State faces fiscal day of reckoning for state employee contracts

THE Office of Financial Management (OFM) is currently negotiating 23 agreements for state employees. Considering the governor's budget office forecasts multibillion-dollar deficits for the next eight years, now is the time for the governor and legislative leaders to demand major labor concessions.

If Gov. Chris Gregoire and lawmakers don't provide leadership now in terms of concessions, it will be two years before another opportunity presents itself. In the meantime, funding the current agreements is a price too high to pay.

Taxpayers face a future fiscal tidal wave thanks to generous state employee contracts and unfunded pension and health-care liabilities. Washington state's economy simply can't support the current level of employee salaries, health-care benefits and pensions. According to the Bureau of Economic Analysis, the average state employee earns $5,302 more than the average private-sector employee — and this does not include the lucrative health care, vacation and pensions state employees receive, which amount to 30 percent of total compensation.

Since unions won't budge on the issue of renegotiating health-care and retirement benefits, the state should forgo bargaining over these issues. Instead, the governor should include benefit changes in her budget, which then goes to the Legislature for an up-or-down vote. The state's collective-bargaining law permits the employer — the state — to do just that. For example, the governor could require state employees to cover at least 24 percent of their health-insurance costs, which is more comparable to the private sector.

Now is also the time to reduce taxpayers' liability for retiree health-care benefits and state pensions. Financial-services company Credit Suisse reports that Washington state has an unfunded retiree health-care liability of $10 billion. Pew Center on the States pegs that same figure at $7.9 billion. These aren't contractual benefits like pensions, but they are promised — and they're accruing obligations the next generation will have to pay.

The state pension system is faring even worse. State Actuary Matthew Smith warned that unfunded pension problems have grown due to "delayed and suspended contributions, increased benefits and investment losses." He went on to recommend "a shift in focus to identifying, measuring and managing retirement system risks. Without such a plan to manage these risks, the retirement systems as we know them may not be sustainable."

Aside from a general decline in the value of Washington state pension funds, budget realities and political preferences have combined to produce a perfect pension storm. Legislators skipped payments to the state's pension fund for the fiscal years ending in 2003, 2004 and 2005. Lawmakers also chose to ignore Smith's recommendations that the state recognize longer life spans for state employees.

Further compounding the problem, the Washington State Investment Board risked more of its pension portfolio — 25 percent — on risky private-equity investments than any other major state plan.

The result of all these maneuverings? Smith is projecting "a 30 to 40 percent drop in funded status." He estimates it will take 10 to 20 years to recover the investment losses. This includes tripling contributions from all employers — including school districts — and the state General Fund for the next 12 fiscal years.

Taxpayers should not be continually forced to fund overly generous state employee salaries and benefits, especially in the context of a bad economy and a budget crisis. It's time to cap the existing pension system and create a defined-contribution system for all new state employees. The fiscal day of reckoning has arrived for Gov. Gregoire and the Legislature.