The state is sitting on a large surplus in the Law Enforcement Officers’ and Fire Fighters’ (LEOFF) Retirement System Plan 1. The various budget proposals differ in how they would use it.

LEOFF 1 has been closed to new members since 1977 and only three members are still working. As of June 30, 2023, it was 149% funded. The Office of the State Actuary estimates that the expected difference between assets and obligations in the plan will be more than $3 billion in FY 2027.

The Legislature, in HB 2034, states that “over the life of the plan, over 80 percent of all funds contributed have been from the state through general fund—state appropriations.” Further, as SSB 5085 notes, the state Supreme Court has held, “[A] defined benefit plan entitles the members to a predetermined distribution upon retirement and to an actuarially sound plan to ensure that the plan is adequately funded to meet those distribution requirements. It does not entitle them to any use of the contributions other than to ensure the above entitlements are met.” Consequently, the Legislature seems agreed that it is time to make use of the LEOFF 1 surplus.

Transfer the Funds to Help Close the Shortfall

Former Gov. Inslee’s budget proposal assumed that the LEOFF surplus was about $2 billion. He proposed combining the LEOFF 1 and LEOFF 2 funds into a single pool and transferring $1 billion to the general fund–state (GFS) in 2025–27.

The Senate Ranking Member proposed transferring $2.5 billion from LEOFF 1 to the GFS in 2025–27.

Fund Additional Benefits

The Senate-passed budget assumes enactment of SSB 5085. (The bill was passed by the Senate March 3 and was heard by House Appropriations March 13.) The bill would close LEOFF 1, the Teachers’ Retirement System (TRS) Plan 1, and the Public Employees’ Retirement System (PERS) Plan 1. The assets of the three plans would be merged and transferred to a new legacy retirement system account, effective Sept. 1, 2027. (This would not change benefits for plan members.)

Additionally, SSB 5085 would add 3% cost-of-living adjustments (COLAs) for PERS 1 and TRS 1 members for FY 2026. Thereafter, PERS 1 and TRS 1 members would receive annual COLAs tied to inflation. The bill would also reduce contribution rates related to the unfunded actuarial accrued liability in PERS 1 and TRS 1.

According to the fiscal note from the Office of the State Actuary, the $3.4 billion surplus in LEOFF 1 “subsidizes both the $2.6 billion benefit improvement and the PERS 1 and TRS 1 UAAL contributions that were expected to be made by employers in FYs 2026 and 2027.” The bill is estimated to reduce GFS spending by $361.0 million in 2025–27 and by $237.4 million in 2027–29.

Hide the Money for Future Use

The House-passed budget assumes passage of HB 2034. (The bill is scheduled for executive session in the Appropriations Committee tomorrow.) HB 2034 would terminate LEOFF 1 effective June 30, 2029 (the last day of the 2027–29 biennium). It would establish the restated LEOFF retirement system, to which LEOFF 1 assets equaling 120% of the actuarial present value of LEOFF 1 benefits would be transferred. Any remaining amounts would be transferred to the pension funding stabilization account (PFSA). These transfers would also take place on June 30, 2029. The fiscal note from the Office of the State Actuary estimates that the transfer to the PFSA would total $3.3 billion.

By statute, the PFSA may be used to pay state government employer contributions to certain retirement systems. HB 2034 would allow the Legislature to transfer funds from the PFSA to the GFS during 2027–29.

However, the House-passed operating budget does not assume that the $3.3 billion will be transferred to the GFS in 2027–29 (the second biennium of the outlook period). Why propose closing LEOFF 1 now if the termination won’t take place for four years? And why put the money in an easily accessible account but not use it to help close the shortfall?

This may sound familiar. As we showed in our report on the causes of the current maintenance level shortfall, the seeds of the problem were planted in 2021, when the Legislature swept a restricted account (the rainy day fund) and transferred the money to an easily accessible account (the Washington rescue plan transition account). The money was eventually all spent on general programs. We have a shortfall today because the higher spending level enabled by this and other policies could not be funded with existing revenues. Instead of helping to solve the current problem, HB 2034 would start us down the same path again.