Washington State Treasurer Jim McIntire has learned some lessons from the fast and loose Wall Street accounting that plunged the country into recession - he's learned to obfuscate and mislead. When current and prospective bond holders look to Treasurer McIntire to understand the condition of the state's pension fund, they'd best beware.

Treasurer McIntire appears to be going beyond simple carelessness or cleverness. Treasurer McIntire is leading bond holders to believe the State Actuary's grim Risk Assessment fully reflects the condition of the pension fund. In fact, the situation is much worse. And Treasurer McIntire knows it.

The 2010 Washington State Bond Prospectus uses a 2009 Actuarial valuation that was issued before the pension fund lost $16 billion - more than 20 percent of its overall value - in the stock market. Worse, the state will employ an accounting gimmick known as "smoothing" to write off this $16 billion loss over eight years. As a result, next year's report will only reflect a $2 billion loss and there will be no mention of the additional $14 billion loss, the reports will never state the full magnitude of the decline. .

In addition to giving inaccurate information to current and prospective bondholders, Treasurer McIntire's failure to play it straight with the people of Washington further threatens the long-term viability of the pension system. If he continues to delude himself and give false statements, it will prevent Washington from fixing the pension program and forewarning investors that the system is badly broken.

The Actuary's June 15, 2010, report makes clear that the state's pension plan suffers from funding shortfalls, unfunded benefit increases, and investment losses. These problems threaten the credit worthiness of the state's bonds and the viability of the pension programs. The state must face the issues, but instead Treasurer McIntire expressly tells the people of Washington that the pension plan does not have benefit problems or investment problems. Let's review the facts.

Treasurer McIntire says there is not an investment problem. Meanwhile, Washington has gone from $65.8 billion in pension assets in December 2007 to $52.6 billion in June 2010. This loss of $13.2 billion comes after the stock market rebound during the first six months of this year; it does not include the additional investments in the pension from December 2007 to June 2010; and it does not reflect the loss of the assumed 8 percent annual return on investment. Indeed, if the state had not put any additional funds into pensions over the last 30 months, the assumed 8 percent return on investment would have added an additional $14 billion to the pension asset value. This increases the real loss of the pension funds to almost $30 billion.

Because of the 30 to 40 percent funding drop resulting from investment value declines, State Actuary Matt Smith sent a letter to Pension Funding Council Members on September 11, 2009, recommending tripling contributions from all employers by the 2011-13 budgets, with further increases at least through the 2021. The State Actuary estimates it will take 10 to 20 years to recover these losses.

Treasurer McIntire says it's not a benefit problem, but the State Actuary specifically recommends that the Legislature avoid large benefit improvements in the future until risk and affordability measures significantly improve. These unfunded liabilities have exacerbated the state's problem. In the past decade the legislature has significantly underfunded the Actuary's recommendations. In fact, over the last 10 years, the average contribution to the pension fund ranged from only 27 to 87 percent of the Actuary's recommendations. At the same time, the Legislature increased benefits, adding significant costs to the plans. The state's retiree health insurance is also unfunded to the tune of nearly $8 billion.

The pension shortfalls will have real impacts for employees. The State Actuary has recommended that all units of government - all teachers, and employees of the Public Employees Retirement System (PERS) - face significantly increased contribution rates until at least 2024. What's more, the State Actuary notes that the state needs to contribute almost $1.5 billion in next budget cycle, more than double the $770 million for this budget cycle, in addition to the need for local governments to nearly double their contributions to $1.7 billion in this cycle. He further reports that PERS I and the Teachers Employees Retirement System I are at risk of running out of assets prematurely, with the plans likely to show declines of between 15 and 30 percent.

In the face of all this, Treasurer McIntire says the Washington state pension system is "the envy of many states." Let's hope not.

The false reports on the status of the Washington State's pension fund are seriously jeopardizing the state's credit ratings, misleading current and future investors and endangering the retirement program of Washington workers. These are serious issues and it's time for Treasurer Jim McIntire to come clean on the true state of Washington's pension funds.

Filed Under : Pensions