Rhode Island lawmakers had a choice: Keep the state’s pension system as is, forcing big tax increases, service cuts, or both. Or change the pension system to improve solvency and control the growth of future obligations.
Lawmakers chose the latter in November when they overwhelmingly approved an effort spearheaded by Treasurer Gina Raimondo (D) that, among other things, requires certain state workers and school teachers to move some of their retirement funds into a 401(k)-style account. The legislation also suspends annual cost-of-living raises until pension funding levels reach 80 percent, raises age requirements, and re-amortizes pension system debt to lower and smooth future payments. Employee contributions will also rise.
Gov. Lincoln Chafee (I) signed the bill into law upon receiving it.
“This legislation demonstrates to the rest of the country that Rhode Island is serious about getting its fiscal house in order,” Chafee said at the signing. “I want to stress, though, that this is not a cause for celebration. I take no joy in the pain this will cause for thousands of Rhode Islanders. But the most important objective was ensuring retirement security for those in the state system—and this legislation achieves that goal.”
‘Fair, Reasonable, Fiscally Responsible’
“The Rhode Island Retirement Security Act passed because Rhode Islanders called for action and change. Passage of this bill is a great step forward as we continue to work to put our state on a secure path toward growth and prosperity,” Raimondo said in a statement after lawmakers passed the reforms.
She said the measure immediately will reduce the state’s unfunded pension liability by approximately $3 billion and take the funded ratio from 48 to 60 percent, with further improvements expected in the future.
“From the beginning, this process has worked to fix the fundamentals of the state-administered pension system in a fair, reasonable, and fiscally responsible way,” Raimondo said. “In the coming months, I look forward to implementing this reform.”
Cost Controls Needed
If lawmakers had left the system alone, they would have needed to come up with $600 million in taxpayer funding in 2012, double the $300 million pension contribution in 2011. In 10 years the annual taxpayer contribution would have grown to more than $1 billion. Much of the cost would have fallen on local governments, which pay 60 percent of teacher pensions, according to Raimondo.
John Simmons, executive director of the Rhode Island Public Expenditure Council, an independent, nonpartisan research organization that helped shape the reform package, said the effort entailed nearly a year of work.
“There were a couple of small changes on the floor, but what we wrote is fairly representative” of the reforms the lawmakers adopted, he said.
“The order of magnitude of the problem was substantial,” Simmons said. “They saw that early on. Tax increases, reduction of government services, putting some municipal governments into potential bankruptcy, . . . all these things could have happened if they had failed.
“To say they identified the problems, enacted reforms, and fixed things should give them high marks. In the Senate, only two were opposed, and they were labor leaders. In the House, only a few opposed,” Simmons added. “High marks definitely should go to Treasurer Raimondo, who started it.”
Political Base Bucked
Simmons said the changes are especially significant because Rhode Island is a Democrat-dominated state with a strong labor union presence, usually a combination that blocks such actions. But Democrat Raimondo worked with labor union officials, other lawmakers, and nonpartisan organizations such as RIPEC.
In the end, some labor unions filed suit against the changes, but most lawmakers supported them, recognizing there was a possibility of soaring taxes and service cutbacks, local government bankruptcies, and possible insolvency of the pension system itself if things did not change, Simmons said.
Some of Rhode Island’s pension problems stemmed from overly optimistic return-on-investment estimates and incorrect mortality rate estimates. This left the pension system with less money coming in than projected and more money going out than expected as retirees live longer, increasing the total amount they receive.
Risks Shared
By moving some money into a 401(k)-style plan, the system becomes a hybrid of a defined benefit and defined contribution system. The hybrid nature of the plan shares the risk between the employer and the employee instead placing the risk entirely on taxpayers if assumptions are inaccurate or investment targets are not met.
The normal retirement age for most employees will be raised to 67, or age 62 with 20 years of service with a reduced benefit. The normal retirement age for general state employees had been 62. Other categories of workers have different normal retirement ages, depending on when they were hired and years of service. The normal retirement age for all public safety employees will be 55 with 25 years of service, up from 20 years.
Simmons said Rhode Island lawmakers “have been acting over the last several years in ways that show they are willing to take on reasonable solutions to important problems.” As an example, he cited income tax changes that have lowered tax rates and simplified the tax system to make the state more competitive with its neighbors and stem the flow of high-income earners out of Rhode Island.
