In a 3-3 vote, the state Pension Funding Council rejected a motion at a Sept. 30 meeting to lower the assumed rate of return for the public pension systems and correspondingly increase the state’s contribution to the pension plans. Although recommended by State Actuary Matt Smith, council members opposed to the move declined to add millions in new financial obligations for the upcoming two biennial budgets.

Currently, the state’s unfunded liabilities total $11.2 billion, with the rate of return used by the state at 7.5 percent. The unfunded liability is a decrease from the $12.6 billion unfunded liabilities from the previous year.

In his report to the council, Smith recommended lowering the assumed rate of return to 7.4 percent, although in the past five years the actual returns have been 7.85 percent. His recommendation was based on investment returns by the Washington State Investment Board (WSIB).

However, Sen. John Braun (R-20) told colleagues he was reluctant to add $200 million in spending from the general fund over the next two budget cycles. “If this were a year from now and we had just come off a good revenue forecast and the concerns about a recession were way in the future, then I think my decision might be different.”

“We do take on higher risk to get a higher return,” WSIB Executive Director Theresa Whitmarsh told the council. “One of the philosophies of the WSIB has been because we’re such a long-horizon investor, if we’re disciplined and don’t overreact to short-term market trends, we are able to essentially harvest that response.”

However, the 20-year return has been 7.1 percent, which Smith told the council is because the investments were “hammered by the Great Recession. It kind of gives you an idea of the challenge of looking at historical returns when trying to figure out what the future’s going to look like. The period that you select really does matter. You want to be sure you’re looking at a complete market cycle. The returns of the last ten years and shorter do not represent a complete cycle.”

In favor of the change was Senate Ways and Means Committee Chair Christine Rofles (D-23). She told colleagues: “we’re in the good economic times, and for me going from 7.5 percent to 7.4 percent is still fairly optimistic in terms of the market.”…

This article quotes selections from “Pension council rejects lower growth assumptions” by Lens News, October 2, 2019. Read the rest of the article here.