Committee staff presented an educational briefing on the LEOFF‑1 study, explaining benefit formulas, demographic composition, historic funding and federal tax issues that could affect proposed statutory changes. Aaron Gutierrez, committee staff, led the briefing.
The study matters because LEOFF‑1 is a legacy plan with very few active members, large retiree liabilities, and proposals under consideration that could change plan structure, benefits and the possible disposition of surplus assets.
Gutierrez summarized LEOFF‑1 benefits: a formula based on years of service, final-average salary and a tiered multiplier (1% for years 5–10; 1.5% for years 10–20; 2% for 20+), plus a one‑time benefit enhancement paid starting in 2023. He noted LEOFF‑1 retirees receive an uncapped cost‑of‑living adjustment tied to CPI and employer funding of necessary medical benefits (after Medicare). The office’s prior OPEB valuation (based on the 6/30/2022 data) estimated the present value of medical liabilities at about $2.2 billion and annual medical payments near $124 million; a portion of those costs is offset by the fire insurance premium tax, estimated to direct about $7 million per year to local governments for medical benefits.
Gutierrez reviewed demographics: as of the June 30, 2023 valuation the system had very few active members (reported as seven at that valuation and noted as likely reduced to four since), average beneficiary age about 78.4 years, average monthly benefit roughly $5,413, and long average retirement duration (~30 years). OSA actuary Michael Harbour provided a breakdown of annuitants during the session: just under 2,000 service retirees, about 2,400 disabled retirees and about 1,800 survivors.
Staff then stepped through federal-tax concepts relevant to plan redesigns: Internal Revenue Service rules on plan qualification, the exclusive‑benefit principle, determination letters and private‑letter rulings (PLRs). Gutierrez stressed that changes to plan structure can raise the risk of IRS scrutiny; if a plan were disqualified the result could create tax consequences and liabilities for members, employers and the state. He said plan disqualification of a governmental plan is rare but that the IRS typically offers remediation options in practice. The staff presentation noted that federal counsel (Ice Miller) and the Attorney General’s Office are being consulted for formal analysis.
Gutierrez then summarized how two bills approach the legacy plan differently. Substitute House Bill 2034, he said, would restate the LEOFF‑1 plan, then terminate the old plan and create a new restated plan that expressly guarantees LEOFF‑1 benefits; the bill includes an incentive for remaining active members to retire (an additional five years of service credit plus a one‑time $25,000 lump sum) and would deposit any transferred assets into the Pension Fund Stabilization Account, with a potential for later reversion depending on subsequent appropriation language. The bill also requires DRS to pursue an IRS determination letter before most changes take effect.
Substitute Senate Bill 5085, Gutierrez said, proposes to merge LEOFF‑1 with TRS‑1 and PERS‑1 into a single “legacy retirement” plan with three benefit tiers aligned to the legacy plans. That bill contains an express guarantee that members’ benefits would not be reduced and would grant ongoing COLAs for TRS‑1 and PERS‑1 members. Like the other bill, it requires DRS to seek a determination letter before most changes take effect. Gutierrez noted a key legal and factual question: whether an overfunded legacy trust that has not received contributions for many years but has grown via investment returns could be treated in ways that trigger adverse federal tax consequences.
Multiple public commenters addressed the committee after the briefing. Michael Doucheman, president of the Retired Firefighters of Washington, submitted a private‑letter ruling (PLR) to the committee and told members the PLR concluded a plan structured like SSB 5085 would not meet IRS requirements; he asked the committee to provide that PLR to the Attorney General’s Office or outside counsel and to circulate any legal opinions to legislators. Claire Olivers, president of the Retired Public Employees Council of Washington, and Pete Diedrich of the Washington State School Retirees Association urged use of any LEOFF‑1 surplus to restore recurring COLAs for TRS‑1 and PERS‑1. Diedrich asked the committee to recommend Senate Bill 5085 rather than ending the study without a recommendation. Patty Mann, representing firefighter retirees, urged committee members to include firefighter voices in future deliberations.
Committee staff said the item was educational and no action was taken. Staff will receive additional counsel from the State Investment Board, DRS, the Attorney General’s Office (Ice Miller) and return a draft report to the committee in September.