I attended the LEOFF 2 Board meeting Wednesday in Olympia where the bill was discussed at length.  At the end of the meeting, the LEOFF 2 Board voted not to support HB2350 by a vote of 5 to 2.  Opposition came from the Cities, as well as from other Board Members, who believed the bill threatened active LEOFF 2 police officers and firefighters with unwanted liability and higher pension premiums.  Some realized that HB2350 was a bad bill for both LEOFF 1 and LEOFF 2 members.  Opposition to this bill comes from all LEOFF 1 organizations, the Cities, the Counties and even from the LEOFF 2 board itself. 

Let’s take a look at the claims made in these emails.

“HB 2350 is real reform that guarantees the pension promises made to all firefighters and police officers (both active and retired) by the State of Washington, saves the state budget up to $80 million over the remainder of this biennium, and creates a merged system with diminished risks of future underfunding or large fluctuations in contribution rates.”

Unfortunately, the bill does not guarantee anything.  In fact it does withhold $80 million dollars in pension contributions and provides no provision for making up this underfunding.  Currently you have two funds that are funded at 124% for LEOFF 2 and 127% for LEOFF 1.  After a merger you would have one fund that is $80 million dollars short.  That shortage would only grow because that $80 million would not be earning anything for the fund.  There is no plan for restoring that $80 million dollars. 

“LEOFF 1 & 2 Benefit Protections – All LEOFF 1 benefits, including local disability board benefits, are guaranteed to not be reduced (Section 5).  The same protection is applied to LEOFF 2 member benefits.”

The supposed guarantee of benefits referred to is relative to disability benefits and it only references RCW 41.26.150.  Those are the benefits for things like eyeglasses, hearing aids and dental care.  Those benefits are set by the local Disability Boards and are subject to fluctuation.  They generally have been increased over time to meet inflationary costs. The bill would set those benefits back to their level as of July 1, 2003.  Did you even have dental care then?

Of great concern to LEOFF 1 members and the employers is the fact that the continued existence of the Disability Boards is not protected.  As we read the bill it seems to clearly empower the new LEOFF Board to eliminate or restructure the current boards.  It is the very existence of these boards that has enabled LEOFF 1 members to secure and maintain necessary medical care while at the same time allowed the local government input in helping to manage the cost of that care.  We simply cannot agree to any bill that threatens these boards.

We spent over two years in a mandated study of LEOFF 1 medical benefits.  This study was participated in by all of the LEOFF 1 organizations, the cities, the counties and the union organizations including the Council of Fire Fighters.  Included in the process were the Department of Retirement Services, the Attorney General and the State Actuary.  Not only did we all agree that the LEOFF 1 system should be left alone and not tampered with, all of us signed a document acknowledging that.  See  http://www.drs.wa.gov/leoff-1-medical-benefits/.  Take a look a page 50 for the signatures.

The statement as to protection of benefits is probably true in so far as it applies to the monthly retirement benefit.  But that is not because of this bill it is because the State Constitution and case law says they have to pay those benefits.  We certainly don’t need this bill to guarantee that.

“State Savings - State contributions to LEOFF 2 are suspended immediately upon passage of the bill for the remainder of the 2011-13 biennium saving as much as $80 million general fund (Sections 1 & 22).  There is no reduction in employer or member rates.”

See the first item in the list. But, also consider the fact there is nothing to prohibit the state from coming back to the trough for more in the 2013-15 biennium.  The bill tries to say the legislature cannot change the rates set by the board.  I really do not believe the legislature is going to give up their authority to control spending – nor should they.  They have been elected to do that job.  They will not place that responsibility in the hands of an unelected board of people who have a vested interest in improving the benefits of the system.

“Future LEOFF Funding – The assets in the LEOFF 1 retirement fund are currently projected to be sufficient to meet the futureliabilities of the plan but there is some risk that increased costs could put LEOFF 1 into pay-as-you-go (“pay-go”) status.  The two primary risks of increased costs for LEOFF 1 liabilities are 1) less-than-expected investment returns; and 2) higher-than-expected inflation.”

LEOFF 1 members are not concerned about any “pay-go” status.  That can only occur in the case of a very bad economic situation.  Yes the pension system had bad performance in 2008 but it is recovering very well.  It made 21% last year.  Matt Smith discussed this at the LEOFF 2 Board meeting on the January 25^th.  Even if there was some sort of long term financial disaster the State is still legally obligated to pay the pension.  The legislators know and understand this.  The constitution guarantees it.  Case law guarantees it.  If the state goes bankrupt the pensions are second in line for payment from the liquidation of assets.

Interestingly, the “pay-go” argument is the only argument that the supporters of this bill can make to claim it is a good deal for LEOFF 1, which it is not.  That same argument so concerned some of the LEOFF 2 Board members that they felt they would be violation their fiduciary duty to LEOFF 2 members by voting to support the bill.  Why?  Because LEOFF 2 members would have to make up any loss generated by any loss in the system generated by LEOFF 1.

“ “Pay-go” risk removed - A merger of the LEOFF Plan 1 and LEOFF Plan 2 retirement funds commingles the liabilities of both plans.  So, an increase in LEOFF 1 costs would become the shared responsibility of LEOFF members, LEOFF employers and the State according to the 50-30-20 ratio currently in place for LEOFF 2 (Section 10).  The risk of LEOFF 1 going into pay-as-you-go “pay-go” status is reduced to zero.”

See my comments for the item above.  There is no elimination of the risk of “pay-go” it is just transferred to LEOFF 2.  This statement is just hiding behind technical language and it remains true that LEOFF 2 would pay for LEOFF 1.  How is that a good deal for LEOFF 2?  LEOFF 1 already has a guarantee of payment, so we don’t need it.  There is simply no purpose or need for this bill.

Note that all of Moorhead’s arguments appear to come from a document written by Steve Nelsen the Director of the LEOFF 2 Board.  You can get a copy of that document at http://leoff.wa.gov/boardmtgs/index.htm.  (Click on the January 25 Meeting Materials Link.)  The LEOFF 2 Board had this information at the meeting.  Steve Nelsen made a presentation based on this material and the Board asked him numerous questions about his material.  Then the LEOFF 2 Board voted NOT to support HB2350. 

Additionally, we created a couple of documents that dealt with the assertions in Steve Nelsen’s presentation.  You can get a copy at these two links:

http://www.leoff1.net/attachments/1/2012%20Merger%20Bill%20Summary-Review.pdf and http://www.leoff1.net/attachments/1/HB2350_Before_After_RSPOA.pdf.

Facts, or so they say.

The emails list what they claim as “facts”. Here is their listing – with our comments added.

Merges LEOFF 2 assets and liabilities with LEOFF 1 assets and liabilities. Both LEOFF Plans have very similar assets, liabilities, smoothed market losses and fund balances.

Well, at least this is true, but what does it mean?  It does not do anything for either LEOFF 1 or LEOFF 2 except create a combined pension fund that is $80 million dollars short of what it should be.

The pay-go risk in a merged LEOFF Plan is zero or near zero each year going forward.

This is completely a “Red Herring” argument. I discussed it above.  The LEOFF 2 Board thinks it is so bad for LEOFF 2 that they voted not to support the bill.

Maintains current LEOFF 1 benefits for LEOFF 1 members and current LEOFF 2 benefits for LEOFF 2 members.

This is simply not true – particularly for LEOFF 1. HB 2350 creates a very big threat to local disability boards.  It does not matter whether or not this situation was intended by the bill’s author.  We have had two law firms independently look at this bill and this section particularly alarmed them.  That means the bill is poorly written and, regardless of intent, constitutes a serious threat of loss of benefits or litigation to protect them. 

LEOFF 1 members would become eligible for participation in the board and gain governance of their plan by the renamed “LEOFF” Board.

The governance provisions of this bill are the worst part of this bill for LEOFF 1.  LEOFF 1 would have no representation on the board and would not even be able to nominate someone to the board in the future.  The board is unelected and absolutely not representative of LEOFF 1.  We have written extensively about this governance issue.  The governance provisions of HB2350 are absolutely unacceptable to LEOFF 1 members.  How anyone with any understanding of the nature of boards and human being would think that LEOFF 1 members would trust that board or system is beyond us.

The LEOFF Board, not the Select Committee on Pension Policy, would adopt actuarial assumptions and be responsible for studying LEOFF 1and 2 benefit issues and recommending legislation.

What is wrong with the Select Committee?  We have had excellent results working with that committee.  There are elected legislators on that committee and we can work with them.  LEOFF 2 does not like this committee because LEOFF 2 wants to set their own contribution rates.  They don’t think they can get the right kind of assumptions from the SCPP.  LEOFF 1 does not have to deal with the contribution issue.  LEOFF 1 contributions were suspended in 2000, so the state cannot gain anything by manipulating them.

Any future benefit enhancements for LEOFF 1 or 2 would require Legislative approval, which is the same as today.

Yes, but this statement tends to suggest the Legislature would remain the oversight body for LEOFF 2.  It would not.  The bill would remove the authority of the Legislature to set or even approve assumptions and contribution rates.  It even removes the LEOFF 2 Board from the Accounting and Budgeting RCW requirements of RCW 43.88.  LEOFF 2 would set contribution rates, mortality tables, inflation assumptions, salary assumptions and investment return assumptions and the Legislature could not change them.  Combine this with the fact that of the 11 members of the LEOFF 2 board, seven are members of the LEOFF 2 pension plan.  Those seven members have a vested interest in manipulating the pension system to enhance their benefits and contributions.  Only two members of the LEOFF 2 Board are elected officials and one of those is a LEOFF 2 member.

People tend to get upset when we point out the “fox in henhouse” nature of the construction of the LEOFF 2 Board.That is unfortunate as we do not wish to defame the integrity of any of those people.I am convinced that the current members of the LEOFF 2 Board are all honorable people who take their responsibilities seriously and act accordingly.The vote to not support HB2350 is a good example of that.Each board member reviewed their reflections on the issue and gave a complete accounting of their thoughts in determining how they would vote.But board membership changes over time and the faces around that table will not always be the same.For a governance process we need a construction that reduces the dilemma for the members who wear multiple hats.

The current governance structure may be a good deal for LEOFF 2.  We applaud them for setting up such governance.  It is not a good deal for LEOFF 1 and we want no part of it.  Worse yet, we don’t think it is a good deal for the State, the Employers or the people.

Next, the emails tells us what HB2350 does not do.  Here are the claims with our responses:

Does not take any money out of LEOFF 1 or LEOFF 2.

This is a technical argument.  It shorts the combined funds by $80 million.  So far as I can see, that is taking money out of the system.

Does not utilize pension dollars for other State purposes.

Again, this is a technical argument.  $80 million that should be pension dollars will be used for other state purposes and the current LEOFF 1 pension surplus will be available for LEOFF 2 benefit enhancement.

Does not violate IRS rules.

It clearly violates IRS rules.  Our attorneys have reviewed the Ice Miller review secured by the State Actuary and see that HB 2350 would clearly violate those rules.  Even Matt Smith the State Actuary does not make this claim.  Worse yet it violates a lot of other rules as well.  See Joe Fischnaller’s review.  You can download a copy at http://www.leoff1.net/attachments/1/HB2350Analysis_JEF.pdf.

Does not create unconstitutionality.

HB2350 is clearly unconstitutional.  We have had two law firms review this issue and both are in agreement.  The LEOFF 2 Board has had a Florida lawyer give them an opinion.  Then they claim the lawyer says it is a legal bill.  But, they will not show the opinion.  Our lawyers are Washington attorneys with extensive LEOFF litigation experience.  One of them is a former legislator and former State Supreme Court Chief Justice.  We have shown our opinions.  HB2350 is not legal.

Does not use LEOFF 1 funds to bail out LEOFF 2.

LEOFF 2 does not need to be bailed out.  Neither does LEOFF 1.  What it does do is create a situation where LEOFF 1 money can be used to enhance LEOFF 2 benefits.

Does not change the structure or existence of local disability boards or those benefits.

Local disability boards and benefits are put at serious risk by HB2350.  The claim that they are not is irresponsible.  Now that may not have been the intent when the bill was written, but any person that understands the LEOFF 1 system can clearly see the threat this bill presents.  Our lawyers focused on this immediately. The good intentions of the bill’s author notwithstanding, it is a bad bill and poorly written and will generate a lot of misery for LEOFF 1 members as well as litigation.

Does not grant LEOFF 1 benefits to LEOFF 2 members.

While the bill does not specifically do this, Section 5 clearly creates a pathway for LEOFF 2 to seek LEOFF 1 benefits.  We would like them to have LEOFF 1 benefits, but not through a path that will destroy both systems.  Again, read Section 5.  This is another item identified by our attorneys.

Does not require future contributions by active LEOFF 1 members.

It may not “require” contributions, but it certainly permits the implementation of contributions beginning in 2013 and on the same schedule as LEOFF 2 contributions.  By the way, this is another of the illegal items in this bill.

One of the greatest challenges in dealing with HB2350 is the tendency of the supporters of the bill to use declarative statements such as, “Does not create unconstitutionality” and then provide no supporting evidence even while claiming to have such evidence in hand.  Now they may truly believe they are right, but the mere fact that other people think they are wrong suggests that at the very least the bill language is unclear.  That signals serious problems and litigation to straighten out such disagreements.  Now, compound that with the fact that the supporters claim to have a strong legal opinion that supports their position but will not release it and then contrast that with the fact that the detractors also claim to have strong legal opinions that say the bill is illegal on several fronts and provide the legal opinion for review.

Regardless of which side is correct it is clear that there are serious issues.  Given the lack of transparency, the detractors win this argument hands down. 

It is important to remember that just saying something is so does not make it so.  That is why we put our cards on the table.