Editorial: Legislature overreached in pension sweetening

As if the challenges of adequately funding schools and roads were not enough for a new governor and Legislature, a ruling from Thurston County Superior Court Judge Chris Wickham has added another: paying for cost-of-living adjustments to state pension plans that lawmakers rescinded last year.

Wickham ordered the state to reinstitute the COLAs, at a potential cost to Washington taxpayers of more than $500 million in the upcoming budget biennium. That’s about one-half the additional money officials have speculated will be needed to fully fund K-12 education. The bill for the COLAs could eventually reach close to $3.5 billion.

The state cannot allow the ruling to stand without an appeal.

Washington is fortunate to have one of the better-funded state pension systems in the United States. Reserves for the six major plans are enough to cover 99 percent of projected obligations. Only the two plans closed to employees in 1977, when it was clear the state was rapidly getting in over its head, remain underfunded.

The Legislature has made several modifications to all the plans from time to time, some to sweeten the pot for workers, some to withdraw the sweeteners when their cost could not be accommodated in tighter state budgets. Terminating the COLAs is one example, the awarding of extra benefits because state investments prospered in the late 1990s is another. It, too, has since been withdrawn, and it, too, was appealed by the Washington Education Association.

In both cases the issue is whether the state, having granted additional benefits, can take them away. Are they contractual, and so not subject to changes, or perishable if the legislation that implemented the changes also provided for their elimination? The state’s argument that no contracts were violated in either case has so far not prevailed.

Fortunately, while the benefits lawsuits continue, the State Investment Board has earned the kind of returns individual investors can only envy. Investment returns account for more than 84 percent of pension payouts. Most pension projections are based, unrealistically, on an 8 percent rate of return on investments. Despite reverses suffered in the recession, Washington’s average returns have exceeded that benchmark over the last 20 years.

It should be noted the benefits paid to state retirees are not extravagant. The annual median pension paid – the midpoint for all 130,000 retirees – is about $18,200. About three-quarters receive less than $30,000. Still, they are fortunate to have defined benefits while most private-sector plans are now defined contribution, like 401(k)s. And very few individuals can manage money as capably as the Investment Board.

When Wickham issues his final order, the state should make an appeal promptly. The sooner the COLA and gain-sharing lawsuits are resolved, the sooner the potential size of the state’s future obligations can be calculated.

And the Legislature should never again sweeten pensions unless the sugar to fund them is already in the bowl.