Washington state's decision to tap pension fund raises red flag

Washington State Governor's Office

Washington state's move to tap the surplus from one of its pension funds to help close a shortfall sets a bad precedent, according to a Morningstar DBRS analysis.

"A takeaway from the Washington state case is that government sponsors facing budgetary pressures may be tempted to view overfunded public defined benefit pension plans as a source of fiscal flexibility," said Marcos Alvarez, managing director for global financial institution ratings at Morningstar DBRS.

"Using pension surpluses to fund unrelated public spending would have negative credit implications for rated pension plans, even when accrued benefits remain legally protected and the sponsor provides a general commitment to make pensions whole," Alvarez said.

Washington Gov. Bob Ferguson signed House Bill 2034 in April 2026, which terminates and replaces the overfunded Law Enforcement Officers' and Firefighters' Retirement System Plan 1 (LEOFF 1). The controversial measure sweeps $3.9 billion in surplus funds into general state spending and climate programs.

The law formally ends LEOFF 1 on June 30, 2029, and creates a successor fund designed to maintain benefit promises to existing members at a 110% funding level. The pre-existing plan was funded at 160% and was expected to be funded at 200% by 2029.

The law directs $569 million to a climate commitment account and $3.4 billion to general state budget relief.

Though the new plan would be funded at 110%, Alvarez said a downturn could put the fund in jeopardy.

But his larger concern is other state and local governments — not as highly rated as Washington — could employ a similar tactic.

"I understand the state of Washington had good reasons to implement this legislation," Alvarez said. "But this is not great precedent for other pension plans as well funded as this or who have different demographics."

The plan that Washington closed supports pensions for long-retired members and wasn't open to new members, he noted.

Washington State carries bond ratings of Aaa from Moody's Ratings, AA-plus from S&P Global Ratings and Fitch Ratings, though Moody's and Fitch revised their outlooks to negative in April.

In its revision to negative on April 25, Fitch analysts said the change "reflects weakening of financial resilience due to budgeted drawdowns from the state's Budget Stabilization Account (BSA) in the current biennium and risks around the state's plan to restore reserves and structural balance."