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Pensions pinching government budgets

By ERICA HALL

The Mirror

Large increases in employee pension contributions are threatening to sink the city and school district budgets in Federal Way, and as local officials work to identify possible revenue sources, they’re asking the Legislature to spread increases over several years to lessen the impact.

In addition, city finance director Iwen Wang said municipal officials would like to see lawmakers repeal a gain-sharing plan that has had the unintended consequence of ratcheting up pension payments to thousands of state employees.

The state has a $4.9 billion unfunded obligation to its employee pension plans, and because the city of Federal Way, South King Fire and Rescue and Federal Way Public Schools employ people who are eligible for state pensions, they’re responsible for funding their shares of the obligation.

Last year, the city paid almost $500,000 into employee pensions to cover the 181 city employees enrolled in Public Employees’ Retirement System (PERS) plans and 119 police officers enrolled in a Law Enforcement Officers and Firefighters (LEOFF) plan.

This year, the city will have to pay $689,065, almost 40 percent more, and by 2009, the cost to the city will have increased 198 percent, up to $1.5 million that year alone, officials said. That’s going to leave an estimated $1 million hole in the operating budget annually, starting in 2009.

Federal Way Public Schools is looking at a $350,000 payment this year for its share of the pension obligation. Most of the district’s employees are covered by the state’s pension plans.

Chief financial officer Sally McLean said district administrators don’t know where the money’s going to come from. The superintendent and a citizen-based Fiscal Advisory Committee “are just starting to tackle how to fund pensions,” she said. The money will have to come from somewhere, she said, noting, “Something would have to not be done, and we haven’t decided what that will be.”

South King Fire and Rescue officials were unavailable for comment.

Each year, the Office of the State Actuary estimates future costs based on typical variables — life expectancy, gender, when employees entered the system, when they plan to retire and the riskiness of their occupations — and sets the state’s obligation to the pension system. The actuary then recommends that figure to the Pension Funding Council. The council reviews the recommendation and makes its own, forwarding all but the LEOFF plan to the Legislature’s Select Committee on Pension Policy. The LEOFF recommendation is forwarded to the LEOFF board.

Based on those recommendations, the Legislature adopts measures to fund the pension plans each year.

When the plans’ assets and projected investments bring a greater return than the amount of the state’s obligation, the state and local governments don’t have a problem. But, when assets and investments bring in a return that’s lower than the obligation, the state and cities cover the difference.

Throughout the 1980s, the state chronically underfunded the pension system, Wang said. With the dot-com bust and the economic recession that followed the 9-11 terrorist attacks, there never seemed to be a good time to make the contributions. Still, the obligation remained — and grew.

In addition, a 1998 bill established that whenever returns are 10 percent higher than expected over four years, half of the excess over 10 percent is shared among all the enrollees. A fluke in the language made the better-than-normal return the new base pension standard rather than a one-time distribution, effectively raising the bar employers had to continue meeting, regardless of the market performance over the next four years.

Altogether, the underfunding, the low return on the investments and the gain-sharing have worked to create the deficit that lawmakers and local governments say must be addressed.

The state this year is looking at a $3 billion revenue surplus, and Governor Christine Gregoire has suggested directing $176 million to the pension plan to help catch up. Still, cities’ contributions will be greater than anticipated.

If the Legislature increases contribution amounts this year, Wang said she’ll amend the city’s 2006-07 biennial budget downward to reflect the new contribution cost.

Officials hope the Legislature spreads increases over a few years. “It’ll give us a little more time to make up the gap,” she said.

Staff writer Erica Hall: 925-5565, ehall@fedwaymirror.com

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