A plan to sweep up to $3.3 billion in surplus funds from the LEOFF 1 retirement system to help offset the state’s general fund budget deficit has been introduced. AWC has questions about the intent of the bill and whether or not the excess funds will be used to cover the unfunded liabilities in the other closed pension funds to reduce pension costs for all public employers. Cities contributed to the LEOFF 1 system and would want that contribution acknowledged in any effort to remove the funds and use them for other purposes.

The LEOFF 1 retirement system was the first iteration of a state-managed pension fund for local firefighters and law enforcement officers. The LEOFF 1 plan closed to new entrants in 1970 and was followed up by the LEOFF 2 retirement system – the plan still in use today. LEOFF 1 was funded by a combination of state contributions, local government employer contributions, and member contributions which were then invested by the State Investment Board and used to fund pensions for retired firefighters and law enforcement in the plan.

LEOFF 1 currently has over 6,100 retirees and less than 10 active members (i.e. current employees still contributing to the plan) and is about 150% fully funded. The Office of the State Actuary estimates that the plan will be 200% fully funded by 2029 due to investment returns and a reduction of liabilities over time, resulting in a $3.3 billion surplus by that time.

Enter HB 2034, sponsored by House Appropriations Committee chair Rep. Timm Ormsby (D–Spokane). The 173-page bill is fundamentally quite simple: it repeals the LEOFF 1 retirement system on June 30, 2029 and replaces it with a “Restated LEOFF” retirement system that takes on the former LEOFF 1 retirees, with all the same benefits as LEOFF 1. To fund the new plan, enough funds are transferred from the LEOFF 1 account to the new Restated LEOFF account to achieve a 120% funded status. The remaining surplus (projected at $3.3 billion) is the transferred to the state’s Pension Funding Stabilization Account (PFSA) – the account the state uses to provide state employer contributions for PERS, PSERS, and the Teachers Retirement System.

Finally, and most importantly for cities, the bill allows “during the 2027-2029 fiscal biennium the legislature may direct the state treasurer to make transfers of moneys in the pension funding stabilization account into the state general fund.” This effectively allows the legislature to use the surplus LEOFF 1 funds deposited in the PFSA to partially fill the general fund budget deficit that is projected over the 2025-26 and 2027-29 bienniums.

This sweep of surplus LEOFF 1 pension funds likely represents one of the single biggest bites out the $15 billion 4-year deficit that the legislature could consider that does not require raising taxes or making budget cuts. In the legislative findings section of the bill, the proposal states: “While [LEOFF 1 firefighters and law enforcement] have a constitutionally protected right to the pension benefits that are provided as part of their contract of employment, there is no such right in surplus assets which are unnecessary to the actuarial soundness of the retirement plan.”

AWC has questions about the proposal. The LEOFF 1 surplus is based off returns that were in part originally funded by cities and city government employees to cover city retirement obligations, and should not be used to offset unrelated state general fund budget woes. AWC thinks there should be a nexus between the use of surplus pension funds and covering costs for retirees.

If the surplus is unnecessary to fund LEOFF 1 pensions, then we believe that at very least it should be used to fund other underfunded pensions like PERS 1, including possibly funding an ongoing COLA for that plan. While the intended recipients of those original contribution dollars would no longer get the surplus funds (they likely would not anyway, as surplus pension dollars eventually revert to the state when there are no more pensions to fund), at least they would still be used to cover city employee pensions and help cities avoid new long term obligations from legislatively imposed PERS 1 COLAs, instead of a short term bailout for a budget hole of the legislature’s own making. LEOFF 1 surplus dollars could also be appropriately used for funding LEOFF 1 retirees’ medical benefits, which amount to over $2 billion annually. At least then there would be a nexus between the LEOFF 1 surplus and funding benefits for LEOFF 1 retirees, while relieving cities of long-term costs for those benefits.

Date to remember

HB 2034 is scheduled for a hearing in the House Appropriations Committee on March 13 at 4 pm.