State employees’ retirement benefits intact

Washington’s state employee retirement fund lost $130 million when Lehman Brothers declared bankruptcy last week. But thanks in part to changes after the tech bubble burst seven years ago, the 616,723 teachers, police officers, firefighters and state employees enrolled in the program won’t lose any guaranteed benefits. Instead, many can expect the cost of participating in state retirement program to actually drop next year.

The State Investment Board manages Washington public employees’ $62 billion retirement fund. The money is part of a larger $78 billion portfolio that also includes $11.5 billion in the state workers compensation trust fund.

Only participants in the state’s Plan 3, which includes a 401(k)-style component, are at risk of any losses. The guaranteed portion of this program is safe, but employee-directed investments may have lost value because of Wall Street’s recent turmoil.

Investment lessons

Those investors, and others trying to get a handle on their retirement plans during a period of market uncertainty, may be able draw lessons from the State Investment Board.

“You can’t duplicate the portfolio we have or the very long time-horizon we can take as an institutional investor,” said Joe Dear, executive director of the board. “But everybody can diversify, stay focused on their plan, and not react emotionally to extraordinary turbulence.”

With investments in stocks, private equity, real estate, timber, and in conservative income-producers such as bonds, a big drop in one area will be balanced by strengths elsewhere in the portfolio, he said.

Though the $130 million loss due to Lehman Brothers’ failure sounds big, the State Investment Board has been careful to avoid becoming dependent on any one investment, Dear said. “This loss represents 0.17 percent of the total $78 billion of assets under management here.”

Contributions adjusted

That careful diversification was not always matched by an equally careful look at how much workers and their employers would have to contribute in order to keep retirement programs funded as older baby boomers started collecting pensions, said Matt Smith, state actuary.

Instead, worker and employer contributions adjusted rapidly up and down based on stock market returns.

When stocks went up during the tech bubble, the state slashed the amount that workers and employers had to put into the state fund. Then the bubble burst, and suddenly the contributions were not enough to cover the state’s retirement guarantees, Smith said.

To prevent that from happening again, the Office of the State Actuary has changed how contributions by workers and employers are calculated, Smith said.

“Contribution rates adjust slowly based on the trend over several years,” he said. “The system is much more sustainable over the long run.”

That long-term approach means that even with current market turmoil, employee contributions to state-run retirement plans will generally go down or not change at all when adjusted in summer 2009. Employer contributions will generally go up. Most workers and employers will see less than a 1 percent change up or down.
It would take several years of market losses before public employees would see a significant hike in their required contribution to the state retirement plan, Smith said.