The New York Times had an article this week about pension costs faced by states and large cities across America. Their argument is that the rate of return assumed by the plans is too high because returns for most funds over the last decade have been lower than the estimate. They say that 8% is the rate most states use, and it’s what Washington has been using for the past few years.
Washington is in the enviable position of having a mostly fully-funded pension system. We are one of the best-funded systems in the country. The Pew Center on the States does a comprehensive review periodically and serves as a clear basis for comparison between states. They ding Washington for not funding health care benefits for retires, which we largely do not offer, so its no surprise that we haven’t funded it. Many of the local governments in Washington do have significant liability here, and have done a haphazard job of putting aside money to pay for these.
I think it’s interesting that the Pew folks ding us for having the system 100% funded. At the beginning of the decade we were 120% funded, and we’ve allowed this to decline to the current levels, but if you look at the chart you can see that once we brought the funding level down to 100% we kept it there. Overfunding pension accounts isn’t necessary and consumes resources that could be spent on something more important.
The Times article seems to want states to lower their expected return. We are doing this in incremental steps every biennium with a target of 7.5%. I’m a little concerned about using the 10-year returns as the baseline – the last decade included two significant recessions, one of which was (and still is) the worst recession since the great depression. Our 40-year return is above 8%. This may or may not be a better basis for comparison. We will watch the returns and adjust as we go.
Pensions are something that require a long time horizon to think about. Making abrupt changes based on short-term data is dangerous, but so is not making decisions that adjust the funding levels if there really are fundamental changes in the economy.
