Last Friday, the House passed E2SHB 2034. The bill would terminate the Law Enforcement Officers’ and Firefighters’ retirement system Plan 1 (LEOFF 1), which has been closed to new members since 1977, and create a restated LEOFF defined benefit retirement fund. As of June 30, 2024, LEOFF 1 was estimated to be 160% funded.

HB 2034 was one of multiple proposals last year about how to use the expected surplus in the plan. The Legislature did not ultimately adopt any of the proposals last year, but it did require a report on the implications of two of the proposals. The resulting report was released in November. The Select Committee on Pension Policy submitted the report to the Legislature without recommendation.

Under E2SHB 2034, the state actuary would determine the actuarial present value of the projected LEOFF 1 benefits as of June 30, 2029. Then, as passed by the House, the bill would transfer 110% of the actuarial present value of the projected plan 1 benefits to the restated fund. (As originally proposed, the bill would have transferred 120% of the projected benefits to the new fund.)

Of the remaining assets in LEOFF 1, $569.0 million would be deposited in the climate commitment account (CCA) and the rest would be deposited in the pension funding stabilization account (PFSA). All the transfers would occur on June 30, 2029, the last day of the 2027–29 biennium.

Although the PFSA must, by statute, be used to pay employer contributions for members of public employees’ retirement system, teachers’ retirement system, school employees’ retirement system, and public safety employees’ retirement system, E2SHB 2034 would allow the state to transfer funds from the PFSA to the general fund–state (GFS) in 2027–29.

How big is the surplus? The LEOFF 1 study completed in November estimated that the expected surplus in the fund was $2.5 billion as of June 30, 2024. However, as the report notes, “the existence of a surplus cannot be determined with certainty until at or very near the end of the plan’s life.” The fiscal note for HB 2034, as introduced last year, estimated that—assuming a 120% funded status—the amount available for transfer to other accounts would have been about $3.3 billion on June 30, 2029. There is not yet an updated fiscal note for the version of the bill passed by the House last week.

Although a large surplus is expected now, it’s possible that the plan could run out of funding before benefits are paid. The version of the bill passed by the House increases this risk by maintaining just 110% funded status instead of 120%. Leaving less money in the restated fund means there would be more money for general state use, but it also means there would be a smaller cushion for potential adverse experience in the future.

The Office of the State Treasurer (OST) cautioned, as part of the November study, that last year’s change to the assumed investment rate of return means that “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.” OST also noted that reducing the overall funded status of the state retirement systems would be viewed as a credit negative.

The proposed $569 million transfer to the CCA appears to be a backfill for the potential one-time use of the CCA for the working families tax credit in 2025–27. Using the CCA for this purpose was part of Gov. Ferguson’s supplemental budget proposal. That a backfill is included in E2SHB 2034 suggests that the House operating budget proposal will also use the CCA for the working families tax credit this year.

Effectively, E2SHB 2034 would move funding from a restricted account to an account that is easily accessible for general use. The Legislature did something similar when it swept the rainy day fund in 2021 and deposited the money in the GFS and another unrestricted account. We identified this action as a contributing factor to the 2024 budget shortfall. Whatever the amount of the LEOFF 1 transfer, it would be one-time money. If the Legislature decides to make this change, the funds should be used for one-time projects.