Reforming public pensions in Rhode Island.

• Author: Hu, Christopher D.

INTRODUCTION

On November 18, 2011, Rhode Island governor Lincoln Chafee signed into law the Rhode Island Retirement Security Act of 2011 (RIRSA), which dramatically alters the pension benefits provided to state employees. (1) Rhode Island is not alone in seeking to adjust its pension system: numerous states and localities have enacted changes to public employee pensions in the past few years, (2) with further reforms on the horizon throughout the nation. (3) Despite the state's small size, RIRSA warrants closer analysis for three simple reasons: 1) the gravity of the Ocean State's public pension crisis, 2) the ambitious scope of its reform measures--which the Pew Center on the States has called "unprecedented" (4)--and 3) its potential impact as a bellwether for the rest of the country.

RIRSA--which was passed with overwhelming support by the state's heavily Democratic General Assembly--has four key features. (5) First, it suspends cost-of-living adjustments ("COLAs") for current retirees receiving pensions. Second, it moves most state employees from a traditional defined benefit plan to a "hybrid" plan that shifts investment risk from the state to its employees. (6) Third, it increases the age at which most employees are eligible to retire with pensions. Finally, it obligates municipalities to develop their own pension reform plans. Together, these measures are estimated to reduce the state's unfunded pension liability from $7 billion to about $4 billion over the next 25 years. (7)

1. RHODE ISLAND'S PENSION CRISIS AND THE PATH TO REFORM

   1. Background

      Pension systems for retired state and local employees, many of which were already seriously underfunded, (8) have taken a turn for the worse in the post2008 recession. The stock market's slump has forced pension plans to adjust their investment projections downward, resulting in over $1 trillion in state and local unfunded pension liability. (9) In Rhode Island, the problem is particularly severe: its pension system is only 48% funded, compared to a national average of 75%, and there are now more retirees receiving benefits than current employees paying into the system. (10) Ten cents out of every dollar spent by the state now go to pay for retiree benefits. (11) More generally, the state has suffered more than most during the recession, and currently boasts the nation's second-highest unemployment rate. (12)

      From 2005 through 2010, the Rhode Island legislature passed several laws intended to address the state's pension woes, but they were all piecemeal measures that failed to tackle the most costly aspects of the system. (13) The most dramatic warning of the state's looming pension problems came at the municipal level: beset by mounting police and firefighter pension costs, the city of Central Falls filed for bankruptcy In August 2011. (14) Almost immediately afterward, RIRSA's supporters--led by Governor Lincoln Chafee (a former Republican U.S. senator turned independent) and Democratic state treasurer Gina Raimondo---unveiled their sweeping reform proposal.

   2. Building Political Support for Reform

      In Rhode Island, as throughout the country, labor unions and Democrats are political allies, and public pensions are notoriously susceptible to interest group politics. (15) As one might expect, public employee unions fiercely opposed RIRSA, and they had good reason to hope that the state's Democratic-dominated General Assembly would be receptive to their concerns. Rhode Island's public sector unions are a formidable force: in 2010, the state had the second-highest rate of public sector unionization in the nation, with 67% of its 62,000 public workers represented by unions. (16) Union lobbyists made clear that support in future elections would depend on state legislators' stance on pension re- form, (17) and the head of the national AFL-CIO even called the Senate president in a last-ditch attempt to delay the vote. (18) Unions also organized protests outside the General Assembly building in downtown Providence, with one rally drawing an estimated 3,500 protesters. (19) Finally, as discussed in more detail below, they threatened that would sue to challenge the constitutionality of RIRSA's cuts. (20) These public sector unions were joined by allies among Rhode Island's private sector unions (21) as well as the state branch of the AARP. (22)

      How did RIRSA's backers manage to succeed in the face of this political pressure? First, Rhode Island's pension problems are among the nation's worst, and the Central Falls bankruptcy dramatized what might happen to the rest of the state if the legislature failed to act. Even union leaders acknowledged that something had to be done, even if they disagreed with scope of the proposed reforms. (23) Second, state treasurer Gina Raimondo--who served as the public face of RIRSA---effectively conveyed the scale of this crisis to Rhode Islanders and avoided framing the issue through anti-worker or anti-government rhetoric. Raimondo emphasized how rising pension costs constrained state spending on education and social services, which built support among the state's non-profit community, (24) and RIRSA's backers portrayed the bill as motivated by a desire to save the pension system, not destroy it. (25) As Senate president Teresa Paiva Weed said on the floor of the Senate before that body's final vote on RIRSA, "doing nothing only puts our retirees'--and our active members'--benefits at greater risk." (26) Raimondo also devoted substantial effort to public outreach, giving numerous presentations throughout the state, including to union members. (27) In addition, she included four union officials on a twelve-member commission to set up to study reform proposals. (28)

      In the end, the vote was a landslide. Indeed, one of the most remarkable aspects of RIRSA's passage is its margin of victory in the Democratic-dominated General Assembly: it passed the House of Representatives by a vote of 57 to 15 and the Senate by a vote of 35 to 2, garnering "yes" votes from 74 of 94 Democratic state legislators. (29)

2. How RIRSA WORKS

   1. Key Features

      1. COLA suspension

         RIRSA suspends annual COLAs for retired state employees until the state's pension plans are 80% funded overall. (30) Until that time--which could be many years into the future, since the plans are currently only 48% funded--the plans will pay out an "interim COLA" every five years, calculated using a formula that is capped at 4% and applied only to the retiree's first $25,000 of pension income. Even after the plans return to the 80% funded level, annual COLAs will be calculated using the same formula and capped at 4% annually; unless the state's five-year smoothed investment return exceeds 5.5%, no COLA will be paid at all. (31)

         The practical consequence of these changes is that current retirees will likely see their annual pension COLAs suspended indefinitely, with only much-reduced interim COLAs to stave off the effects of inflation. COLAs are one of the most...