The operating budget proposals from Senate and House Republicans would save around $700 million in 2021–23 by merging the assets and liabilities of the Teachers’ Retirement System (TRS) plan 1 with the Law Enforcement Officers’ and Firefighters’ System (LEOFF) plan 1. (Both plans are closed to new members.)

According to the state’s most recent actuarial valuation of the state retirement plans, TRS 1 was just 66% funded as of June 30, 2019. Meanwhile, LEOFF 1 was 141% funded. Because TRS 1 is less than 100% funded, employer contribution rates are higher than they otherwise would be, as contributions must cover the unfunded actuarial accrued liability (UAAL). For example, in 2019, the total employer contribution rate for TRS 1 was 14.24%. Of that, 6.19% was for the UAAL.

Merging the two plans is an idea that has been kicked around for many years now. In 2016, the operating budget required the Select Committee on Pension Policy (SCPP) to study merging TRS 1 and LEOFF 1. (The SCPP was also required to update a 2011 study of merging LEOFF 1 with LEOFF plan 2.)

According to the 2016 study,

At the highest level, the current fiscal conditions of LEOFF 1 and TRS 1 are the result of the Legislature contributing more than needed for one plan, and less than needed for the other. While there are a multitude of reasons and details underlying these contributions, ultimately that is the result.

As it stands now:

• LEOFF 1 has more assets than it is estimated to need.

• TRS 1 has fewer assets than it is estimated to need, and bringing it up to full funding represents a significant ongoing cost for the state.

Thus, the “proposal has an expected savings because it merges a plan currently in surplus (LEOFF 1) with a plan that is not in surplus (TRS 1). When we apply the existing TRS 1 funding policy to a smaller (combined) unfunded liability, the result is smaller expected contribution requirements.”

(On the other hand, a merger like this “is expected to have both short and long-term savings. The short-term savings is locked in by the bill, but under sufficiently poor economic conditions the long-term savings could shrink, or become a cost.”)

Federal and state legal analyses included in the study suggest that the proposal would pass legal muster. As the Attorney General’s Office notes, “In a defined benefit plan such LEOFF Plan 1, statutory benefits are not proportional to the contributions that employees pay into the plan. The risk for any shortfall falls on the employer. As a result members are entitled to their retirement allowance, but they have no share in the plan’s surplus.” (Citation omitted.)

The 2021–23 operating budget proposal from House Republicans assumes that merging the two plans would save the state $733.0 million in 2021–23 and $803.0 million in 2023–25. According to the budget documents, the proposal would merge TRS 1 and LEOFF 1 and provide a one-time $20,000 benefit to each LEOFF 1 member.

Similarly, the budget proposal from Senate Republicans includes savings of $705.5 million in 2021–23 and $829.7 million in 2023–25.

It appears that SB 5453 is the vehicle for the Senate proposal. (It has not received a hearing and there is no fiscal note.) The bill would merge the assets, liabilities, and membership of LEOFF 1 and TRS 1, “in a way that does not impact benefits provided to members of either” plan. There would be a one-time benefit of $20,000 per member of LEOFF 1. Additionally, the bill would transfer the balance of the LEOFF system benefits improvement account to the LEOFF plan 2 retirement fund. The transferred amount would be used to enhance the benefit multiplier for active LEOFF 2 members.