There is a substantial expected surplus in the Law Enforcement Officers’ and Fire Fighters’ (LEOFF) Retirement System Plan 1. During the 2025 legislative session, there were several proposals to extract funds for use in the state operating budget. Ultimately, the enacted 2025–27 operating budget required the Select Committee on Pension Policy (SCPP) to “study and report on the tax, legal, actuarial, pension policy, and administrative implications” of the LEOFF 1 policies proposed in SSB 5085 and SHB 2034.

• SSB 5085 would merge the assets of LEOFF 1, the Teachers’ Retirement System (TRS) Plan 1, and the Public Employees’ Retirement System (PERS) Plan 1. SSB 5085 would use the surplus to fund ongoing cost-of-living adjustments for PERS 1 and TRS 1 members.
• SHB 2034 would terminate LEOFF 1 and establish a restated LEOFF retirement system. LEOFF 1 assets of 120% of the actuarial present value of LEOFF 1 benefits would be transferred to the new system, and the remaining assets would be transferred to the pension funding stabilization account (from which it would be easy to make transfers to the general fund–state).

(A third pension bill was enacted this year: SSB 5357. It increased the long-term investment rate of return assumption for pensions and temporarily reduced some contributions to PERS 1 and TRS 1.)

The final SCPP report is now available (report attachments are available here). It provides a good history of LEOFF 1 funding. Initially, employee and employer contribution rates were insufficient to cover costs, so the state began to appropriate funds to the system. Altogether, state appropriations account for 77% of all LEOFF 1 contributions. (Contributions ended in 2000.)

According to the report, the Office of the State Actuary estimates “LEOFF 1 has a funded status of 160%, and an expected surplus of $2.5 billion.”

The SCPP report includes comments from the Department of Retirement Services, the Office of the State Treasurer, the Washington State Investment Board, the Attorney General’s Office, the Office of the State Actuary, and Ice Miller (Special Assistant Attorney General for federal tax issues). Generally, they believe either proposal could be implemented. Some think the approach of SSB 5085 would be preferable to that of SHB 2034.

The SCPP report summarizes,

The decision to support one bill over another depends on the specific policy objectives prioritized by policymakers. For instance, SHB 2034 would make available substantial funding for immediate state obligations but sacrifices potential future investment returns. On the other hand, SSB 5085 enacts a “Plans 2 Style” COLA for PERS 1 and TRS 1 members, funded by depleting the projected LEOFF 1 surplus. Policymakers must evaluate which bill best aligns with their goals, balancing short-term fiscal needs against long-term financial stability.

The report also notes that the Legislature could take no action: “Since LEOFF 1 is a closed system, over time there will be fewer and fewer beneficiaries until eventually there are none. If things continue as expected, the expected surplus in LEOFF 1 will become a real surplus in a few decades.”

The SCPP report explains, “the existence of a surplus cannot be determined with certainty until at or very near the end of the plan’s life.” Actuaries can only estimate expected surpluses based on various assumptions about the future. And, as the Office of the State Treasurer (OST) noted, this was made more difficult with the passage of ESSB 5357:

ESSB 5357 changed the investment return assumption for the state’s pension systems from 7.00% to 7.25% without any compelling market data as a reason for the adjustment. It is unwise to expect that future pension fund returns will match 10–20 year performance.

With the higher assumed rate of return, it is likely that the LEOFF 1 surplus will be overstated, making it difficult to predict the amount of funds needed to maintain LEOFF 1’s 120% funding level, while also making it difficult to determine how much excess funding there is to distribute in the ways contemplated by either SB 5085 or HB 2034.

OST is particularly concerned about SHB 2034, which would remove funds from the pension system and allow them to be transferred to the general fund–state:

In a time of increased financial risk, this would reduce the aggregate funding status of the state’s pension system, which will be viewed by rating agencies and investors as a credit negative. The rating agencies and investors will likely view this for what it is—the state pulling funds out of the retirement system (which have grown through decades of diligent contributions and favorable investment earnings) to be deposited in the PFSA. Section 505 of the bill gives the legislature the authority to transfer funds from the PFSA to the state General Fund. If transferred from the PFSA to the general fund, its [sic] most likely that the funds would be used as another one-time revenue source to help balance the state’s structurally unbalanced operating budget.

Similarly, in our policy brief on the enacted operating budget, we identified both the change to the investment rate of return assumption and the potential use of the LEOFF 1 expected surplus for ongoing, general budget purposes as choices that could prove unsustainable in the long run.

At a Nov. 18 meeting, the SCPP voted to submit the report to the Legislature without recommendation.