The American Legislative Exchange Council (ALEC) recently published a report, Unaccountable and Unaffordable, on unfunded public pension liabilities. According to the authors’ research, all states combined have about $6 trillion in unfunded pension liabilities. The report investigated 280 state-administered pension plans, including the ones in Washington state, and examined their current assets and liabilities.

The authors conclude that one of the main contributors to such underfunding of public pension plans is unrealistic discount rates, “an investment return, expressed in percentages that the retirement plan’s managers hope to achieve.”  Instead of using risk-free rates, plan managers calculate pension funds using assumed, and overly optimistic, rates of return. Between 2000 and 2016, this expected rate of return across the country averaged 7.83%, whereas the actual rate of return for this period only averaged 6.99%.

In contrast, risk-free rates are set at a reliable 2.142 % (the yield of an average U.S. Treasury bond). When plan managers assume the return rate to be greater than it is, the government does not invest an adequate amount of money into pension plans, creating unfunded liabilities that cause shortfalls in the future.

The report ranks states based on several factors:

• total unfunded liabilities;
• unfunded liabilities per capita; and
• funding ratio of public pension plans.

Washington state is ranked 38th for the total unfunded liabilities, with an estimated $120 billion shortage. Unfortunately, the gap has increased by 11% since 2016. This number translates into $16,547 in unfunded liabilities per person, meaning that every man, woman and child in Washington state share the liability.

These statistics put Washington at #25 in ranking among states, with Tennessee having the least shortage per capita ($7,601) and Alaska – the largest per capita ($45,689). Unfortunately, Washington state officials are not making needed changes in plan management to close the gap. The report reveals that, in 2017, our state’s funding ratio has dropped to 38.2%, a 1.7% decrease from 2016.

In contrast, Wisconsin officials fund their pension plans at 61.5% and Connecticut at 19.7%. The funding ratio that accounts for future return rates further misleads the public into believing that their public pension plans are secure.

Washington state data shows that the funding ratio is 84%. However, plan managers use unrealistic discount rates to calculate it. The funding ratio using the risk-free rate of 2.14% shows that Washington only funds 38% of its pension fund, which translates into billions of dollars in unfunded liabilities (pg. 12).

ALEC specialists recommend state officials be more transparent with the public, starting with easily accessible and comprehendible data. It would help citizens see the information and hold their elected and appointed officials accountable. They also suggest lowering the assumed return rate, at least to a more realistic percentage, if not to a risk-free one. Additionally, changes in plan management as well as comprehensive legislation, addressing the problem, would help closing the gap between real assets and present liabilities.

Luckily, Washington state is making improvements to its public pension plans, including decreasing the assumed rate of return to a more reasonable 7.7% for 2017-19, down from 7.9% in 2013 through 2015. However, for our pension plans to be secure, more drastic measures need to be implemented. For complete confidence in the health of our public pension plans, managers should at least use an assumed rate of return of 6.99%.  Then workers and the public can rest easier knowing that funding for public retirement plans is secure.

*For the full report, go to https://www.alec.org/app/uploads/2017/12/2017-Unaccountable-and-Unaffordable-FINAL_DEC_WEB.pdf

Washington State Legislature, Office of State Actuary Report: https://leg.wa.gov/osa/supportinformation/Pages/ActuarialAssumptions2016.aspx