State actuary recommends higher inflation and salary-growth assumptions; council votes to keep current assumptions

Acting Chair Katie Trebnsey called the Oct. 8 Pension Funding Council meeting to order as members heard recommendations from the Office of State Actuary (OSA) and the state actuary on the biennial economic experience study.

Luke Maselink, senior actuary with the Office of the State Actuary, told the council that the 06/30/2024 measurement showed combined funded ratios near 100% and that the strong fiscal-year 2020-21 investment returns continue to be recognized under the statutes'smoothing rules. "These are point-in-time measurements," Maselink said, adding that the smoothing method spreads a large single-year gain or loss over up to eight years to limit volatility in reported funded status and contribution rates.

The OSA recommended three changes to long-term economic assumptions used for pension funding: raise the inflation assumption from 2.75% to 3.0% to reflect persistent higher inflation and regional (Seattle-Tacoma-Bellevue) experience; increase the general salary growth assumption by 25 basis points (marking a recommended rise from 3.25% to 3.50% in OSA's models); and set the investment rate-of-return assumption at 7.25% for all plans (an increase from the prior 7.00% recommendation). "We are increasing our recommendation to 3% per year," Maselink said of inflation, and Matt Smith, the state actuary, summarized that the capital market assumptions and simulated commingled trust fund returns provided by the State Investment Board supported a 7.25% assumption.

OSA emphasized that assumption changes affect the timing of contribution-rate calculations and that any change would first affect budgets in the 2027-29 biennium. Matt Smith noted that while the office provides four-year budget impacts, long-term costs depend on actual future experience and any later funding adjustments.

During council discussion, members asked technical questions about smoothing and how valuations feed into later contribution-rate decisions. OSA explained that the smoothing mechanism applies to asset returns (up to eight years) but that experience gains or losses from salary or inflation differences generally flow through the annual measurements without the same smoothing.

After discussion, Representative Tim Ormsby moved (seconded by Senator June Robinson) that the council "maintain the current prescribed long term economic assumptions." The motion passed on roll call, 4 ayes to 2 nays. The council thus did not adopt OSA's recommended changes at this meeting.

What happened and why it matters: OSA's recommendations were intended to align funding assumptions with current capital market expectations and regional inflation trends. Keeping the current prescribed assumptions preserves short-term budget predictability for employers and governments; adopting the OSA recommendations would have increased projected pension costs in the medium term and moved funding more conservatively. The state actuary and the State Investment Board presented data supporting the OSA approach; council members who supported maintaining current assumptions cited near-term budget pressures and the fiscal committee's responsibility to weigh those trade-offs.

Looking ahead: OSA will continue to prepare the statutory biennial valuation and projections. Contribution rates for the 2027-29 biennium are calculated later based on the 06/30/2025 valuation and the assumptions the council ultimately adopts (unless the Legislature modifies them). The council may revisit assumptions in future cycles consistent with statute and observed experience.

Sources: Office of State Actuary presentations and the state actuary's remarks at the Oct. 8 Pension Funding Council meeting.