Rhode Island's Winding Road to Serious Pension Reform

If all the parties approve it, a recent agreement will preserve most of the benefits of a sweeping reform law.
by | March 5, 2014

More than two years after the passage of landmark state legislation, Rhode Island's pension-reform saga may finally be coming to an end. When governments wait too long to address looming pension troubles, they often end up boxed in by the need to save money on one side and prohibitions against diminishing current employees' pensions on the other. But in this case, the final product has been worth the wait.

The pension-reform legislation was enacted in November 2011. Public-employee unions filed a lawsuit challenging it the following year. That December, a state Superior Court judge ordered the sides into talks brokered by a federal mediator. The recent agreement reached by outgoing Gov. Lincoln Chaffee, state Treasurer Gina Raimondo (who is running for governor) and the unions is fair and preserves most of the savings provided by the 2011 legislation.

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The law provided that retirees would get cost of living adjustments (COLAs) just once every five years until the state pension fund has 80 percent of the money it needs to fund projected expenditures. It raised the retirement age for most state employees to the age at which they can begin to collect Social Security. And it scaled back the traditional defined-benefit portion of the pension plan while adding a defined-contribution element that requires all but public-safety employees to contribute 5 percent of salary to an individual retirement account, matched by a 1 percent employer contribution.

Under the settlement, individuals who retired before June 30, 2012, would get a one-time 2 percent COLA. Going forward, COLAs would be awarded every fourth year (instead of every fifth under the original legislation) until state pensions are 80 percent funded. And COLAs would be calculated using a new formula based on both inflation and the pension fund's investment returns.

Another change from the 2011 law is that employees with 20-plus years of service would move out of the hybrid 401(k)-style pension plan and back into a traditional one, where the amount those workers contribute to the pension fund would increase. In some cases, the minimum retirement age would be lowered and benefits would accrue more quickly.

The deal still has to be approved by retirees, current state workers and the legislature, and they should approve it without delay. If not for reform, Rhode Island's unfunded liability would stand at an estimated $8.9 billion. Under the 2011 law, unfunded liability fell to $4.8 billion, and the settlement would increase it only to $5.05 billion.

Had the lawsuit continued, there is always the chance that the public-employee unions would have prevailed, a result that the Providence Journal editorialized would have been a "catastrophe" from which there would be "little hope of recovery in our lifetimes."

Credit rating agencies seem to agree. Moody's noted that the deal only modestly reduces the savings from reform and said that settling the lawsuit removes a lingering source of fiscal uncertainty. It termed the agreement "credit positive," which means it would help the state maintain or improve its bond rating.

Rhode Island is only the latest state or local government to discover just how thorny it gets if you wait too long before moving to fix public-employee pension problems. But in the end the state and its employees and retirees were lucky. Even though it took more than two years, it seems likely that the Ocean State will indeed avert a catastrophe.

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