SCPP October Meeting Agenda
SCPP Meeting Report | October 18, 2016
The Select Committee on Pension Policy met on Tuesday, October 18, 2016. On the Agenda was an update of TRS 1/LEOFF 1 Merger Study. As with most of these updates there was little new information. The exception for this meeting is that the first legal review of the merger proposal from the Attorney General’s Office was presented and the Actuary’s Office provided an updated version of the Fiscal Note for SB 6668.
Audio of the meeting:
Video of the meeting: http://www.tvw.org/watch/?eventID=2016101069 (between 47:20 and 1:19:30)
Note that the video shows only the committee and no slides or presenters. The audio works better than the video because it is easier to move about on the timeline.
See AG Presentation Slides at http://leoff1.net/pdf/2016-1018_AG_Presentation.pdf
On the legal front, Assistant Attorney General Anne Hall reviewed the various tax, federal and state laws that might apply to the merger. Like any report from your attorney she provided a general overview and claimed that except for a couple of problems the proposed merger would pass muster on both the federal and local levels. The telling part of the presentation was that there are certain requirements for a merger that the bill does not meet. Evidently both statutes, LEOFF and TRS, have to be amended to incorporate the merger. The bill does not do that. Secondly the law is very clear that the money in the pension fund can only be used for the benefit of the plan members. She was unclear as to how that would be accomplished under the merger. A third issue is that the legislature must provide for a systematic funding of the plan. She was unable to demonstrate how that would apply outside of claiming that it would need proof of an actuarially unsound funding system.
Obviously the decimation of the funding status of LEOFF 1 under the proposed merger is proof of an actuarially unsound system. Then combine that with the efforts of the legislature to vacate the systematic funding program currently in place for TRS 1 is further proof that the funding program is actuarially unsound.
Our problem is getting the Actuary to publicly label the plan as actuarially unsound. He tends to see his job as showing the impact of different funding scenarios and making statements about the risk level of each approach but does not go so far as to make value judgements of the various approaches. While we understand his reluctance to make such a statement – after all he works for the legislature – it seems clear the various associations of professional actuaries oppose under-funding pension plans and would object to deflating the funded status of a healthy system. The Actuary has taken strong positions in the past as to interest rate assumptions. We hope we will step forward here.
Senator Conway and others raised additional issues during the legal discussion covering such items as the fact that Cities and booking the LEOFF pension surplus for GASB reporting and whether the change would mean they would have to report it as a liability rather than an asset. That could impact their bond rating and is of a great concern. Additionally there still remains confusion as to who owns the money and particularly since the money in the system was from contributions from the state, the employers and the employees. Obviously the change would eliminate the chance of anyone getting the surplus as some form of distribution at some point in the future.
Finally is the issue of what happens in the event of a market collapse. Under the merger proposal the burden of paying the LEOFF 1 pension plan beneficiaries would fall on the state and the school districts even though the school districts have never had LEOFF 1 employees. The Assistant AG thought that would be OK, but was unable to enunciate why.
The bottom line is that the legal issues are not resolved and continue to reveal more problems with each review. Next month, November 15th, the SCPP meeting will have more legal input. The firm Ice Miller will have representatives to speak at that meeting. It should be remembered that Ice Miller has been working on this merger since at least 2013 – over three years and over three draft versions of the bill – and the legal issues have yet to be resolved.
I don’t think they will ever get resolved because I think the entire merger concept is illegal and will be rejected by the courts. Unfortunately it looks like that is the track we are on.
Matt Smith, the State Actuary, presented an actuarial review with updated information. Essentially it is a revised Fiscal Note for SB 6668.
Presentation slides: http://leoff1.net/pdf/2016-1018_MergerActuarialUpdate_Presentation.pdf
Updated Fiscal Note: http://leoff1.net/pdf/2016-1018_FiscalNote.pdf
It is interesting to note that a few things have happened since the original SB 6668 was put forward. Most of those changes tend to make the entire merger idea less attractive, but more importantly they demonstrate how quickly the numbers can change. It tends to reinforce our concern that there is enough instability in the system that the current level of surplus is necessary to ensure the stability of the LEOFF 1 pension system.
The new Fiscal Note reflects most recent participant data and 2015 Actuarial Valuation Report (AVR) Asset returns through June 30, 2016. It assumes the payment of the $5,000 payout one year later and increases the level of pension fund contributions needed to reach full funding from 4.24 percent to 5.05 percent. Additionally the LEOFF 1 surplus decreased from June 30, 2014, to June 30, 2015, measurement and that lower surplus leads to lower expected long-term savings from the merger.
So, where the original SB 6668 was going to produce a biennial saving of $343 million in premium payments it would now only produce a savings of $241 million. That is a decrease of $102 million in just one year. This is a clear demonstration of how volatile this surplus concept really is.
An additional presentation dealt with an update of the policy section of the report. Not much was presented as everything is still in draft format. The claim is that the draft policy section is now up to about 17 pages in length. That tells me that they either have a long way to go or the report will not be very complete. I guess we will find out more next month.
A disturbing part of the presentation was the statement that answers will not be provided for all of the questions we have asked. These questions were sent in in response to their request but it now appears that they intend to cherry pick the questions and address only those that suit their purpose. Some of the questions we have asked address serious issues but also issues that might make the sponsors of the bill uncomfortable. All questions deserve answers.
View the policy presentation slides: http://leoff1.net/pdf/2016-1018_MergerStudyPolicyUpdate_Presentation.pdf
The Washington State Investment Board report was the first thing on the SCPP agenda. It is worth reading through the presentation or listening to the audio. One take away from that presentation is the fact that they only earned 6.1% last year while the assumption rate for the pension was 7.8%. Another reason to be concerned about the merger plan.
See the SIB presentation: http://leoff1.net/pdf/2016-1018_WSIB_Presentation.pdf
November: SCPP receives draft reports from agencies including, Policy analysis and framing or “shell” document intended to combine the pieces of the report together. Ice Miller law firm will report on the tax issues.
December: Final action on report with Committee recommendations (optional).
January: Report due January 9, 2017
I have to admit that I am biased on this issue, but I continue to see more and new complications to this merger concept. Even one senator who has been very pro merger is now talking about the complications. Remember they spent three years working on this and had the involvement of staff and law firms. They wrote a draft bill in 2013 and revised it in 2015 and then completed their bill in 2016. With all of that they got it wrong. In this SCPP meeting the Attorney General is telling them it is still not legal as constructed.
I guess we now wait for the November 15th meeting and get prepared to produce some sort of minority report.