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- State Actuary Presents a LEOFF 1 Review
State Actuary Presents a LEOFF 1 Review
- By Jerry Taylor
- Published 09/8/2009
- Pension Watch
The “Optimistic Investment Outlook” assumes a 10.3% rate of return over 15 years. Under this scenario, the system would remain fully funded. No resumption of contributions would be required. In fact, the system would have a significant excess that increases as it ages.
Given our bleak current financial situation, few people subscribe to the optimistic view. However, it is still a possibility and particularly so when you look at the long-term history of return on investment going all the way back to before the depression. Obviously, if this case proves the winner, there will be a lot of folks lining up to get a chunk of that surplus sometime in the next few years.
What Are The Health Risks in LEOFF 1?
Obviously, the possibility of a future unfunded liability is a concern. The state is facing large budget deficits. No doubt, the legislature will be reluctant to pour money into the retirement system. The potential of future investment losses remains a concern even in the face of some evidence of a recovering economy.
The LEOFF 1 system is mature and closed. That means we have to do with what we have. Liabilities are starting to decline but there is not new money coming in from employees and employers or the state.
There are some possible solutions. The state could provide additional funding to further shore up the system. That, practically speaking, is not an option until we recover from the current economic crisis. There will be a great deal of political pressure to restore programs they have cut or reduced to meet the crisis. Lurking in the background will be the need to restore lost funding in the other pension systems. Remember, the legislature cut contributions on everything except LEOFF 2. That money will need to be made up. I see little likelihood in the state putting more money into LEOFF 1.
Of course, the state will need to resume contributions when the plan is no longer fully funded. Our experience with the first five years of the LEOFF 1 plan suggests the state might not step up to that plate in an expeditious manner. The actuary thinks the simple resumption of the prior funding policy would likely be insufficient.
Obviously, benefit improvements are unlikely.
One possible scenario would be to “lock in” the funded status after recovery. That means removing the funds from the combined pension trust and managing them under some different plan. Such plans would base investment returns on bonds or some other stable instrument instead of equities and real estate. That would mean less income but a more stable base. Any prospect of a surplus would be eliminated.
I do not think this is a likely solution. It would take a pretty big surplus to provide enough funding to switch from an 8% return on investment assumption to a 4.5% to 5.5% assumption for a bond portfolio. We are not likely to see that kind of surplus in the near term. Even before the meltdown there would not have been enough money to make that switch and stay fully funded.
Another factor against such a switch is the fact that our health status in the larger pool of unhealthy systems mitigates the state of health for the other systems and adds investment leverage for the State Investment Board. So the hit of removing us from the common pool would impact the other systems in a negative way.
Given our bleak current financial situation, few people subscribe to the optimistic view. However, it is still a possibility and particularly so when you look at the long-term history of return on investment going all the way back to before the depression. Obviously, if this case proves the winner, there will be a lot of folks lining up to get a chunk of that surplus sometime in the next few years.
What Are The Health Risks in LEOFF 1?
Obviously, the possibility of a future unfunded liability is a concern. The state is facing large budget deficits. No doubt, the legislature will be reluctant to pour money into the retirement system. The potential of future investment losses remains a concern even in the face of some evidence of a recovering economy.
The LEOFF 1 system is mature and closed. That means we have to do with what we have. Liabilities are starting to decline but there is not new money coming in from employees and employers or the state.
There are some possible solutions. The state could provide additional funding to further shore up the system. That, practically speaking, is not an option until we recover from the current economic crisis. There will be a great deal of political pressure to restore programs they have cut or reduced to meet the crisis. Lurking in the background will be the need to restore lost funding in the other pension systems. Remember, the legislature cut contributions on everything except LEOFF 2. That money will need to be made up. I see little likelihood in the state putting more money into LEOFF 1.
Of course, the state will need to resume contributions when the plan is no longer fully funded. Our experience with the first five years of the LEOFF 1 plan suggests the state might not step up to that plate in an expeditious manner. The actuary thinks the simple resumption of the prior funding policy would likely be insufficient.
Obviously, benefit improvements are unlikely.
One possible scenario would be to “lock in” the funded status after recovery. That means removing the funds from the combined pension trust and managing them under some different plan. Such plans would base investment returns on bonds or some other stable instrument instead of equities and real estate. That would mean less income but a more stable base. Any prospect of a surplus would be eliminated.
I do not think this is a likely solution. It would take a pretty big surplus to provide enough funding to switch from an 8% return on investment assumption to a 4.5% to 5.5% assumption for a bond portfolio. We are not likely to see that kind of surplus in the near term. Even before the meltdown there would not have been enough money to make that switch and stay fully funded.
Another factor against such a switch is the fact that our health status in the larger pool of unhealthy systems mitigates the state of health for the other systems and adds investment leverage for the State Investment Board. So the hit of removing us from the common pool would impact the other systems in a negative way.