There is NO legislative necessity for this bill, but the proponents claim the following three items as the needs generating the bill.

The Legislature has the authority to set pension rates and assumptions for LEOFF systems. This bill would remove that authority and prevent legislative revision so long as the LEOFF Board actions are certified as being reasonable by the state actuary.

Position: Assigning policy decision-making process, which is the responsibility of elected officials, primarily to non-elected officials who gain personally from these decisions is bad public policy.

There is a slight risk of the LEOFF 1 system becoming a pay as you go system after 2037 if a pessimistic view of returns on investment is considered.

Position:  Both LEOFF 1 and LEOFF 2 are well funded at 127% and 124% respectively. Both are among the healthiest pension systems in the country and neither needs rescuing. Only a pessimistic view of investment returns significantly below those assumed by the legislature and those actually attained historically since 1926 would produce a pay-go scenario for LEOFF 1. (http://osa.leg.wa.gov/Actuarial_Services/Actuarial_Information/Historical_Returns.htm)

Even if such a pessimistic situation should occur, it would not be before 2037 where there would be very few LEOFF 1 beneficiaries.

Conversely, with expected returns the LEOFF 1 pension plan would be 200% funded by 2037 and any existing surplus in the system would revert to the State when the plan expires. Throughout this period there would be no cost to the State. (http://osa.leg.wa.gov/Actuarial_Services/RiskAssessment/Plans/LEOFF.htm)

The LEOFF 2 system must identify funding to increase benefits. Merging the funds would make the money in the merged fund available to increase LEOFF 2 benefits.

Position: Steve Nelson, the Director of the LEOFF 2 Board and Matt Smith, the State Actuary, have both publicly stated that under the merger the LEOFF 1 funds could be used to increase LEOFF 2 benefits. The LEOFF 1 Pension Trust is an inappropriate venue for funding increased benefits for LEOFF 2.Additionally we are convinced that such an action may well be illegal and in violation of existing state and federal law and case law relative to these pension systems.

This is bad public policy and is unfair to those men and women who have served an entire career protecting the public safety of the citizens of Washington State.

LEOFF 1 and LEOFF 2 plans are two separate and distinct pension funds with their own respective rules, regulations, and benefits.

Position: Transitioning to the most common denominator will most likely cost cities and counties general fund revenue that currently does not exist.It is likely that LEOFF 2 members will want the same benefits as those provided to LEOFF 1 members, which will negatively impact cities/counties.In fact Section 5 of the bill suggests this as a possibility under the combined plan.

LEOFF 1 has been in existence since 1970 – 42 years. Over that time the law has been refined through legislation and litigation so that it is stable. It has been a closed system since 1977 so that no new members have entered the system since that date. The legislature created a pension premium holiday in 2000 and neither the employees, employers nor the state has been required to make pension premium contributions since that date. The system remains fully funded and healthy with no cost to the state.

In contrast LEOFF 2 is an open system with members entering and leaving the system.It is dynamic and subject to fluctuation as salary and other elements change. It has an entirely different set of benefits and a different premium structure. The only common element is the name “LEOFF”.

Merging LEOFF 1 and LEOFF 2 could confuse the meaning of existing laws and case law resulting in new litigation over issues already settled in the past.

Position: This would be costly to the stakeholders and the state and is unnecessary.

Currently, oversight for LEOFF 1 is provided by the State Legislature. This bill would move oversight and governance to the LEOFF 2 board. The proposed legislation would provide no effective representation for the LEOFF 1 stakeholders. Even nomination to a board position would be dependent on the largess of either WSCFF or WACOPS both of which represent unions composed primarily of LEOFF 2 members. The political reality is that LEOFF 1 members would be marginalized and without a voice even if given a “token” representative and such a “token” representative is not proposed.

LEOFF 1 stakeholders believe we have been fairly treated and well managed by the legislature and the Select Committee on Pension Policy. We have access to those individuals and can easily address concerns or issues.

We believe that the governance system for our pension is protected at law and that changing it would violate contractual rights.

The proposed governance change is absolutely unacceptable to LEOFF 1 members.

The bill proposes payment of legal expenses out of the system's trust fund (which contains contributions from employees, cities, counties and the state).

Position: This would subject the victim of a tort to paying the legal expenses for both sides of an issue.It could result in using our fund contributions to secure even more contributions through the legal system. Again, this is bad public policy.  It isolates a non-elected board from proper responsibility for due diligence and protects improper governance.

HB2350 does not protect local Disability/Pension Boards.

Position: Local boards are considered as contractual rights and protected under Bakenhus.

Additionally the cities and counties value and want to retain local control of these boards.Under the proposed bill there is no protection that insures the continuance of the local board. They could be taken over by the new LEOFF Board and restructured as seen fit by the LEOFF Board. The cities and counties want to retain local jurisdiction of their boards and have a say in what benefits are provided and the costs to be paid. The variety of benefit packages provided by these boards is testimony to their success in reflecting the needs of local jurisdictions.

The new Board would establish contribution rates for LEOFF 1 after July1, 2013 and the new rates would be based upon a 50-30-20 split not the 6% rate that was suspended in July 2000.

Position: This would cost the employers more. This would cost the employees more. This would cost the state more. It is most likely in violation of contractual rights.

Assumptions for contribution rates shall be determined by the new Board and are NOT subject to legislative revision as long as they are certified as reasonable.

Position: Reasonable is a very subjective word. The determination would rest with a state employee and not with elected officials. This gives the state, employers and employees no recourse nor does it allow for challenge to the rates they will have to pay. It also deprives elected state legislators any control in their budget.

Increased benefits as proposed by the new board shall become effective within ninety days unless a bill is enacted by the Legislature in the next session repealing it.

Position: This provides the benefit for a year before the Legislature can stop it. It is ceding legislative responsibility to a non-elected board comprised of a majority of people who would benefit directly from favorable board action.This is bad public policy.

The alternative to this is even worse (sec.9 1. b ii) Benefits presented in this manner are not subject to change or amendment.

HB2350 Sec13 (4) changes in long term assumptions and actuarial evaluations. They will be set by the new board are not subject to revision by the Legislature as long as they are certified as reasonable.

Position: Again, this takes away from the responsibility of the Legislature. The term reasonable is not defined and the decision as to reasonableness rests with one state employee.

Sec.16 provides that the new Board shall notify OFM and DRS of the new contribution rates. These rates are not subject to modification by the Legislature.

Position: More of the same bad public policy. The legislature is asked to forfeit their responsibilities as elected officials and pass that authority to a non-elected board comprised of members with a vested interest in these issues.

Sec.18 provides that employers shall be charged a supplemental rate above the employer established rate to pay for additional benefits granted to members.

Position: Again the employers are subject to charges for which they have no say.We think this is bad public policy. As employers are denied a fair role in this process they will move to make legislative and adjustments or even litigation to protect their interests. This just creates unnecessary turmoil in the system.

If HB2350 is enacted will allow the use of funds paid by the state, employers and LEOFF members to be used for a variety of things as determined by the new Board.

Position: There is nothing to prevent the new Board from enacting benefits equal to LEOFF 1 and the employers will have no alternative but to pay.

Legal reviews by prominent attorneys find serious contractual and constitutional issues with the proposed legislation.

Position: Separate and independent legal reviews done by Phil Talmadge, a former legislator and former Chief Justice of the Washington State Supreme Court, and Joe Fischnaller, one of the preeminent LEOFF pension attorneys in Washington, have both concluded there are serious legal issues and violations of established LEOFF 1 constitutional and contractual rights in the proposed bill.

Additionally, Ice Miller, an Indianapolis law firm contracted with by the State Actuary has defined a number of areas of legal concern relative to the requirements of Federal Tax Codes.

And, a few more issues:

This bill assigns policy making decisions to a non-elected board with no oversight. There are constitutional issues defined by our attorneys that are not addressed.

In addition LEOFF 1 members are not being given the opportunity to vote or have a say in all this.

It does have an effect on LEOFF 1 and takes approximately $5 billion of our funds to be used for expanded LEOFF 2 benefits.  LEOFF 1 is not seeking any additional benefits.

There is also the issue raised in Ice Miller of LEOFF 1 funds only being for the exclusive use of LEOFF 1. This was also raised in the recent Medical Benefits Study.

The employers have an expectation that some of the surplus could be used to help them offset their responsibility to a plan they did not create.

Download this as a PDF file.