Passage of overhaul isn't the end of the story
Published Nov. 21, 2011
By Joe Baker/Daily News staff
During the past few months, Rhode Islanders probably have learned more than they ever wanted to know about public pensions.
For much of the past year, residents have been inundated with media reports about the state's pension fund. Although they previously had no need to be conversant in language normally reserved for those with MBAs, many residents now find they can discuss unfunded liabilities and actuarial studies without embarrassing themselves.
Although state officials have known for some time that the pension system is underfunded, the situation was exacerbated earlier this year when the State Retirement Board made two critical adjustments to the formula for computing future payouts. First, the board said, retirees were living longer, so it adjusted the mortality rate - the age retired employees could be expected to live to - from 77 to 84. Second, it reduced the assumed earnings of pension funds - or interest on investments - from the 8.25 percent rate established in 1998 to a more conservative 7.75 percent.
The combination of these two changes meant the fund could expect to pay out more as retirees lived longer and yet bring in less from interest earnings. That immediately ballooned the unfunded liability - or the difference between expected payouts and money set aside for them - from $4 billion to $7 billion.
According to this estimate, the plan - which includes state workers as well as those in the Employees' Retirement Fund, which covers the state's teachers, and local workers in the Municipal Employees' Retirement Fund - is only 48 percent funded. (There also are 36 locally administered plans in the state that are negotiated with municipal officials; a September report from the state auditor general deemed 24 of those plans "at risk.")
The retirement board's adjustments had labor leaders crying foul. They claimed the board "created" a pension crisis where there is none and threatened to sue over changes to benefits retirees already have earned.
Early this year, General Treasurer Gina M. Raimondo sounded the alarm, when she said the state needed to make drastic changes in the pension system to head off financial calamity. Gov. Lincoln D. Chafee, who like Raimondo was elected in 2010, and legislative leaders quickly climbed on board.
In September, Raimondo unveiled a proposal to fix the system with a warning that material changes to the plan would undercut the expected financial savings of about $3 billion. The General Assembly convened a special session in October to deal exclusively with pension reform; unions representing active and retired state workers expressed outrage during a number of rallies at the Statehouse.
After holding nearly 30 hours of public hearings on the proposal, legislative leaders softened some of the more onerous impacts, including retirement age and cost-of-living adjustments, but not to the satisfaction of labor leaders, who have vowed to sue over the changes.
The General Assembly overwhelmingly approved the legislation Thursday, and Chafee signed it into law Friday.
The biggest change was the suspension of COLAs for retirees for at least five years. After five years, the state will perform an actuarial study to determine if market conditions warrant giving a COLA on the first $25,000 of a retiree's pension.
The legislation also increases the age when employees can retire on a sliding scale, depending on how close the worker is to retirement, and creates a new hybrid benefit plan combining the traditional defined-benefit pension with a defined-contribution, or 401(k)-style plan.
The changes will save cities and towns money as well, because it will reduce their annual pension payments for teachers and other local employees in the state system.
Rhode Island is not the only state facing a pension crisis, but apparently is out front in dealing with it. According to a 2010 study by Stanford University, California's unfunded pension liability is more than $500 billion. Other studies peg New Jersey and Illinois' liabilities at more than $150 billion. Many states are reluctant to tackle retirees' benefits. Some, including California, are worried about reducing benefits already earned by those still working.
Despite calls from some municipal officials, Rhode Island did not address the liabilities in locally administered pension funds. Concerned about potential lawsuits over interfering with locally negotiated provisions, legislators instead required each local pension fund to conduct actuarial and experience studies and to submit a plan to address their unfunded liabilities. The state will pay for half of the cost of the studies.
State leaders say that if the plans do not adequately address the liability, they will have legal grounds to step in.
State officials have said they will continue to discuss municipal pensions and other post-employment benefits, or OPEB, in the next legislative session.
While the dust still is settling on last week's vote, one thing appears clear: The issue of pension reform ultimately may be decided in court.

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