Here in Washington, there are eight state-administered public retirement systems for state and local government employees, with 15 different plans within those systems. These systems serve nearly 700,000 current and former public employees. The retirement benefits they earn result in more than $3.4 billion in payments each year, most of which is distributed within the state.
Washington has been a national leader in designing and maintaining sustainable public pension plans. More than 30 years ago, the state undertook a comprehensive reform of its pension plans to provide reasonable benefits while maintaining healthy funding status for the plans. More recently, the state was the first to use hybrid defined contribution/defined benefit plans.
These reforms and innovations, combined with progressive investment policies, have resulted in Washington's system of public pensions being consistently ranked among the best-funded of any state in the country.
In the 1930s and 1940s, retirement systems were created for the state's public employees, teachers, judges, law enforcement officers and fire fighters. Each was independently administered until 1976, when the Legislature created the Department of Retirement Systems (DRS) to serve as the administrator over all public retirement systems. In 1996, administration of the state's Deferred Compensation and Dependent Care programs (for eligible public employees) was transferred to DRS. Legislation in 2008 transferred the administration of DCAP to the Health Care Authority (HCA), effective January 1, 2009.
Most of Washington's public pension plans are designed to be prefunded, which means they accumulate the assets needed to pay a member's retirement benefits during the member's working years. The Judges' Retirement Fund and the Judicial Retirement System (both closed to new membership) are funded on a pay-as-you-go basis, which uses current receipts to pay current benefits.
Both public employers and their employees contribute to the retirement plans. The amounts they contribute are calculated as a percentage of the employee's pay. In a few plans, those percentages are set in statute, but for most, the Legislature can adjust the rates, as needed. The Washington State Investment Board collectively invests the contributions and the earnings on those investments help to fund the plans.
The Office of the State Actuary (OSA) performs a valuation of the retirement plans every other year, studying the experience of each and analyzing the effects of anticipated economic and demographic changes. In the valuation, OSA determines how much money must be contributed annually to pay for the benefits members are expected to earn during their public service.
OSA's recommendations then go to the Pension Funding Council, which is responsible for evaluating and adopting employee and employer contribution rates (subject to review by the Legislature). There is one exception — rates for the Law Enforcement Officers' and Fire Fighters' (LEOFF) Plan 2 are evaluated and adopted by the LEOFF Plan 2 Retirement Board.
A plan with assets that equal its liabilities is termed fully funded, which means the value of the assets on hand equals the plan's accrued liabilities. Any gap between the benefits earned and a retirement plan's assets is referred to as an unfunded liability. A plan with unfunded liability is considered underfunded.
The biggest difference between fully funded and underfunded plans is that underfunded plans must finance benefits that members have earned in the past, in addition to those that continue to accrue each year. A fully funded plan only needs to finance the benefits that accrue with each additional year of a member's service.
Overall, the Washington state retirement plans are in a solid funding position. Only two of the state's large retirement plans — PERS Plan 1 and TRS Plan 1 — have an unfunded liability. In 1989, the Legislature enacted a policy that requires bringing those plans to fully funded status by the year 2024. As a result of that commitment, each will have the resources to pay earned retirement benefits into the future.
Further information on public pension plan funding is available on the OSA website.