Facing a budget hole worth billions of dollars, Washington state devised a plan to take what it deems excess funding from one of the nation’s few pension funds able to pay out retirement benefits without coming up short. The pension’s contributors immediately sued, pitting the state against its retirees.
Democratic lawmakers who ushered the bill through the process say that money belongs to the state and should fund services and replenish a rainy-day fund. Pension reform advocates say other states are likely watching the lawsuit closely to see if they might have the option to do the same.
“They wanted some of this older pension system’s money, because we have a pretty substantial ongoing budget shortfall, and they’re relying on sweeping these funds to help balance the budget,” Ryan Frost, director of budget tax policy at the Washington Policy Center, told Straight Arrow.
The argument for
Gov. Bob Ferguson signed House Bill 2034 in April.
That law strips billions of dollars from the Law Enforcement Officers’ and Firefighters’ System Plan 1, or LEOFF 1.
The bill was written by four Democratic state representatives who argue that the plan is overfunded and that 80% of contributions to that pension plan came from the state.
Some of that money will bridge the budget deficit, while some will backfill spending from the state’s rainy-day fund.
The bill’s authors also don’t believe it will impact beneficiaries of that pension plan.
“Whatever pension those firefighters and law enforcement signed when they came into service, those benefits are guaranteed,” Rep. Timm Ormsby, D-Spokane, told the Washington State Standard.
That pension plan is also the second-most well-funded in the country.
There are significant legal protections for pension funds, but Ormsby said they consulted with counsel, and this plan does not run afoul of any court precedent.
The argument against
“It’s blatantly unconstitutional and illegal,” Frost said.
A lawsuit filed last month accuses the plan of exactly that.
While this pension plan is considered overfunded, plan funding depends on a few things. One of those is investment returns.
Washington’s Office of the State Actuary analyzed this plan.
It found that LEOFF 1 had a 5% chance of falling under 100% funding. However, if this plan goes through, those odds go up to 40%.
“That would mean the state would have to start contributing money again to this plan, which would be a pretty awful decision,” Frost said.
Part of that is because the state hasn’t had to contribute money to this plan for more than two decades.
LEOFF 1 was open for only seven years in the 1970s and was open to firefighters and police officers hired before Oct. 1, 1977. Those hired after are part of a separate pension fund.
That plan has lived off decent investment returns, which is why the state legislature wants some of the money. They feel it will be healthy even with some of the money gone.
“They could be right about that, but the underlying legal protections of, if it’s funded or not, are pretty concrete,” Frost said. “That the legislature is not entitled to this money.”
He added that a court ruling in favor of the legislature could set a dangerous precedent for pension plans across the country, allowing state governments to declare open season on any pension fund deemed overfunded.
What’s next?
The courts have yet to schedule a hearing in the lawsuit. Half a dozen individuals initially filed it, but it’s likely to become a class-action suit.
Once that is decided, courts will have to make determinations about how the Washington Legislature is approaching this.
Their plan is being called a “termination and restatement.” It actually terminates the pension in 2029, then reinstates the plan with less money.
“I’ve never heard of it, and I’ve worked in pensions a very long time,” Frost said.
Frost expects this process to take at least a year.
Meanwhile, with no new members admitted to this pension plan, there will eventually be no more beneficiaries.
There are still several members actively working under LEOFF 1, but once they retire and die with no beneficiaries remaining, this money will return to state coffers. That’s unlikely to happen for several decades, and lawmakers are counting on that budget money now.
“In 30-40 years, when the last beneficiary of this plan is gone, then, yeah, the money would revert to the state, but there’s no legal mechanism for that to happen before that,” Frost said.
Attempts to alter pension plans often fail because the plans are considered contracts between workers and employers. The U.S. Constitution offers broad protections to contracts, with options limited mainly to bankruptcy. To alter pensions, states must create new ones that only affect future employees.
While Washington’s actions are novel, courts have stopped others from attempting to short-change their pension funds. California attempted to withhold money from CalPERS, which has had its own issues in recent months.
Several courts ruled it illegal, and the Golden State had to pay back billions.
“The legal protections around these funds, and who the funds are for, are some of the strongest in the entire country,” Frost said.
Round out your reading
- Tennessee officials will pay $835,000 for jailing man over Charlie Kirk meme.
- Why the immune system turns on women more often than men.
- More than 340 newspapers block the Wayback Machine. What that means for the future of the internet.
- Why Rep. Cohen filed articles of impeachment against Supreme Court Justice John Roberts.
- We’re building a new Straight Arrow. Help us shape our future by taking our survey.