Two pensions policies with impacts to cities have made their way into the House proposals for this biennium’s operating budget. The policies include another PERS 1 COLA and a sweep from the LEOFF 2 pension fund. The Senate budget proposal does not currently include a PERS 1 COLA or a LEOFF 2 sweep.

PERS Plan 1 cost of living adjustment

A late addition to the House operating budget (HB 1094) is in the form of an amendment that appropriates $17.2 million to cover the state’s portion of a one-time 1.5% increase in benefits for PERS plan 1 and TERS plan 1 beneficiaries. The appropriation is in conjunction with the recently introduced HB 1565, sponsored by Rep. Jesse Johnson (D–Federal Way), which authorizes the one-time 1.5% benefits increase for PERS 1 and TERS 1 beneficiaries and caps the proposed COLA at $22 per month. HB 1565 was introduced on March 30 and has yet to be scheduled for a hearing. It is currently in the House Appropriations Committee. Currently, there is no fiscal note for the bill, so it is not yet clear how much of a fiscal impact local governments are likely to see.

The proposed PERS 1 COLA comes on the heels of a similar 3% increase that was passed last year. Last year’s bill necessitated a 0.12% PERS employer-paid supplemental contribution to pay for the benefits increase and will result in local governments contributing an extra $77.9 million by 2030. This year, employer contribution rates for PERS was expected to drop from 12.52% in the 2019-21 biennium to 10.07% this biennium. However, HB 1565’s benefits increase will likely cut in on those savings and give local governments an effectively higher rate after the supplemental contribution is factored in.

For background, the supplemental contribution rate impacts local government employers. PERS Plan 1 is underfunded, meaning that its assets are considered insufficient to meet the expected obligations. As a result, employers are paying a higher rate to make up the difference. Retirees within PERS Plan 1 do not have any additional fiscal costs to make up this difference.

AWC opposes an additional unfunded cost of living adjustment in the 2021-23 biennium that will result increased pension costs for city employers.

LEOFF Plan 2 pension fund sweep

The House operating budget includes a $600 million sweep from the LEOFF plan 2 pension fund to the local law enforcement officers’ and firefighters’ Benefit Improvement Account. This follows a similar transfer of $200 million from LEOFF 2 to the Benefit Improvement Account in the current biennium. The benefits funded by the benefit improvement account have not yet been defined, so funds currently sit in the account with no clear direction as to what new or enhanced pension benefit they will be used for.

AWC is concerned that the proposal is unsustainable and based on poor pension policy. It effectively uses pension trust funds intended to pay for current pension obligations to fund additional, as yet undefined benefits. The transfer reduces the LEOFF 2 pension plan’s funded status and creates unknown future fiscal impacts.

The House expects to move its budget off the House floor over the weekend of April 3.