Bold action to tackle a significant shortfall in its pension liabilities could make Rhode Island a model for fiscal reform across the country.
Under a bill spearheaded by Gov. Lincoln Chafee and General Treasurer Gina Raimondo, and passed overwhelmingly by both houses of the state legislature, officials expect the state’s unfunded pension liability to be cut by 41% – from $7.3 billion to $4.3 billion – and the funding level for its defined benefit plan to rise from 48.4% to 59.8% .
Prior to the law’s passage, Rhode Island was one of only a few states that could afford to pay less than half of its current pension obligations.
Wide-ranging change
Most of the savings under the new law come from suspending cost-of-living increases for retirees. The legislation also lowers the total contributions by state and local employers from $689 million to $414 million, which will save taxpayers about $275 million in fiscal year 2013, and increases the retirement eligibility to 67 for employees not yet eligible for retirement.
The law takes effect July 1.
“In addressing all of these factors in one piece of legislation, and applying reforms to current, future and retired state employees, teachers, judges, public safety personnel and municipal employees (six pension systems in total), Fitch believes Rhode Island’s pension reform is the most comprehensive measure undertaken by any of the states in recent years,” the rating agency said.
The law forces public workers to split their retirement funds between a guaranteed pension and a 401(k)-style plan whose value is tied to the strength of investments, a hybrid plan that, according to the Pew Center on the States, would be the first such plan in the nation to affect current employees.
“The reform is unusually expansive,” Fitch said. “The sweeping nature of the reform may inspire similar efforts in other states grappling with large unfunded pension obligations.”
The law will affect 66,000 active and retired state workers, teachers and municipal employees. While 10% of tax revenue now goes to retired public workers, the figure was expected to rise to 20% within seven years if no action had been taken.
Chafee, noting the reduced benefits to workers and retirees, said the law was “cause for encouragement, but not cause of celebration.”
Raimondo praised lawmakers and said the measure is a first step “to move the state’s struggling pension system onto firmer ground.”