By an overwhelming and bipartisan majority vote, the Rhode Island Legislature adopted sweeping pension reforms last month, at the urging of the governor and the state treasurer. Disappointed labor leaders are expected to seek redress in the courts. Their complaint is that, in violation of contract law, benefits will be frozen, modified and even reduced for incumbent employees and cost-of-living adjustments (COLAs) will be frozen for current retirees.
Rhode Island's state pension plan is a mess, with very serious underfunding. This legislation addresses that problem but leaves the dozens of municipal plans to fend for themselves. That's unfortunate, because many of those local systems are clearly in a death spiral financially. Nonetheless, the new pension law deserves national attention for four features:
The new law won't fix the state pension fund's entire problem, so it is important that all stakeholders realize that this reform package is just the first major step in what will be a long, long journey back toward full funding. Necessary, but not necessarily sufficient, would be the best way to describe its ultimate fiscal impact. And as mentioned before, these provisions do not apply to local governments, as several municipal leaders complained that the hybrid plan's design could actually increase their costs or abridge labor contracts. Obviously the city and town councils will watch closely how this bill is viewed by the state's courts, and many will be tempted to defer actions until the court resolves the contract law issues. That's unfortunate, because many of the local pension plans need equivalent reforms just as desperately as the state.
Gov. Lincoln Chafee and State Treasurer Gina Raimondo deserve accolades for their leadership and perseverance to bring these reforms to the state Legislature and successfully convince lawmakers of their necessity. They have risked their political support from organized labor in a strong union state. Whatever flaws this new law may contain, it looks to me to be the best achievable legislative solution to a messy fiscal problem -- and an important, unavoidable step in the right direction. If other governors and state treasurers facing similar pension problems were equally persistent and skillful, the festering sores of public pension plans would begin to heal more quickly.
Rhode Island's new law will be watched closely by policymakers, pension reform advocates, employers and unions in other states, as it moves (hopefully quickly) through the state courts. As noted before, its structure appears to be well-crafted from a federal law perspective, as it comprehensively addresses most if not all the key tests that federal judges have used when evaluating federal contract law issues for public pensions. But these issues are also state-specific and the union thus can have two bites of the apple. I can't predict the judicial outcome, but I can safely predict that it will become a landmark case. Some commentators believe the state's approach reflects a trend toward more-aggressive solutions that are sorely needed and often unavoidable. Pension reformers elsewhere will also be encouraged by the legislative success, voting margins and plan-design precedents. Rhode Island has thus become a battleground state in the national debate over public pension reforms, and a legal laboratory for the "police power" of the state to remedy a failed system. But as the unforgettable Yogi Berra once said, "It ain't over till it's over."
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