The Legislature has passed ESSB 5357, which would increase the state’s assumption of investment returns that is used to determine the funded status of pension plans to 7.25%. This is a backward step in a 15-year effort to reduce the assumption so that it better reflects the level of risk. In 2010, Washington assumed 8% investment returns; the state gradually reduced the assumption until it reached 7% in 2021. The higher the return assumption, the more the state is relying on future investment returns to cover benefits. Thus, increasing the assumption means the state can contribute less today, but it could result in less solvent plans in the future.

Indeed, the bill would reduce pension contribution rates. It would also amortize the costs of Public Employees’ Retirement System (PERS) Plan 1 and Teachers’ Retirement System (TRS) Plan 1 benefit improvements over a 15-year period, instead of over ten years.

There is a fiscal note for a similar version of the bill, but the employer contribution rates specified in the final version are lower than assumed in the fiscal note. Consequently, the near-term reduction to state spending in the adopted bill may be larger. That said, I think the general impacts shown in the fiscal note from the state actuary would hold. According to the actuary:

• Given the contribution rate reductions and the investment rate of return assumption increase, the bill “lowers the expected short-term contribution requirements but increases the risk of higher contribution requirements in the future.”
• Amortizing benefit improvements over 15 years “creates a short-term budgetary savings but results in a long-term cost to the retirement systems.”

Meanwhile, it’s not clear how or if the operating budget will use the expected surplus in the Law Enforcement Officers’ and Fire Fighters’ (LEOFF) Retirement System Plan 1. The bills assumed in the Senate-passed budget and the House-passed budget that would have moved the surplus funds out of LEOFF 1 have not been approved by the Legislature.