Last week, the House Appropriations Committee held a hearing on HB 1899, which would allow first class cities to enter into agreements with the State Investment Board (SIB) allowing the SIB to “assume the duties of investing the retirement funds of the first class cities’ retirement systems.” The only first class cities with their own retirement systems are Seattle, Spokane and Tacoma.

The bill notes that

Over time, the higher administrative costs and the more limited investment and diversification opportunities available to the smaller cities’ pension funds lead to both less investment return and more risk over time.

Under any such asset management agreements, the state would assume “no liability or other responsibility for the benefits owed by each city to the members and beneficiaries of the respective systems.”

According to the bill analysis, the SIB currently manages $87 billion, of which $64 billion is made up of state pension funds. The retirement systems of Seattle, Spokane and Tacoma collectively invest about $3.2 billion. The bill report estimates that Seattle’s investment return over the past seven years averaged 3.5 percent, while the SIB averaged 5.9 percent.

According to Publicola,

Seattle city employee unions are reportedly nervous about the idea of letting the state manage their funds because they believe state management will make them vulnerable to Republican demands at the state (as opposed to liberal Seattle) level to scale back public employee benefits.

I don’t see a basis for such a concern in the bill language. But let’s go ahead and take a look at how the cities are doing.

I recently linked to a Pew study on local pensions, which found

a bigger gap in pension funding for city-run plans than for plans managed statewide or administered by the state for city and other public employees. Across the 61 cities, plans managed by cities for their own employees had on average 66 percent of the money needed in the long run, compared with an average of 79 percent for state-administered and statewide plans that covered city workers and others.

The only Washington city it looked at was Seattle, and it seems to have overestimated Seattle’s pension system funded status. According to the Seattle City Employees’ Retirement System (SCERS) 2011 annual report, it was 92.4 percent funded in 2008, 62 percent funded in 2010, and 74.3 percent funded in 2011. SCERS made at least 100 percent of its annual required contribution (ARC) every year since 1989 — except for 2010, in which it made only 47.2 percent of its ARC. (2010 is the latest year available.)

According to the Spokane Employees’ Retirement System’s 2011 annual report, it had a funded status of 68.8 percent in 2011, down from 72.2 percent in 2010. It contributed 67.92 percent of its ARC in 2011, down from 73.49 percent in 2010. (It hasn’t contributed at least 100 percent of its ARC since 2002.)

According to the Tacoma Employees’ Retirement System 2012 Actuarial Valuation, it had a funded status of 90.1 percent in 2012 and 94.9 percent in 2011. It contributed 132 percent of its ARC in 2011, up from 125 percent in 2010.

Seattle’s 2012 report, Options for a Sustainable Retirement Benefit, notes that “The investment return is the most important determinant of a plan’s cost as asset growth provides the majority of the value to pay benefits.” If a plan doesn’t get the investment return it expects, it would have to increase contributions to cover promised benefits (which in turn increases the pressure to lessen those benefits in some way).

(For more on public pensions, see here.)