Article by Erik Smith. Published on Tuesday, December 14, 2010 EST.

Will Eliminate Automatic Increases in Pension Payments, But Just Wait for Screams – Also Suggests Limits on State Health Payments

Gov. Christine Gregoire is flanked by Steve Hill, director of the state Department of Retirement Systems, and Doug Porter, director of the state Health Care Authority.  

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Dec. 13.—Gov. Christine Gregoire, signaling a tough line on at least some of the state’s biggest public-employee costs, announced Monday that she will ask the Legislature to cancel annual pension increases for the bulk of the state’s retirees. 

            She said her proposal could save hundreds of millions of dollars a year – and billions of dollars over the next decade. But it’s not going to be easy overcoming the opposition that is sure to emerge from unions and retiree groups, she admitted. At the same time, she said she intends to cap the amount the state pays annually for health care inflation.

            “Now, I am fully aware that the changes in both health care and pensions will not be easy, but there is a direct correlation between the rapidly increasing cost of these programs and our ability to pay for education and other social services,” she told reporters at a news conference Monday. “If we are serious as a state about meeting the challenges that Washington state faces, these reforms are necessary.”
 

            Chops Pension Spending in Big Way

            The pension proposal is far more specific than the one on health care, and it’s also the one that is likely to bring the loudest screams.

It clearly does save money, but at the expense of the state’s oldest retirees, by taking away an annual increase they have enjoyed since 1995. At the same time the governor would eliminate an early retirement incentive that allowed more recent retirees to retire with full benefits before age 65. She also would eliminate a loophole in state law that allows colleges and universities to rehire retired workers while they draw full benefits.

Right away the pension proposal would lop a $425 million expense from the 2011-13 state budget. Planned pension spending would fall from $1.4 billion to a flat $1 billion or so.

            And over the next 25 years, the state would save $11.3 billion. Local governments participating in the state plans would see a savings of $9 billion over the same period.

Most of that savings comes from eliminating the automatic adjustments, and it should be noted that the savings figures presume that the Legislature never authorizes another cost-of-living adjustment and keeps pension payments flat. That’s unlikely to happen because of political pressure from retirees.

            The automatic adjustments cover teachers and public employees who entered service before 1977. There are 90,000 retirees covered by those “Plan 1” pension programs, and another 13,000 still on the state payroll.

            State Employees Vow Fight

            Greg Devereux, executive director of the Washington Federation of State Employees, said the unions will fight proposals to end the early retirement incentive. It was granted through negotiations with unions. “Once you receive a benefit, it’s a property right, and they can’t take it away from you,” he said.

            The union already has won a court ruling saying the state can’t take away another pension benefit without providing equal compensation – “gainsharing,” which goosed pension benefits when stock market returns were high. Same thing applies here, Devereux said.

            Ending the automatic increases is a different matter, because they weren’t a matter of negotiation. Still it seems unfair, he said. New Plan 1 retirees won’t get them, and older retirees have been getting them for years.

            The real problem lies with the state, Devereux said, which shorted its pension obligations for years. “It could have put money into the PERS 1 system, and it didn’t,” he said.

            One Way Out of Big Pension Bill

            That much is true. A few years ago, when state tax revenue was booming, lawmakers put money into salary increases instead. But lawmakers have rarely made pension funding a top priority – they adopted a rigorous payment plan 20 years ago and lost their enthusiasm quickly. The automatic increases – about $600 a year for each retiree – only made the problem worse. 

            And now the bill is coming due at pretty much the worst time imaginable. Thanks to recession and wildly ambitious spending plans adopted in the boom years of the last decade, the state now faces a $5.7 billion shortfall. Even after the budget cuts passed Saturday by the Legislature in a one-day special session, lawmakers still have to find a way to whack another $5 billion.

             Without changes to the pension system, the state actuary says pension payments have to double for 2011-13, to about $1.4 billion, and must rise to $1.8 billion in the budget that follows. They’ll have to stay that high for a full decade. Otherwise the Plan 1 pension accounts run out of money, and the state – which can’t renege on pension obligations to retirees – will see its annual pension outlay shoot through the roof.

            The governor’s proposal offers another way out – instead of paying more money, it can cut benefits instead. That takes care of just under 10 percent of the state’s current budget problem. It also would eliminate 60 percent of the state’s $7 billion unfunded pension liability.

            State Has Authority

            Gregoire said there is no question that the state has the authority to cut the automatic adjustment, which is where most of the pension savings come from. There’s no question about the state’s authority there, she said

            She said the Legislature back in 1995 didn’t think it through – the automatic adjustments weren’t tied to inflation, and so they increase even when the inflation rate is zero. She said the state ought to go back to the old way, of boosting benefits only with the Legislature’s approval. In the old days, that required plenty of jockeying and lobbying by retiree groups.

            “I am a long-term public servant,” she said. “I am a member of Plan 1, so I know the sacrifice that’s being asked. My husband is as well, and he understands the sacrifice that’s being asked.”

            Sets Goal for Health Care

            The governor said she plans to hand all state health care purchasing to a single agency, the Health Care Authority. It’s part of an effort to cap the annual increase in health care costs in Washington state to four to five percent. Other innovative Washington state programs are being developed as part of the national health care reform effort. “If we are able to do that, over the next 10 years we would save $15 billion to $26 billion,” she said. “This is money that businesses and families can dedicate to other purposes, in our case to essential services and education.”

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