)The granting of unfunded benefit increases such as the COLAs provided to retirees in 1979, 1983, 1986 and 1987 and the benefit formula increases granted in PERS I and TRS I in 1972 and 1973;

      (3)Revision in actuarial estimates--especially for inflation and disability retirements in LEOFF I; and

      (4)Prior years of underfunding.

Current statutes provide for these unfunded liabilities to be fully amortized by the following dates:  LEOFF Plan I by March 1, 2010; TRS Plan I by June 30, 2014; and PERS Plan I by June 30, 2025.

Since the 1981-83 biennium, the state has consistently funded its retirement systems at a lower level than the funding provisions in statute would require.  The director of the Department of Retirement Systems (DRS) has established employer contribution rates each biennium that reflect the level of pension funding actually included in the budget, rather than setting rates at a level that would be consistent with the PERS I, TRS I and LEOFF I funding statutes.

In 1983 the Legislature created the revenue accrual account and provided that at the close of each fiscal biennium the treasurer would transfer to it the remaining cash balance in the state general fund.  Money in the revenue accrual "may only be spent... for the purpose of decreasing the unfunded liability of a state retirement system."

At the close of the 1981-83 biennium $47 million was appropriated from the revenue accrual account to reduce the state's unfunded pension liabilities in LEOFF and TRS.  At the close of the 1983-85 biennium $9 million was appropriated to LEOFF to replace, not supplement, a general fund appropriation.  Another $11 million was used to make regular PERS contributions for members in the K-12 system.

At the close of the 1985-87 biennium the Legislature appropriated $110 million from the revenue accrual account to fund benefits to be earned in LEOFF during the 1987-89 biennium; and $55 million to fund benefits to be earned in TRS during the 1987-89 biennium.  "Earned benefits," by definition, are not "unfunded liabilities." The unencumbered cash balance of the state general fund is projected to be in excess of $300 million at the end of the 1987-89 biennium.

SUMMARY:

A new chapter on state retirement system funding is created:

      (1)Employer contribution rates for Public Employee's Retirement System (PERS), Teachers' Retirement System (TRS), and Washington State Patrol Retirement System (WSPRS) and the state contribution rate for Law Enforcement Officers and Fire Fighter's Retirement System (LEOFF) are established in statute.

      (2)Effective September 1, 1990 employers will pay a basic contribution rate of 7.10 percent of compensation for each PERS member, 12.60 percent for each TRS member, and 21.47 percent for each WSPRS member.  The state shall pay a basic contribution rate of 16.88 percent for each LEOFF member.

      (3)The basic contribution rate is intended to be sufficient to fully fund PERS Plan I, TRS Plan I and LEOFF Plan I by June 30, 2024 (35 years); to fully amortize the unfunded liability of WSPRS by June 30, 2024; and to continue to fully fund PERS II, TRS II and LEOFF II, as required by current law.

      (4)The Economic and Revenue Forecast Council shall review the basic contribution rate every six years and recommend any necessary changes.  The first review will begin September 1989.  Rates shall change only if the Legislature amends them in statute.

      (5)The Department of Retirement Systems (DRS) shall bill each employer the basic contribution rate, and each employer shall pay that rate regardless of the level of pension funding included in the state budget.  The State Treasurer shall transfer the required state basic contribution for LEOFF each month regardless of the level of pension funding included in the state budget.  Any member of an affected system may take legal action to require that the employer or state make the contributions required by law.

      (6)Beginning September 1, 1990, DRS shall also charge employers and the state an additional supplemental contribution rate to fund any benefit increases granted in PERS, TRS, LEOFF or WSPRS after January 1, 1990. Legislation which grants a benefit increase cannot overcome this requirement except by a direct amendment of the statutory provision which requires the supplemental contribution.

      (7)The supplemental contribution rate shall be calculated by the State Actuary and shall be sufficient to:

      (a)fund benefit increases for active members of PERS I, TRS I, LEOFF I or WSPRS not later than June 20, 2024;

      (b)fund benefit increases for PERS II, TRS II, or LEOFF II pursuant to current statutes;

      (c)fund ad hoc COLAs as the benefits are paid out to retirees; and

      (d)fund automatic COLAs in PERS I or TRS I not later than June 30, 2024.

DRS may collect additional employer contributions pursuant to any current or future statutes which require special contributions, such as for labor guild employees, legislators, or new employers.

      (8)The revenue accrual account is abolished effective September 1, 1990.

Current retirement system funding provisions are amended to be consistent with the provisions of the new funding chapter. The terms "Plan I" and "Plan II"  are defined in LEOFF, TRS and PERS statutes.  Separate funds are provided for Plan I an Plan II in each system, consistent with current accounting and funding practice.

The Governor's proposed biennial budget shall include funding for the state's retirement systems at a level consistent with the provisions of the new funding chapter.

Appropriation:    none

Revenue:    none

Fiscal Note:      available