Rhode Island public pensions

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Rhode Island public pensions are made up of four pension systems. In FY2008, the systems had a combined funding level of 61.1%, with a total liability of $11.2 billion and an unfunded liability nearly three times payroll.^[1] The unfunded liability for state employee and teacher pensions totals $6.8 billion, according to a report released September 2012 by the state auditor general.^[2] That was only marginally improved from FY2011, when the unfunded liability was more than $7 billion, which is only a little less than the total annual state budget.^[3]

Rhode Island has 23,422 total employees as of 2010.^[4] In Fiscal Year 2010, the state has a total of 40,279 active and inactive pension fund members, with 25,293 receiving periodic benefit payments. ^[5]

In FY2011, the state paid $205.1 million in pensions and $48.5 million toward retiree health insurance.^[2]

The state budget bill Rhode Island House Bill 7397 HB 7397, Article 6, removed a statutory obligation to make certain payments to the state retirement system for state employees and for teachers.^[6][7]

Employees Retirement System of Rhode Island ("ERS") is severely underfunded. It operated on a pay-as-you-go basis from 1936 to the late 1970s. Although the state has made 100% of its contributions since the 1980s, the system is still just 57%. "You’re paying for the sins of the past,” said Frank Karpinski, executive director of the Rhode Island system.^[1]

While Rhode Island's pension system is still underfunded, the Pew report, "The Widening Gap Update," said the state was the most aggressive in overhauling its pension systems to cut costs. The state, whose systems were only 49-percent funded in 2010, acted in 2011 to cut retirement benefits for current and future employees, limit cost-of-living increases, raise the retirement age and put workers in a new hybrid retirement system that include a 401(k)-style component. ^[8]

According to the United States Census Bureau, the state has 12 locally-administered pension systems.^[9]

Pension plans

ERSRI

The Employees Retirement System of Rhode Island provides retirement, disability, survivor and death benefits to state employees, public school teachers and municipal employees who are employed by a participating municipality.

Contribution rate

State employees in the ERS generally contribute 8.75 percent of their salary per year.^[12][13] For state employees, the state contributes an actuarially determined percentage of the member's salary. In 2007, the rate was 18.4 percent.^[12] However, by 2010 the employer contribution rate increased to 36.34 percent for state employees and 14.27 percent for teachers. ^[14]

2011 pension overhaul

In November 2011, Rhode Island legislators responded to the $7 billion in unfunded liability with a massive pension overhaul. The rating agency Fitch called the overhaul the "most comprehensive measure undertaken by any of the states in recent years." ^[15]

The bill, which passed 57-15 in the state House and 34-2 in the Senate, is intended to save a pension system whose taxpayer costs would have doubled to $600 million in the next year without changes. ^[16]

The Rhode Island Retirement Security Act of 2011 tackles a wide range of factors that determine the liabilities of the state's pension systems. Among them are retirement age, cost of living increases, amortization period of the unfunded accrued liability, employee and employer contributions, level of future benefits, and plan design. The legislation applied the reforms to current, future, and retired state employees, teachers, judges, public safety personnel, and municipal employees (six pension systems in total). ^[15]

The bill suspends cost of living adjustments for all public employees in the plan. However, the legislation does allow an interim COLA every fifth year if the pension fund's investments preform well. It also raises the official retirement age to 67 with some exceptions. ^[17]

The legislation is expected to reduce the systems' unfunded actuarially accrued liability from $7.3 billion to $4.3 billion, a 41 percent reduction. The legislation moves public employees to a hybrid defined benefit/defined contribution plan. ^[15] 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. ^[18]

The new legislation takes effect July 1, 2012. Under the new legislation the state's pension plans are expected to exceed 80 percent funded in 2032 for state employees and 2030 for teachers, with full funding of the systems occurring in 2035. By the 2013 valuation the plans are expected to have funding levels of 52.4 percent and 55.5 percent, respectively. These assumptions are based on a 7.5 percent assumed market return. ^[15]

Eligibility

All members employed by the state prior to 2010 with 10 or more years of service are eligible for retirement on or after age 60 if they have credit for 10 years of service, or at any age if they have credit for 28 years of service.^[12]

Increased retirement age

In 2010 Rhode Island lawmakers not only increased the retirement age for new workers from 60 to 62, but they also changed the retirement age for current workers.^[1] Now the minimum retirement age for current workers depends on their length of service.^[1][19]

The Rhode Island Retirement Security Act of 2011 raises the official retirement age to 67 with some exceptions.^[17]

Cost of living adjustments

Rhode Island included in its FY2011 budget a limit on the cost-of-living adjustments provided future retirees to the pensioner's first $35,000 in benefits and require eligible individuals to wait until age 65 to begin collecting the annual COLAs.^[20]

The Rhode Island Retirement Security Act of 2011 suspends cost of living adjustments for all public employees in the plan. However, the legislation does allow an interim COLA every fifth year if the pension fund's investments preform well.^[17]

Possible legal challenges

Rhode Island’s public-sector unions may sue over the new law, saying that the state cannot break contracts. “Pension theft creates longer careers. Pay, vacation, and health care costs will rise dramatically,” the Service Employees International Union Local 580 said on its website. ^[21]

In June 2012 labor unions filed a lawsuit against Rhode Island claiming state officials violated employment contracts and did not first try less severe measures before enacting pension reforms. ^[22]

Gov. Lincoln Chafee is calling for both sides in the state pension reform lawsuit to come to the table and negotiate even as the case moves through the courts. Chafee said it's important to negotiate before the state falls into an even deeper hole when it comes to the pension debt. The law enacted last November is aimed at saving billions of dollars by suspending retirees’ cost-of-living adjustments (COLAs) until the pension system is 80% funded and moving most current employees into a hybrid pension plan. The changes took effect on July 1.^[23]

Attorneys for the state of Rhode Island will ask a judge to dismiss a legal challenge to the state's landmark pension overhaul filed by public-sector unions. State leaders insist that without the changes, ever-escalating pension costs would swamp state finances. They say the pension law — which passed overwhelmingly in 2011 — was carefully crafted to withstand legal scrutiny. The new law is intended to save an estimated $4 billion over 20 years by suspending retiree pension increases, raising retirement ages for many workers and creating a new benefit plan combining traditional pensions with 401(k)-style accounts. Before the changes were enacted, the state's pension costs were set to jump from $319 million in 2011 to $765 million in 2015 and $1.3 billion in 2028. The changes were signed into law by Gov. Lincoln Chafee a year ago and went into effect July 1. They affect 66,000 active and retired state workers, teachers and municipal employees. The unions, however, argue that the pension law is an unconstitutional impairment of an implied contract. They insist lawmakers had a duty to look for alternatives before voting to withhold pension benefits that had already been promised. ^[24]

Center for Freedom and Prosperity

The Rhode Island Center for Freedom and Prosperity is posting pension data on its transparency website, www.RIOpenGov.org.

In February 2012 the Center for Freedom & Prosperity formed a task force to provide research and analysis that may be useful to local officials as they work to design pension reform options for Rhode Island's under-funded municipal retirement systems. Cranston, Rhode Island is the first municipal pension plan that the team will analyze. ^[25]

Pension Fraud Tipline

The state launched a telephone "hotline" for residents to report potential disability pension abuse. The state is soliciting tips from the public for information on pensioners who were awarded a tax-free accidental disability pension – for being hurt on the job – but shouldn't be. ^[26]

Funding levels

The state's pension liabilities can be calculated in a variety of ways, which yield different numbers. Below are the numbers as calculated by to the Pew Center on the States,^[1], the American Enterprise Institute^[27] and Professors Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University, Kellogg Graduate School of Management.^[28]

Other information from the Pew Center on the States Feb. 2010 publication "The Trillion Dollar Gap":

This data is based on projected data from 2008 census data.^[29] In 2008, $1.94 trillion was set aside for pensions, but it is estimated that states have $5.17 trillion in unfunded liabilities.

Rate of return

Rhode Island presumes an 8.25 percent return rate on its pension investments.^[1] However, under the Rhode Island Retirement Security Act of 2011, the rate of return is assumed to be 7.5 percent.^[15]

Municipal pension concerns

The state's pension crisis is also being felt by many municipalities in Rhode Island as well. Mayors from across the state warned that without the ability to cut pensions, their cities will have to raise taxes or slash services to keep up with the ever-escalating cost of providing the retirement plans for municipal employees. ^[30]

A report issued in the fall of 2011 noted that 24 of the 36 municipal pension plans were considered “at risk.” ^[31] Collectively, the local pension systems would need $2 billion to cover the gap between the money that is available now and what the governments have promised to pay out in the future. <ref= fiscaltimes/> A December report by Moody’s Investors Service that said its local governments face heightened credit pressure and possibly more downgrades, priamrily due to unsustainable pension costs. As an example, the town of Pawtucket has a $138 million pension shortfall, with a 30 percent funding ratio for fire and police pensions. ^[32]

When state lawmakers passed sweeping reforms to the state pension plans, mayors from across Rhode Island pleaded with legislators to apply the changes to the state's 36 locally run pension plans, too. They warned that cities would have to raise taxes or make cuts if local leaders weren't given greater authority to cut pension costs, largely by suspending annual increases for retirees. ^[30]

Gov. Lincoln Chafee will host a Municipal Executives Strategy Session with the mayors and town managers of Rhode Island’s 39 cities and towns. The focus of discussion will be evaluating municipal finance issues including proposed solutions for the current independent municipal pension crisis. ^[33]

Providence Mayor Angel Taveras is calling on more than 800 city retirees to accept reduced pensions and less generous health care coverage to help the city avoid a bankruptcy filing. The mayor is seeking three changes:the suspension of future pension cost-of-living adjustments (COLAs) until the system gets from its 32% funded level to 70 percent; a 20 percent health insurance co-share for retirees under the age of 65; and a transition to Medicare with a supplemental plan for those 65 and older. ^[34]

Since 2008 Tiverton failed to make annual required contribution (ARC) to the police pension fund during at least two years. Town Administrator Jim Goncalo told Patch the system is underfunded, but he was not sure by how much. Goncalo said the town will be receiving an actuarial evaluation and an experience study by April that should reveal where the fund stands. ^[35]

According to the Rhode Island Center for Freedom & Prosperity the state's unfunded pension liability may be much greater than originally thought and could be nearly $6 billion rather than the reported $2.4 billion. “Using a valuation rate that is more in-line with the private-sector, all municipalities in the Ocean State should be provided with the tools the governor proposes, and we should spare ourselves the drama of picking and choosing qualifying and non-qualifying localities,” said the Rhode Island Center for Freedom & Prosperity’s Rich Danker and Mike Stenhouse. ^[36]

Local public pensions

Main article: Local government public pensions

According to the United States Census Bureau, the state has 12 locally-administered pension systems.^[9]

Transparency

Main articles: Public pension disclosure and Governmental Accounting Standards Board

Data availability

Employee's Retirement System of Rhode Island includes a variety of data about each pension fund on its website, including actuarial information and investment information. ^[37]

Recipients and amounts of payment to individuals are not posted on the website.

Fund performance data

Pension fund investment data is published. Information includes a breakdown of the investments, including total market value and percent invested in various index funds. ^[38]

Rate of return

The assumed rate of return posted on the state website, but it is posted on the reports of each fund:

• State Employees ^[39]
• Teachers ^[40]
• Municipal Employees ^[41]
• Police and Fire ^[42]

Unfunded liabilities

Unfunded liabilities are not posted on the ERSRI website, but they are included in the annual actuarial reports.

Oversight

An July 2012 Internet search does not reveal any pay-to-play problems regarding Rhode Island public pensions. In 2010 legislation was introduced in the state House to address contributions from vendors with state contracs. ^[43]

The Rhode Island State Investment Commission oversees investments of the state's pension plans.

See also

• Rhode Island state budget
• Rhode Island state government salary
• Changes proposed in state pensions

External links

• Employees Retirement System of Rhode Island
• Rhode Island Center for Freedom and Prosperity] allows registered users to see state pension data
• Rhode Island State Pension Fund Management - State Integrity Investigation

References

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