On the Way to Pension Reform

The bankruptcy of Detroit which was $18 billion in debt and had to cut pension benefits for many municipal workers shows how critical it is for cities to have meaningful pension reform. Seattle recently took important first steps to change its pensions, but more fundamental reforms are needed.

Pension commitments have become one of the largest categories of unfunded liability for many municipalities providing these benefits to their city workers. This is true for Seattle as well as other local governments across the country.

Seattle is one of only three Washington municipalities that maintain a city-owned pension system, the others being Tacoma and Spokane. All other municipal governments in Washington place their employees in one of several retirement plans owned and administered by the state of Washington.

Responding to a large unfunded liability, Seattle recently committed to a slightly scaled-down version of the Seattle City Employees Retirement System (SCERS) for many of its future workers, compared to what current employees receive.

Set to begin in 2017, SCERS II will help insulate the city further from investment losses and bolster support for existing retirees. The changes will bring SCERS II closer to the national average.

City officials claim that the reduced retirement plan will cut city pension expenses by $200 million over three decades. During this same period, employee contributions are expected to decrease by approximately $750 million.

However, the original city pension system, established in 1927, now has an unfunded liability of about $1 billion. In the agreement negotiated between city officials and the Coalition of City Unions a group of 20 unions a new defined benefit plan emerged with some modest changes affecting a segment of the citys new employees hired in 2017 and beyond. Due to an adjustment in how the city calculates benefits, new employees in 2017 will average smaller pensions than current workers. But more fundamental reforms are required to address the huge unfunded liability.

In 2014, a Washington Policy Center report that I wrote advocated replacing the current defined benefit plan (traditional pension) with a defined-contribution 401(k) style plan for future employees. This approach would save $1.6 billion over 30 years.

The citys recent changes reduce pension costs for future city employees, but they fall short of the changes needed to meaningfully address the unfunded liability. Additional savings on employee retirement costs would enable the city to spend more tax money on services, including spending necessary to improve public safety, promote education, enhance public health, relieve traffic congestion and serve other pressing community needs.

Allowing city workers to have tax-deferred defined-contribution retirement accounts would go a long way toward solving the financial crisis in the citys pension system while providing a fair and stable retirement for employees. Personal accounts allow employees to supplement their retirement savings during their working careers, in addition to employer contributions, and create a secure financial asset that is not subject to changes in city politics. Money placed in an employees personal account would be more than just a promise. These would be employee-owned retirement savings that could never be taken away by future mayors and future city councils.

The importance of properly financing SCERS and providing real long-term retirement security for city employees, the people the community depends on to provide important public services, has never been greater. Reformed pension policies would ensure costs are sustainable and that public employees receive the retirement benefits they have earned, and it would protect city taxpayers and strengthen Seattles financial position and its credit rating.

Former Washington State Auditor BRIAN SONNTAG serves on the board of directors of the Washington Policy Center. Reach him at [email protected].