Pension Reform at Last?

Finally, after years of minor changes that didn’t solve the growing unfunded liability, a summer and early fall of numerous town hall meetings and other forums led by General Treasurer Gina Raimondo, and some last-minute hiccups over whether to include municipally funded plans, we have a comprehensive pension reform plan before the General Assembly. The legislation is complex and depends upon a lot of math going on behind the recommendations to make things work, but the plan has been declared to be a final fix, or at least as close to one as possible. Now the hard work really begins.

The plan, details of which began to leak out a month ago, aims to reduce the unfunded liability by billions of dollars in the years ahead. It will accomplish this by ending the automatic COLAs that help longer-living retirees earn far more in retirement than they ever did in their actual years of work; raising the retirement age (except for public safety employees) in line with Social Security retirement guidelines; move all state workers and teachers into a hybrid 401k defined contribution plan, and refinance a portion of the debt by extending the repayment period by six years.

Refinancing – or reamortization as it’s called – is the least agreeable part of the reform plan because it will cost us more in the end to do so. However, refinancing undoubtedly makes the difference between leaving retirees’ monthly payments where they are now, or be reduced (a la Central Falls). That’s the price we may have to pay to keep a promise to state employees and teachers who made their required contributions to the pension system with the expectation that they would see that money back in their retirement years.

Eliminating COLAs is going to be tough for a number of retirees who don’t enjoy bigger pensions and don’t receive Social Security. (In the future, state employees will pay into Social Security to ensure balance.) Speaking of Social Security, recipients are no longer guaranteed an annual cost of living increase and didn’t receive one for the past two years. Next year they will, it has just been announced. In the private sector automatic longevity bonuses and COLAs are not common practice.

The COLA payments are the big problem and they are wreaking havoc on the state’s finances – and on many cities and towns, which is why municipalities want COLA relief from the legislature as part of the final legislation. Cities like Providence, Cranston and Warwick, and towns like Johnston, have seriously underfunded locally administered plans that are going broke fast. They can’t afford COLAs anymore either, and are declaring that if they have to make COLA payments come next July it will destroy their finances – even with the relief provided by the state pension overhaul.

Fixing the locally administered plans is going to take more study and effort than could be squeezed into the General Treasurer’s plan, and what relief was provided at the last minute in the state plan will need to be reassigned to the next big overhaul legislation effort – fixing the local plans - which should commence in January. A plan needs to be ironed out that reshapes these plans to mirror the state plan and that eventually moves them under the umbrella of the reformed state system.

Labor leaders concede that something big must be done because the system is simply unsustainable. How far they will let that sober view take them before they attempt to water down the legislation remains to be seen. One thing that everyone seems to understand, and this is vital to the success of this major undertaking, is that Gina Raimondo’s accountants and consulting actuaries have run the numbers, and the whole structure of the plan depends on those numbers working as intended. Should an attempt surface to change out some core provision of the plan, the whole thing collapses. Of particular danger, of course, is taking the easy path by adding more years of refinancing to ease some area of immediate pain. Any recourse to that escape route would be a bad idea indeed.

1 comment:

  1. Does anyone remember back in the 80's and 90's when people poked fun at state empolyees? Most state employees are underpaid and making not making the kind of monies that they could in the private sector.. yes there are exceptions!!! A we see them exceptions on the news almost daily.. But your average empolyee has contributed to a PROMISED retirement!! After so many years of service, what should they expect? About 20 years ago, this issue was brought up and all employees thought they would have to go to a 401K type plan.. State employees, at that time, were excited about this and wanted it.. but the Governor at that time was told it would take monies from the state and thus this plan was not adopted.

    Yes, I am a state employee.. and have proudly been one for the past 25 years. Why is it durng good times, I am poked fun at and during lean times, the state wants to remove from me what they had promised?

    Here is what most state employees are willing to do.. Put all my monies that I have contributed into a 401K type system.. like "the private sector".. Take them monies and add the interest that I would have earned to it.. We are willing to use the average DOW numbers... Yea.. private sector was allowed risky or nonrisky stocks.. just give us what the DOW averaged for the years that we contributed. Compound our contributions and interest.. and leave us alone! Let us be just like the private sector!!!!!!


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