Merger Proposed in Budget Negotiations

Merger Again!

Sort of like the Loch Ness monster the possibility of a LEOFF 1/LEOFF 2 merger popped its head above water on Thursday the 22^nd – a week ago. The story was that the merger was due to be passed as a part of the state budget negotiations in the legislature.  Further it would be passed as NTIB (Necessary to Implement the Budget) and not subject to hearing or even a separate vote.  Thankfully, we were advised on Tuesday morning that the proposal had been withdrawn.  Various reasons were given for the withdrawal but unless it was somehow stuck into the budget deal that was struck on Wednesday and still remains secret, it appears the monster is once again dead.  See this article for more details.

How this came about, what was in the proposal and how it was stopped is an interesting story and worth a read.  It gives us further understanding of how it might show up in the next session of the legislature.

In Secret

First of all, this proposal was generated in secret.  The claim is that it was done solely by the budget committee working to find a way to pass a state budget.  We were down to the wire with just a few days before there would be a government shutdown for lack of a budget.  Of course this adds drama and serves as a vehicle to justify outrageous legislation.  So everything is done behind closed doors and we are not supposed to learn about it until it is a done deal.  Somehow it got leaked on the 22^nd.

Upon hearing about this we started contacting legislators and other organizations that might be impacted.  The Washington State Council of Fire Fighters (WSCFF) was the first to hear the news and they passed on the information to the Retired Fire Fighters of Washington (RFFOW).  A legislative staff person also contacted both of these organizations.  Interestingly no police organizations were notified.  The president of the Washington Council of Police and Sheriffs (WACOPS) had heard nothing, The Seattle Police Officers Guild (SPOG) had heard nothing.  The Council of Metropolitan Police and Sheriffs (COMPAS) had heard nothing.  Some local fire fighter unions like the Tacoma local knew about the plan.

We do not know just how the information spread was contained within the fire fighter community but suspect it may have been at least partially because WSCFF was having a convention in Yakima last week.  In any event the police were left out of the information flow until we contacted them.

The WSCFF Resolution

Last year the delegates to the WSCFF Convention just passed a resolution with 10 principles that any merger proposal must have to gain their support.

They were:

1. Must not reduce LEOFF 1 member benefits.
2. Cannot put the funding for LEOFF 1 benefits at risk.
3. Cannot affect LEOFF 1 disability boards.
4. Cannot affect LEOFF 1 member or employer contributions.
5. Cannot modify LEOFF 1 governance.
6. Must receive IRS approval before the effective date of the bill.
7. Must follow state laws and case law protecting pension benefits and funding.
8. Must ensure the new merged fund is protected from future state underfunding.
9. Cannot modify LEOFF 2 governance.
10. Cannot increase LEOFF 2 member or employer contributions.

The reports were claiming that the proposed legislation would meet each of these principles and WSCFF and at least one of the union locals were supporting the legislation.  Of course no one had seen or at least no one would admit to having seen the actual bill language.

When the proposal was withdrawn on Tuesday the stated reason was that it did not protect the governance of LEOFF 2 in that it did not guarantee the LEOFF 2 Board’s rate setting authority.  That made it look like WSCFF suddenly had some sort of VETO power over the legislature.

We do know that the legislators want money for the budget and don’t really give two hoots for these ten principles, so it is a bit confusing why meeting them would be considered necessary.

I cannot imagine any bill construction that could meet all of these principles, but then others think it can be done.

What was in the bill?

Of course no one has seen the proposal – it was all done in secret.  Even those we are pretty sure are privy to proposal deny it or claim some sort of legislative privilege.  But here is what we know.

1. $15,000 payment to each LEOFF 1 member. This would amount to somewhere around $115 million dollars and would come from the LEOFF 1 Pension Trust fund.  So with the surplus currently in the fund it would still have a surplus of about $1.1 billion.
2. An unstated dental benefit would be statutorily extended to all LEOFF 1 members. This is not universal because most Pension Boards already recognize good dental health is important to overall health and hence necessary medical care.  I assume the cost would be borne by the employers, counties, cities and fire districts.
3. An unstated amount of money to the employers to defray medical costs for LEOFF 1 members. There was no explanation as to where this money would come from or how much it would be.  We now know the money as to come from a suspension of the pension premium contributions for LEOFF 2.  That is, the employers would no longer be required to make LEOFF 2 pension payments.  We do not know if this was envisioned a as short term or long term premium holiday for the employers.
4. A pension premium holiday for the State – no more LEOFF 2 pension payments. That works out to be around $100 million a biennium. We do not know how long such a holiday would last.  In the proposal in the Senate budget it would last forever.  This is the way the state gets money for its budget – by not paying the money they would otherwise owe.  Currently the pension premium split is 50% for the employee, 30% for the employer and 20% for the state.  Under this the LEOFF 2 premiums would be cut in half and the police officers and fire fighters would be the only folks paying in.
5. The LEOFF 1 Pension Trust would be merged into the LEOFF 2 Pension Trust. The idea here is that the $1.1 billion surplus would offset the loss of funding attributable to the lowered contributions.  Since we have no idea of the term of the premium reductions it is not possible to know whether or not the merged fund would keep the combined fund healthy.  I suspect not for long.  We were advised that the State Actuary was actively crunching numbers to see how the idea would price out.  We called them and they refused to talk to us or even admit that they were developing a Fiscal Note for the proposal.  They claim legislative privilege – another product of secret legislation.

Of course any bill merging two pensions into a $14 billion entity would have a lot of other complicated items.  We just don’t know them and were refused access to them.  It is however clearly obvious that any such bill written in secret by a bunch of legislators under a severe time constraint could be expected to have serious flaws.  Just the little bit of information we were given shows several areas that suggest that not only would the bill fail to meet the Fire Fighter Principles and be a bad deal for both LEOFF 1 and LEOFF 2, it would be illegal under existing case law, statutes and the constitution.

Lessons Learned

Yesterday, Wednesday, was the LEOFF2 Board meeting.  They did not have a quorum, so the meeting did not take place but the parties interested in this issue were able to meet and review what had occurred.  By this time we had learned that the merger proposal had been withdrawn and then on Wednesday morning we were advised that the legislature had secured a budget agreement.  But we were there so we had a meeting about merger anyway.

Present were representatives of the Council of Fire Fighters, the lobbyist for COMPAS, the lobbyist for WACOPS, two board members of the RFFOW, representatives from Seattle Fire Local 27, the Seattle Police Retired Officers, and the LEOFF 2 Board and Director.  We had a lively discussion because many were seeing conspiracy and collusion based on the way the information was revealed and strong connection with the WSCFF principles.  I think most of those concerns were dispelled in a period of frank discussion and with the leadership of the WSCFF president.

We did learn that the LEOFF 2 Board director, Steve Nelson, had been asked to draft a merger bill that would meet the ten principles months ago.  Since he was doing this for the legislature he was unable to provide the name of the legislator or even a copy of what he had written.  He did suspect the proposed bill would have been close to what he had written.  While many of us feel the LEOFF 2 Board should not allow their employee to engage in the development of such bills in any forum except the public forum of the Board, they do permit him to do so at this time.  In fairness to Steve he is in a bit of a hard spot because without such a restriction it is difficult for him to refuse a request from a legislator.

A big lesson was made clear once again:  Political action pays off.  The most politically active group, WSCFF appears to be the first to be notified of the secret move to pass a LEOFF 1/LEOFF 2 merger.  I guess this is to be expected given their connections with legislators and their political contributions.  Likewise Dick Warbrouck of the RFFOW was notified in the same manner.  Again, a product of many years of walking the Olympia hallways and active efforts to protect the pension fund.

The Takeaway

The LEOFF 1 Pension Trust sits like a giant low lying peach that the legislators cannot ignore.  They see that money as theirs and not the trust beneficiaries’.  They are frustrated that they long ago (18 years) closed the only door to access money from the system by eliminating pension contributions.  We can certainly expect at least some legislators to come after the Trust Fund in future sessions.

But wait, there is more.  The Cities, Counties and Fire Districts also are looking at that peach and making claims on the right to pick it.  They figure that since they made pension contributions that they have some sort of right to the money.  They know that is not true but they insist on trotting out the rhetoric. Therefore, it is important to them to be a player at the table where the peach is to be served.  Once the money is given away their claims become moot.  Actually they have had a free ride on pension contributions for the last 17 years and have been able to keep that money which we contend belonged to the active employees.

And then there is LEOFF 2.  We know they want the money.  They have been behind two efforts to merger LEOFF 1 into LEOFF 2.  I believe they see their claim as valid simply based on the similarity of the names.  In fact, I believe that most LEOFF 1 members would like to see any surplus migrate to our brothers and sisters in in LEOFF 2 once the LEOFF 1 plan is completed and all the beneficiaries are dead.

It would be nice for them to have the money so they can increase benefits and insure a healthier pension system.  But the fact is that they already have one of the most healthy pension systems in the country.  Sure some benefit enhancements would be good but any way you look at it LEOFF 2 is a good pension plan.  They have benefits that LEOFF 1 does not have just as LEOFF 1 has benefits that LEOFF 2 lacks.  It was not always that way and the concentrated and dedicated efforts of WSCFF, WACOPS and all the other LEOFF 2 organizations have brought the pension plan from an embarrassing and inadequate system to one of the best and healthiest in the nation.  The LEOFF 2 Board is doing an excellent job of governing the system and they should be left alone.

Unfortunately the merger of LEOFF 1 and LEOFF 2 can only be accomplished by giving the legislators some money.  Every proposal for such a merger envisions a pension premium holiday for the state and this time for the employers as well.  I am convinced that such an action would ultimately be devastating to LEOFF 2. Once you allow the state to turn off the premium spigot it will be extremely difficult to switch it back on. I think a merger would place the LEOFF 2 members at risk and that the LEOFF 2 organizations are being myopic about the risks.

Both LEOFF 1 and LEOFF 2 are healthy and properly funded pension systems.  Leave them alone.  They ain’t broke and they don’t need fixing.