Washington lawmakers passed a ticking time bomb for pension solvency and the state budget  

Washington state’s pension systems have historically maintained a solid reputation for prudent fiscal management and disciplined funding practices. That will all change with the passage of Engrossed Substitute Senate Bill 5357 (ESSB 5357), which jeopardizes this legacy by implementing schemes that, though politically expedient in the short term, threaten severe long-term harm to retirement security and state finances. 

A centerpiece of ESSB 5357 is its manipulation of the assumed rate of return (ARR) on pension investments. The bill raises the long-term investment return assumption from 7% to 7.25% for every plan in the state (except the Law Enforcement Officers’ and Firefighters’ Plan 2). On paper, this higher assumed yield immediately shrinks the calculated liabilities of every plan, not just the older closed Plan 1 systems, but active Plan 2s and 3s as well. For example, by assuming a quarter-point higher return, the total projected benefit obligations of the Public Employees Retirement System, PERS, Plans 2 and 3 drop by roughly $3 billion, and the Teachers Retirement System, TRS, Plans 2 and 3 by about $1.74 billion. In aggregate, the liability for current members across the impacted plans falls by over $5.4 billion on paper due to this assumption change, an accounting reduction in obligations that translates into lower contributions required in the near term. 

In the upcoming 2025-27 biennium, the state would save about $453.5 million in pension contributions and roughly $635.8 million in 2027-29. These short-term savings are achieved by artificially lowering what employers (and Plan 2 employees) pay into the retirement plans. However, by the 2029-31 biennium, if investment returns match what the state assumed prior to this scheme, the savings will disappear as the deferred contributions start coming due.  

The fiscal note also acknowledges an indeterminate but potentially significant impact on local governments. For example, school districts will enjoy lower pension bills now (the bill saves local government employers about $261 million in 2025-27), but they will likely face higher costs after 2030 to make up for it. So, future school budgets could be squeezed just as the state’s will.  

Notably, nothing about the pensions’ actual investments has changed to warrant this rosier assumption. The Pension Funding Council had only recently lowered the ARR to 7.0%, which is still higher than the national average. The Office of the State Actuary explicitly notes in its risk analysis that while the bill “increases the assumed investment return, there is no corresponding change in the actual asset allocation of the pension trust. Therefore, there would be no change to the simulated future investment returns.”  

In plainer terms, the funds are not actually expected to earn more money – the legislature is simply hoping they will and passing the risk of any shortfalls to future taxpayers.  

This kind of assumption gaming shortchanges all plans by backloading their true costs. Each plan will now receive less in contributions than the actuaries recommend, effectively betting that higher returns will make up the difference. If that bet fails—even slightly—the plans will face serious funding gaps.  

With the passage of ESSB 5357, Washington has become the first state since the Great Recession to raise its assumed rate of return, making it an extreme outlier nationally. Across the country, state pension systems have been moving steadily toward lower, more cautious assumptions, with many targeting returns closer to the low 6% range or even below. For instance, New York’s largest pension plan has already adopted an assumption of 5.90%. Washington’s choice to swim against this national trend by adopting a more aggressive return assumption significantly increases the likelihood of future shortfalls. 

Repeating past mistakes 

To veterans of Washington’s pension policymaking, ESSB 5357 rings alarm bells precisely because it echoes past mistakes.  

In the early 2000s, after the dot-com boom, the legislature similarly allowed itself to believe that high investment gains could substitute for hard contributions. At that time, the PERS 1 and TRS 1 plans (already closed to new members since 1977) were briefly overfunded thanks to 1990s market gains, leading lawmakers to boost benefits and underfund annual contributions. The assumed returns remained optimistic, and the amortization of unfunded liabilities was stretched out or recalculated on a rolling basis that continually deferred the day of reckoning.  

By 2003, the state was paying barely half of its annually required pension contribution, and the funding statuses of PERS Plan 1 and TRS Plan 1 deteriorated rapidly. What had been a surplus turned into a large unfunded liability when the market declined because contributions had been insufficient to buffer the loss. It took until the mid-2000s for the state to course-correct by adopting more realistic assumptions and a plan to fully amortize Plan 1’s unfunded accrued liabilities (UAAL) by around 2024. Current law has PERS 1 on track to reach full funding by Fiscal Year 2027 and TRS 1 by Fiscal Year 2025, after decades of disciplined payments. 

ESSB 5357 undermines that hard-won progress by resetting and extending the UAAL amortization yet again. The bill essentially gives a four-year “holiday” from Plan 1 UAAL contributions and then re-amortizes the remaining liability over a fresh 15-year period.  

This is a classic can-kicking strategy. As the state actuary summarizes, UAAL contribution rates will be artificially low in the 2020s (through 2032) but then “higher from FY 2033-2040” to catch up, producing “short-term savings but a long-term cost.”  Short-changing pensions in the present only forces larger, more painful contributions later.  

In the early 2000s, the legislature’s use of overly optimistic assumptions and rolling amortizations left Plan 1 dangerously underfunded when reality fell short, necessitating drastic payment increases in later years. ESSB 5357 risks a repeat, but this time impacting almost all of the plans via the inflated return assumption. 

Underfunding pensions is costly 

Underfunding a pension comes with a significant cost; it’s just another form of debt financing, and an expensive one at that. When a pension plan isn’t fully funded, the shortfall behaves like a loan whose interest rate is the same as the assumed rate of return. In Washington’s case, that “interest rate” is now 7.25%. If you don’t pay what’s needed into the fund, the unpaid portion accrues at roughly 7.25% interest, because that is the foregone investment growth the contributions should have been earning. Failing to at least pay the interest each year means the unfunded liability compounds, growing larger and more daunting. By building less cushion into the plans now, the legislature is gambling on strong market returns every year to avoid new unfunded liabilities. Yet market volatility is inevitable, maybe more so now than ever before.  

It’s important to recognize how costly this form of “borrowing” is compared to other options. Washington’s general obligation bonds, for example, carry interest rates in the 3–4% range in today’s market. By choosing to effectively borrow at 7.25% from the pension fund (by not contributing now and owing more later), the state is locking in a rate of interest far above what prudent fiscal stewards would ever pay on a bond issue.  

This pension debt will also not appear on the state’s balance sheet transparently, even though it’s very real. When it does start to come due, it could hit at a time when revenues are strained, forcing steep contribution hikes on taxpayers and employees. 

From 2030 onward, Washington will have to fund not only the normal pension costs of current workers, but also the delayed debt service from this maneuver—effectively paying double for past obligations.  

That future bill will likely crowd out the state’s ability to pay for other priorities. Every dollar diverted to pay down ballooning pension debt in the 2030s is a dollar not available for schools, healthcare, or infrastructure. Thus, underfunding pensions now doesn’t avoid the obligation; it simply defers it into a costlier and riskier period.  

Pensions are not state piggy banks 

Why would a state with a strong economy and plenty of tax revenue choose this path? The answer is not that Washington lacks the means to fund its pensions—it’s that the legislature has opted to spend those means elsewhere.  

Governor Bob Ferguson’s office backed ESSB 5357 as a way to alleviate pressure on the state budget. In public testimony, the plan was frankly described as a necessary “short-term approach.” In other words, lawmakers faced with a tight budget chose to underfund the pension system rather than trim new spending or find new revenue.  

This is fundamentally a spending choice. The roughly $1.1 billion that will not go into the pension funds over the next four years will presumably be funneled into other programs to avoid tough trade-offs in the operating budget. 

Treating pension contributions as a budgetary piggy bank is a dangerous habit. It’s easy to see the appeal for politicians. Unlike most expenditures, underfunding pensions doesn’t immediately halt a program or anger a constituency today, so the pain is invisible to the public as it is quietly nudged into the future. But it is precisely this kind of shortsighted budgeting that has led to the accumulation of $1.6 trillion of public pension debt across the country.  

Washington has historically been a national leader in responsible pension funding, with a current policy that all plans be brought to a fully funded status. According to the state actuary’s projections, PERS 1 and TRS 1 were finally on the verge of nominal full funding after decades of disciplined payments. There is no structural “affordability” crisis requiring lower contributions – the pension debt was shrinking and would soon be retired. ESSB 5357 interrupts that progress for no reason other than to free up money now.  

It is akin to a homeowner nearing the end of their mortgage deciding to refinance into a longer term just to lower this year’s payments and splurge on a vacation. Yes, the annual payment drops for now, but the debt persists for much longer, and more interest is ultimately paid.  

Washington’s pension obligations are not going away, and underfunding them does nothing to reduce the inevitable bill. It simply passes the bill to future legislators (and taxpayers) when it will be larger and have fewer options. 

Conclusion 

This is not a question of ability to pay—it’s a question of willingness to prioritize the promises made to public workers.  

ESSB 5357’s approach of diverting pension funding undermines the long-term stability of Washington’s retirement systems. The bill’s manipulation of assumptions and payment schedules might help within a single budget cycle, but at the expense of the state’s pension solvency and with a higher price tag down the line. History has shown that it is far better to pay pension bills when they are due, rather than deferring them.  

Washington’s leaders should recall the lessons of the early 2000s, when underfunding and optimistic projections led to ballooning pension debt that took years of discipline to fix. They should also heed the state actuary’s implicit advice: maintain realistic assumptions and make contributions at the level required to keep the systems healthy, even when budgets are tight.  

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