The Legislature Has Committed $2.4 Billion to Recurring Pension Increases since 2018

The legislature has granted Public Employee Retirement System (PERS) Plan 1 and Teachers Retirement System (TRS) Plan 1 retirees a “one-time” cost-of-living adjustment (COLA) six times in the past eight years. Combined, these COLAs have added $2.38 billion in new costs on taxpayers.

SSB 5862, the latest, gives Plan 1 retirees another 3 percent increase capped at $110 per month. It was delivered to Governor Ferguson last week. The Office of the State Actuary prices it at $338.1 million in total employer costs over 15 years. It adds $106 million to the PERS 1 unfunded liability and $101 million to TRS 1.

Washington is likely staring down a $7 billion four-year deficit. The legislature cannot fund the services it already has without raising new taxes. It is in no position to keep handing out hundreds of millions in annual unfunded benefit increases.

At some point, calling these one-time stops meaning anything. Here’s every “one time” COLA since 2018, with the total employer (taxpayer) cost:

Source: Office of the State Actuary actuarial fiscal notes. The first five COLAs were amortized over 10 years. SSB 5862 uses 15-year amortization per updated funding policy (RCW 41.45.070).

A COLA is a permanent increase to the retiree’s base benefit, so each year’s 3 percent increase is being calculated on a higher starting number. A retiree who received all six COLAs has seen their benefit permanently increased by more than 17 percent since 2018.

Every increase also hits the plans’ funded status directly. The 2022 COLA added $177 million to the PERS 1 unfunded liability and $169 million to TRS 1. The 2023 COLA added another $163 million and $157 million. Same story for the 2024 and 2026 COLAs. Each one pushes the plans further from solvency and extends the timeline for paying off the remaining debt.

The state actuary flagged this in 2022. The SB 5676 fiscal note warned that a repeated pattern of one-time COLAs could have a significant impact on short-term budgets, projected Plan 1 payoff dates, and pension risk measures. The actuary also noted it could force the state to start assuming future COLAs in its financial reporting, adding another 5 to 8 percent to the total pension liability on top of the direct costs.

Retirees do not pay for these increases. Taxpayers do. Every COLA adds a new supplemental rate surcharge on top of the rates employers already pay to amortize the Plan 1 unfunded liability. These surcharges were supposed to shrink as the plans approached full funding. Instead, every new COLA added another layer of surcharge.

Legislature Stopped Paying Down the Debt

Last session, ESSB 5357 raised the assumed rate of return on pension investments from 7.0 percent to 7.25 percent and took a four-year holiday from paying down the PERS 1 and TRS 1 UAAL. The supplemental payments that were on track to retire the unfunded liability by the end of the decade stopped. The estimated cost of this was around $6.5 to $7 billion in future obligations that did not exist before.

Local governments did not ask for the COLAs, they did not vote for the rate holiday, but they are writing checks for both. Every county, city, and school district that employs PERS or TRS members has watched its pension contribution rates climb as the legislature stacked COLA after COLA onto plans that were already underfunded. Higher pension rates come straight out of city and county operating budgets. Fewer dollars for roads, police, fire, teachers, and every other service local government provides. The deal was supposed to be to pay the supplemental rates, stay the course, and the Plan 1 UAAL gets retired. Local governments held up their end. The legislature added $2.4 billion in new costs through COLAs, then walked away from the repayment schedule.

The Bottom Line

Plan 1 retirees already have a path to inflation protection. Since 1990, every Plan 1 member has had the option at retirement to elect a CPI-based COLA that provides up to 3 percent annually, based on Seattle-area inflation, beginning one year after retirement. Members who elect it receive an actuarially reduced benefit to offset the cost. It is the same COLA that Plans 2 and 3 members receive. The difference is the member pays for it through a lower starting benefit rather than passing the cost to employers.

Most Plan 1 members did not elect it, but that was their choice. The legislature has responded by granting $2.4 billion in employer-funded benefit increases to compensate for a decision retirees themselves made. It funds those increases through surcharges on local governments and taxpayers that had no say in the matter. And it does all of this while running a multi-billion dollar deficits and taking a holiday from the payments that were supposed to make the plans whole.