by Matt Rosenberg July 18th, 2010
SUMMARY: According to a report released this month, the Seattle City Employees Retirement System (SCERS) pension plan has $1 billion more in actuarial liabilities than current market value. The plan is only 62 percent funded, as of January 1, 2010. Liabilities have doubled since 1999. Assets have also grown, but not as sharply; and declined markedly since 2008 due to poor performance of the fund’s domestic and international stocks, and its investments in real estate, venture and alternative capital, and mezzanine debt. The city and employees each pay 8.03 percent of compensation annually into the pension plan, but to fund ongoing benefits and meet liabilities amortized over the next 30 years, overall contributions will have to rise another 8.97 to 9.53 percent, with the employee share of that increase currently capped at 2 percent. The pension fund’s liabilities are shaped in part by an assumption that beneficiaries are to receive a 7.75 percent annual return on investment, and a 1.5 percent annual cost-of-living-adjustment (COLA). Fund planning also includes assumed annual average salary increase of 4 percent for city employees. Another influencing factor cited is longer life expectancies of beneficiaries.
BACKGROUND: SCERS is a pension trust fund for city employees other than police and fire personnel, who are covered under a state plan. There are 5,304 retirees currently getting SCERS benefits; plus 9,071 active system members, most or nearly all of whom will receive future benefits; and another 2,006 terminated workers who will get benefits. Employees and the city each contribute to the plan at a rate of 8.03 percent. The city and employees each contributed $46.6 million to the plan in 2009, up from $40 million each in 2008. The average monthly benefit paid to current retirees and beneficiairies is $1,712. The system covers retirement, death and disability benefits.
1) “Seattle City Employees Retirement System Actuarial Valuation As of January 1, 2010,” July 1, 2010 (“full report”);
2) “Retirement System Overview & Actuarial Valuation Report Review,” presented to City Council’s Finance & Budget committee, July 9, 2010 (“summary report”).
- SCERS has unfunded actuarial liabilities of $1.008 billion as of January 1, 2010, according to the report dated July 1, 2010. This is four times the previous highest amount of unfunded liabilities since 1984 (p. 21, full report). Liabilities are $2.653 billion, assets are $1.645 billion. The system’s funding ratio is 62 percent, lower than any percent shown in previous years listed.
- The fund’s liabilities have doubled from $1.3 billion in 1999 to $2.6 billion in 2010. meanwhile, the fund’s assets were also growing, from $1.375 billion in 1999 to $2.1 billion in 2008, then down to $1.6 billion in 2010. (p. 21, full report).
- By one estimate from the city’s consultants, contributions to the fund would by January 1, 2011 need to be raised 8.97 percent to fund ongoing benefits amortize unfunded liabilities over 30 years. The added employee contribution is currently capped at 2 percent, so the city would have to pay 6.97 percent more for the employee pension plan, on top of the 8.03 percent of wages which it already contributes. (p. 1, summary report, & p 1., full report).
- Another scenario outlined by the city’s consultants begins the rate hike at the same time but somewhat less steeply at first, so that by January 1, 2014 (and continuing until 2041), employees are contributing to the pension fund an additional two percent annually (on top of their current 8.03 percent) and the city contributes an additional 7.53 percent (on top of its current 8.03 percent). (p. 32, full report).
- The city pension fund’s obligations to beneficiaries includes several assumptions which drive planning. One is that the return on investment shall be 7.75 percent, net of investment expenses. (p. 29, full report). Another assumption is of a four percent annual increase in general wages. (p. A-2, full report). Additionally, there is a 1.5 percent annual cost-of-living increase in post-retirement benefits (p. A-3, full report).
- The value of SCERS assets declined 24 percent between January 1, 2008 and January 1, 2010. The fund’s holdings in U.S. government and corporate bonds actually gained value during that period, but these gains were more than offset by marked losses in the value of the fund’s investments in domestic and international stocks, real estate, venture and alternative capital, and mezzanine debt. (p. 10, full report).
“On The Growing Movement for Pension Reform,” John Diaz, San Francisco Chronicle Editorial Page Editor, 7/11/10
“The Trillion Dollar Gap: Underfunded State Retirement Systems And The Roads To Reform,” The Pew Center On The States, 2/10. Washington state fact sheet from Pew study