Legislature Sets PERS Contribution Rates

Last fall, when it was announced that the State Actuary was recommending a 5.73% employer contribution rate for the Public Employees’ Retirement System (PERS) for the 2005-2007 biennium, local governments began scrambling to figure out how to deal with such a significant jump in rates.

(The current PERS employer contribution rate is 1.19%). See the next article for information on LEOFF contribution rates.

Because of the financial hardship significant rate increases impose on both employers and employees alike, the Legislature explored a variety of proposals to soften that budgetary hit.

When the session ended on Sunday, April 24, the Legislature had passed a compromise on pension funding – ESHB 1044. In a departure from previous pension funding policy, the bill phases in the needed 2005-2007 rate increase over a four- year period. It also makes other changes designed primarily to save the state money.

Here’s a brief summary of the bill’s major provisions:

• Begins a four-year phase-in of annual pension contribution rates, with a 2.25% PERS employer contribution rate effective July 1, 2005, increasing to 3.5% effective July 1, 2006.

• Directs the Pension Funding Council to adopt annual contribution rates for the 2007-2009 biennium that complete the four-year phase-in schedule, by September 30, 2006.

• Continues to suspend contribution rates for the unfunded liabilities in PERS 1 during the 2005-2007 biennium.

• Delays recognition of the cost associated with future gain-sharing benefit distributions until the 2007-2009 biennium.

• Directs the Select Committee on Pension Policy to study the options available to address the liability associated with future gain-sharing distributions during the 2005 interim, and report the findings and recommendations of the study to the fiscal committees of the Legislature.

The following chart shows PERS employer and PERS 2 employee contribution rates for the 2005-2007 biennium. (The PERS 1 member contribution rate is set is statute and remains 6.0%; PERS 3 members choose their own contribution rates.)

What Does the Future Hold?

As part of ESHB 1044, the Pension Funding Council has been directed to set rates for the 2007-2009 biennium by September 30, 2006. What will those rates be? Well, we can’t say for sure, but we can give you some indication of what you might expect.

The State Actuary had initially recommended a PERS employer rate of 5.73% for the 2005-07 biennium and a rate of 7.28% for the 2007-09 biennium. When the Select Committee on Pension Policy (SCPP) first recommended phasing in the 2005-07 rates over four years, the Actuary calculated that that proposal would require employer contribution rates of 2.5% effective 7-1-05, 5.5% effective 7-1-06, 8.25% effective 7-1-07, and 9.96% effective 7-1-08. These projections assumed that the gain-sharing benefit would be accounted for in the rates and that employers would resume payments for the unfunded liability of PERS 1, which had been suspended for the 2003-05 biennium (again, to save money).

The pension funding changes passed by the Legislature this session reduced the employer contribution rates for the first and second year even further, from 2.5% to 2.25% for 2005-06, and from 5.5% to 3.5% for 2006-07. In addition, they put off more of the "pain" into the future – by continuing to defer the employer payments towards the unfunded liability of PERS 1 until after the 2005-2007 biennium, and by deciding not to recognize the cost of future gain-sharing distributions until after the 2005-2007 biennium. These actions will cause the rates for the 2007-09 biennium to be even higher than the projections in the previous paragraph.

Again, remember the DRS administrative expense fee (currently .19%) needs to be added to the employer rates. And always keep in mind that benefit changes in the future could make all of these numbers moot. During the 2005 interim, the SCPP will study the liability associated with the gain-sharing benefit and will make recommendations to the 2006 Legislature. The recommendations could include eliminating the gain-sharing benefit and offsetting it with other benefit enhancements -- and the impact those changes could have on the rates is unknown.

The bottom line – although the PERS contribution rate increases for the next two years will be manageable, it is very important to remember that significant contribution rate increases will be required in the future.

 
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