Daniel Gilbert and the Times did some solid reporting on how city government formerly managed its employee pension funds. However, here’s the rest of the story. It’s a story of reform, transformation really, that has occurred over the past five years—new leadership, restored staff morale, greatly improved client services, beefed up professional investment staff, stronger accountability and transparency, and stronger investment portfolio returns putting Seattle in the top 25% of public pension funds nationally.
A 10-year look-back at portfolio returns shows a pretty bleak picture; 4.5% return on average per year. But with the reforms cited above, performance has dramatically improved: 8.8% in a five-year look-back and 7.9% in the most recent three-year period. The five and three year performance has matched expectations and exceeded the median performance of pubic pension programs.
The Seattle city employee pension program is funded at 71% (end of 2017), compared to the national best practice benchmark of 80%. There are three main reasons for this underfunding reality.
First, in the early 2000s, when the fund exceeded a 100% funding level, city employee unions persuaded the City Council to significantly increase benefits. The thinking was “we’re doing good, we are well funded, retirees should benefit.” This was an imprudent decision that would amplify the negative impact of the Great Recession.
Second, the pension portfolio lost about one-third of its value during the Great Recession of 2008-2009. These losses were like a body blow to the fund.
Third, the pension program was poorly managed. Some investments were extremely risky and unwise, there was insufficient oversight and accountability, outside expertise was lacking, and there was misconduct related to certain investment decisions.
These three factors led to a pension system that was grossly underfunded—below 60% at one point—and in need of serious reform. That reform began in 2013.
A final comment about costs. Some suggest that Seattle—and perhaps Spokane and Tacoma which also operate their own pension systems—should merge with the state’s pension program in order to improve investment performance and lower costs. Investment performance is solid as noted above. As for costs, Seattle’s costs are on par with Washington’s. One can argue the pros and cons of a merger, but not because of costs.
Kudos to the leaders and staff at the Seattle City Employees Retirement System (SCERS). You identified the problems. You took corrective action. You have restored the confidence of city employees that their retirement benefits are secure.