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Home / Washington Business - January/February 2007 / Points of View: Compromise needed to find solution to gain-sharing dilemma |
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Points of View: Compromise needed to find solution to gain-sharing dilemma |
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Written On: January/February 2007 |
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Written By: by Rep. Bill Fromhold |
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Rep. Bill Fromhold, D-Vancouver, is vice chair of the House Appropriations committee. He is currently a board member of Clark College, the Washington State University Vancouver Advisory Committee and the Evergreen School District Foundation.
Providing a solution for reducing the cost of gain sharing will require compromise. Gain sharing programs—projected to distribute almost $500 million in benefits on Jan. 1, 2008—are not a particularly good deal for either employers or the employees and retirees, who may or may not see benefits during any particular stretch of time.
But without some kind of reasonable trade-off, the folks who stand to lose from a repeal or reduction of gain sharing can’t really do anything but oppose what is effectively a pay cut. There are more than 200,000 people in state retirement plans that include gain sharing. When considered along with spouses and dependents, nearly a half million people are potential beneficiaries of the gain-sharing benefit—as much as 8 percent of the state's population.
The gain-sharing benefits that are part of Plans 1 and 3 of the public employees’, teachers’ and school employees’ retirement systems are projected to cost about $340 million in state and local government employer contributions during the next two-year budget cycle, including nearly $150 million from the state’s general fund. Over the next 25 years—a period for which the state actuary traditionally evaluates the cost of changes to government pension plans—gain sharing is projected to cost these employers $6.98 billion.
In Plan 1, the benefits liability attributable to gain sharing also represents nearly $1 billion of the $5 billion of unfunded liabilities in those plans. So reductions in Plan 1 gain sharing would also reduce the unfunded liability in the state pension system.
While reduced gain-sharing costs are of obvious benefit to public employers and their supporting taxpayers, benefits could also be designed that would be more desirable to the recipients. This would be helpful in gaining the legislative support that may be unattainable without such a compromise.
Some elements of a deal that could be combined to work are:
• Allow the gain-sharing event projected for Jan. 1, 2008—based on the four-year average of investment returns ending June 30, 2007—to occur. This would represent a large portion of the total currently projected cost of the ongoing benefit. However, changing the terms so near the date when the distribution amount will be fixed may be unrealistic.
• Eliminate gain sharing eligibility for all new employees. New employees have not become accustomed to the possibility of gain sharing.
• Provide these same newly hired teachers and classified school employees the choice of entering Plan 2 as well as Plan 3—the latter being the only retirement plan currently available to these groups. This choice of plans is already available to state and local government employees entering the system.
• Raise the "trigger" of earnings above the 10 percent four-year average used for gain sharing, requiring a 12, 14, or even 15 percent average earnings threshold instead.
• Provide a phase-in of the “Rule of 90” prospectively (i.e. do not apply it to years of service already earned by employees), with a minimum retirement age of 60 under the Rule of 90 formula.
While it might appear that this approach unnecessarily grants new benefits, structuring work done by the state actuary shows that a cost-effective compromise can be reached that still reduces gain-sharing costs by 60 to 70 percent, reducing the Plan 1 unfunded liability. Thus, a solution for gain sharing that both addresses the needs of the state and the needs of the retirement system members, retirees, and their families can be formulated and can gain legislative support.
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