6/5/09

It's High Time For Pension Reform


Pension reform is the single most critical legislative issue facing the Rhode Island General Assembly this spring. Solving the massive projected budget deficit for next fiscal year – most recently estimated at almost $600 million – absolutely depends on pension reform. But will the Democratic controlled legislature step up to the plate on an issue of equal critical importance to the state’s public employee labor unions and their legions of retirees? Good question.

Ballooning pension costs are weighing down heavily on state governments everywhere. A host of states, including the Ocean State, have seriously under-funded and unsustainable pension obligations. As do many of our cities and towns. The pension problem even affects national governments: the little known U.S. government agency – the Pension Benefit Guaranty Corporation - responsible for insuring pensions for some 44 million Americans, is running a whopping $33.5 billion deficit.

This is the result of taking on the pension obligations of American workers and retirees whose private companies (like many of the U.S. domestic air carriers) simply walked away from their pension obligations years ago. InGreat Britain, and the same is true in other western European countries, public pension obligations now reach almost a 1,000 million pounds – that’s well over a trillion dollars.

Here in Rhode Island, it’s not that the pension problem has gone unrecognized. Auditor General Ernest Almonte has been speaking out about it for years now. The state even took some initial baby steps at pension reform several years ago, while kicking the core problem down the road to today’s juncture. In a state where nothing of critical importance gets addressed if politicians get help it, even tiny tweaks to the state pension system, and they mostly involved new hires, were important advances. But the big issues of pension reform, and the costs, have yet to be tackled.

Governor Carcieri, to his credit, has long recognized the absolute necessity of pension reform. Earlier this year he advanced proposals to significantly change the system. He called for raising the eligible minimum retirement age to age 59 and to eliminate automatic COLAs every year for new retirees. Estimated savings: almost $50 million next year alone. Not to be outdone, a legislative commission appointed by House Speaker Bill Murphy, who also is on record for pension reform, came back from its deliberations with even more far reaching changes: 65 would be the minimum eligible age to start receiving a pension, and instituting a hybrid 401k-style for new state employees and teachers (many of whom around the state are enrolled in the state pension plan).

Murphy and other Democratic legislative leaders are sitting at the moment on the pension commission’s detailed study and cost analysis. Obviously they intend to proceed very cautiously due to the stiff opposition position taken by the powerful labor unions to which they are beholden. (The almost 24,000 state employees and public school teachers in the state pension plan are all unionized.) What this will mean for real reform taking place this year is the big question going forward. Expect them to attempt to gain union concessions on some of the major reform issues, if they can, before going public.

Governor Carcieri has stated it will impossible to balance next year’s state budget without passage of pension reform legislation. Without it, the state may have to raise taxes, which nobody wants, and squeeze cities and towns on term of state aid even further than we are already doing. Pension reform is one of those big systemic issues that must be addressed to get state government healthy again. Without substantive pension reform the obligations will just keep growing, and it is estimated that by 2017, and perhaps sooner, the state will not be able to meet its obligations to its retirees. In actuality, the situation is so serious that we not only have to reform the pension system to save money, we have to put more money into the system in the years ahead to reduce its unfunded portion.

More tinkering around the edges won’t solve this problem. It’s time for bold and decisive action.