Senate Republican budget chief Joe Zarelli and Gov. Christine Gregoire

OLYMPIA, March 22.—The complicated pension-policy dispute that is snarling budget negotiations at the state Capitol is actually pretty easy to explain – as long as labor unions are telling the story.

According to a bulletin that appears on the website of the Washington Federation of State Employees, the House Democrats are the “Jedi Knights.”

They’re wielding their light sabers in the fight against “class warfare.” It appears Senate Republican budget chief Joe Zarelli, R-Ridgefield, is playing the role of Darth Vader. And if it is a battle to the death, well, that’s just what you have to expect when the Evil Empire declares war on the workers.

But there’s a problem when you tell the story this way.

A long time ago, in a Legislature far, far away, pension reform wasn’t a Republican idea. The first to suggest it was a Democratic governor, Christine Gregoire. Last year, in fact, some of the Legislature’s most liberal Democrats voted for it.

Only since then has the issue become a partisan battle, overshadowed by charges of union-bashing, budget “gimmickry” and the furor over the March 2 Senate takeover by a coalition of Republican and Democratic budget hawks. Political maneuvering has managed to confuse the issue to the point that Gregoire conceded Monday that changes to pension policy have become “toxic” and urged lawmakers to try something else.

Sounds like the force may be with the unions.

Early Retirement the Issue

These days legislative Democrats are describing the budget dispute as a choice between budget gimmicks. To help close the current billion-dollar hole in the budget, they want to shunt $330 million in school district payments from the current budget period to the next one. That would make next year’s problem that much worse, expanding the projected $2 billion shortfall that the Legislature already faces in 2013-15.

On the other side, the coalition of 22 Republicans and three Democrats that took control of the Senate wants to skip a pension payment. That would save $143 million this year, but because the money wouldn’t be invested in the stock market and left to ride for the next 25 years, the state would face an additional expense of $400 million by the time current workers retire.

So it’s really one distasteful budget trick versus another, Democrats maintain. The night of the takeover, Senate Ways and Means Chairman Ed Murray, D-Seattle, declared, “This is a gimmick. Skipping a pension payment is a gimmick.”

And Senate Majority Leader Lisa Brown, D-Spokane, said, “Calling this fiscally responsible is amazing to me.”

But there’s more to the pension proposal than a skipped payment. The more significant element is the elimination of a generous early-retirement incentive that most state employees have enjoyed since 2001.

Full retirement age in this state is 65. It used to be that an employee who wished to retire early took a whopping hit, based on hard-nosed actuarial calculations. Not any more. It all depends on the age at retirement. But right now, for example, an employee with less than 30 years’ service can retire at age 55 and take only a 30 percent reduction from his or her pension. The hit used to be 64 percent.

Net Savings is $1.9 Billion

Critics say it’s the kind of benefit you just don’t see in the private sector. If the state were to eliminate it for new hires and return to the old way of doing things, Washington taxpayers could save $2.3 billion over the next 25 years.

So if you add both ideas together, you get a net benefit of $1.9 billion.

“Everybody wants to talk about the skipped payment,” Zarelli says, but he argues that the proposal ought to be considered in toto.

“I’ll say this again. The skipping of the pension payment is joined at the hip with reform in the pension system.”

It is a critical issue for the more-conservative lawmakers who have made sustainability of the state budget their central concern this year. By tackling pension issues in this budget cycle, they also make headway in reducing the state’s long-term expenses.

And in the last week, Zarelli has introduced a new wrinkle. Rather than using the savings to reduce future pension payments, he has drafted a new bill that directs the state to keep up its payments and uses the savings to pay off old unfunded pension liabilities. Over the last decade, even when times were good, the Legislature did a miserable job of keeping up with its liability in its oldest pension plans, shorting and even skipping payments altogether, meaning that future legislatures will have to make double and even triple payments if they want to keep up. All of which gives the argument about a skipped payment a partisan tinge. Zarelli points out that when Democrats were in charge they had no qualms about it. “It’s kind of a red herring,” he says.

Zarelli’s new idea can’t be considered a mandate, though – at best it is a suggestion.  The current Legislature can’t tell future legislatures what to do.

But ending the early retirement incentive – that’s a different matter. It’s a permanent change.  And until the current uproar, before anyone started talking about a war on the workers, it was an idea that appeared to have broad support in both parties. It started at the top.

Was Democratic Idea

Gregoire gave the idea a formal send-off at a news conference on Dec. 13, 2010. The state’s long-term pension liabilities were one of the state’s biggest problems, she said. She advocated an end to automatic cost-of-living increases in the state’s oldest plans, a proposal that was adopted by last year’s Legislature and which will save the state $11.3 billion over 25 years.

But that wasn’t her only idea. She said the early retirement incentives are “expensive benefits that no longer fit with the modern workforce and the realities of our economy as it stands today.”

The governor’s proposal didn’t take away early retirement benefits from current public employees now enrolled in state pension plans – that could have been challenged in court. Instead it eliminated the benefit for future hires, meaning that the greatest financial benefit will be felt years from now. You can’t expect much short-term gain, said House Ways and Means Chairman Ross Hunter when the bill came up for a vote in his committee last April 14, but “it is designed to have a positive financial impact on the long-term financial health of the state.” HB 1742 sailed out of his committee 25-2.

That vote was the end of it. The measure went to the House Rules Committee, controlled of course by Democratic House leaders, and it disappeared without a trace.

Unions Cry Foul

Until the Gang of 25 took over the Senate this month, the proposal really didn’t stand a chance. Public employee unions are major players on the Democratic side of politics, and in a Legislature controlled by the Democratic Party, their influence goes a long way. The unions maintain that the early-retirement benefits were part of a legislative bargain that was struck a decade ago, provided in return for the creation of optional pension plans for state employees. Those ‘Plan 3’ retirement programs operate in part like the private sector’s 401(k) programs; the more traditional ‘Plan 2’ programs, with their guaranteed benefits, remain far more popular.

But more important to union officials than any ancient dealmaking is the idea that public employees deserve more generous retirement benefits than those in the private sector. Explained Jeff Johnson, president of the state Labor Council, “If you take a look at state employees and you take a look at the state salary surveys that have been done, you can see the sacrifice that state employees have made to go into public service. They are taking much lower wages in return for decent health care benefits and decent pension-benefit plans.”

Johnson was speaking to the Senate Ways and Means Committee, one of a dozen union officials who argued against the idea during a Feb. 2 hearing. At that point, Zarelli was pushing a bill that enacted his pension-reform program, and criticism was muted by the fact that his proposal was headed for certain doom. At that point labor didn’t need to pull out the stops.

Now everything has been turned upside down by the upheaval in the Senate. The Federation, largest of the state-employee labor unions, is exhorting its 40,000 members to flood members’ offices with calls. Declares one Federation bulletin, “We all want the House Democrats to be the Jedi Knights that stick to the right path they’ve been on in the budget for the most part, but even Jedis can move to the wrong side.” The union’s website deplores “the evils of Zarelli-style pension ‘reform,’” and it features a photo of the Dark Knight of Ridgefield himself. Director Greg Devereux told the Olympian newspaper over the weekend, “Zarelli is pushing this because it is ideologically driven. They want to hurt public employee pensions. They want to hurt public employee unions in this country.”

GOP Stands With Governor

All of which points up the central irony of the situation. It would be just as appropriate for the Federation to post the governor’s photo as Zarelli’s.

To be sure, Gregoire is critical of the skipped pension payment. But she hasn’t changed her mind about ending the early retirement incentives, says spokeswoman Karina Shagren.

Meanwhile, House Republican budget chief Gary Alexander, R-Olympia, says the proposal makes just as much sense this year as it did when the Democratic governor was pushing it. As long as it doesn’t take away the benefits that have been granted to current employees, Alexander says it’s hard to call it unfair.  “This is very similar to the proposal that came out of the Ways and Means committee with very few opponents, but at this point in time I think this is an issue for the Democratic caucuses and their budget people to resolve,” he says.

Sometimes it’s hard to tell which team is playing on the dark side.

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