SENATE BILL REPORT
SB 5418
BYSenators Johnson, Moore, Nelson, Hayner, Bailey, Lee, Metcalf and Talmadge; by request of Joint Committee on Pension Policy
Altering pension funding.
Senate Committee on Ways & Means
Senate Hearing Date(s):February 20, 1989; February 23, 1989
Majority Report: That Substitute Senate Bill No. 5418 be substituted therefor, and the substitute bill do pass.
Signed by Senators McDonald, Chairman; Craswell, Vice Chairman; Amondson, Bailey, Bluechel, Cantu, Hayner, Johnson, Lee, Newhouse, Niemi, Owen, Saling, Smith, Williams.
Senate Staff:Charles Langen (786-7715)
February 24, 1989
AS REPORTED BY COMMITTEE ON WAYS & MEANS, FEBRUARY 23, 1989
BACKGROUND:
On an annual basis, the Office of the State Actuary performs what are known as "actuarial valuations." These valuations are required by the Law Enforcement Officers' and Fire Fighters Retirement System (LEOFF), Public Employees' Retirement System (PERS), Teachers' Retirement System (TRS) and Washington State Patrol Retirement System (WSPRS). These valuations are mathematical computations and procedures using various assumptions to determine the current assets and future liabilities of the respective retirement system at a given time, as well as the contributions required of employers in the future to fully fund the system.
The assumptions used in a valuation may be classified under three categories: decremental or demographic, incremental and economic. The decremental or demographic assumptions (which reduce future liability) are the probabilities of retirement, disability, death and withdrawal of membership for reasons other than retirement, disability or death (turnover). The incremental assumptions (which increase future liabilities) are future membership growth and salary increases. Finally, the economic assumptions are future interest rates and inflation.
Each of these various assumptions acts as a discounting factor in determining the present value of future retirement liability. Generally speaking, of these three categories, the decremental assumptions have the greatest statistical accuracy and the economic assumptions have the least statistical accuracy. The actuary preparing the valuations is solely responsible for the selection of these assumptions.
Within each five year period, the actuary is required by law to perform what is known as an "experience study." The experience study is a determination of the current validity of the assumptions used, given the funding policy and the experience of the system. From findings of the experience study, the actuary may revise the assumptions being used and may make recommendations on a change in the current funding policy.
Prior to its submission, the State Actuary recommends to the Governor the employer/state contribution rates, stated as level percentages of salary, to be used in the biennial budget to obtain full funding for LEOFF, PERS, TRS and WSPRS. The Governor, however, is not required to utilize that rate in the gubernatorial budget request nor is the Legislature required to use the actuary's recommendation in the adoption of the biennial budget.
LEOFF, PERS and TRS were divided into two tiers on October 1, 1977. Membership in these systems is statutorily distinguished by indicating whether or not the employee was first employed prior to, or on, and after this date. In written or verbal communications, however, they are distinguished as "Plan I" for those first employed prior to October 1, 1977, and "Plan II" for those first employed on or after this date.
The unfunded actuarial accrued liabilities (commonly known as the "unfunded liabilities") of LEOFF I, PERS I and TRS I are to be amortized by the years 2010, 2014 and 2026, respectively. The amortization period for WSPRS is a "rolling 40 years"; that is, it is always 40 years from the most recent valuation. By statutory definition, LEOFF II, PERS II and TRS II may not incur unfunded actuarial accrued liability because the members and the employers automatically share equally in all costs of the Plan II portion of the respective system.
SUMMARY:
Beginning July 1, 1989, the basic state contribution rate for LEOFF and the basic employer contribution rate for PERS, TRS and WSPRS are established by law and required to be utilized in the Governor's request bill and the appropriations act. These rates (expressed as a percentage of the total salary of the system's membership) will be 16.88 percent for LEOFF, 7.1 percent for PERS, 12.6 percent for TRS, and 21.47 percent for WSPRS. These rates will be billed for both Plan I and Plan II membership except, upon receipt, the first dollars received will be used to assure the full funding of the Plan II portion of LEOFF, PERS and TRS, and the remaining amounts going to the Plan I portions of LEOFF, PERS and TRS.
A supplemental employer contribution rate for benefits enacted after January 1, 1989, as determined by the State Actuary, is also authorized. The payment of this rate may not be negated by a subsequently enacted statute which authorizes additional benefits.
The Economic and Revenue Forecast Council shall adopt the economic assumptions (i.e., interest rates and inflation) used by the State Actuary in conducting valuation studies of the state retirement systems. Beginning September 1, 1989, and every six years thereafter, the State Actuary shall submit to the council information regarding the experience and financial condition of each of the state retirement systems. After review of this information, the council shall recommend to the Legislature any revisions to the respective basic employer rates it deems necessary to amortize the unfunded liabilities of LEOFF, PERS, TRS and WSPRS by 2024 and to continue to fully fund the Plan II portions of LEOFF, PERS and TRS.
The informal terms of "Plan I" and "Plan II" are formalized in the statutory definitions of LEOFF, PERS and TRS.
A number of sections of the Revised Code of Washington are repealed, including the provision of the revenue accrual account. The remaining sections repealed deal generally with the maintenance of actuarial data by the Department of Retirement Systems and the performance of the valuation and the experience study.
A severability clause is provided.
EFFECT OF PROPOSED SUBSTITUTE:
The effective date of the act and internal implementation dates are revised to July 1, 1991.
Appropriation: none
Revenue: none
Fiscal Note: requested January 27, 1989
Senate Committee - Testified: Senator Stan Johnson, Chair, Joint Committee on Pension Policy; Representative Lorraine Hine, Vice Chair, Joint Committee on Pension Policy; Jerry Allard, State Actuary; Stan Marshburn, Assistant Director, OFM