In an attempt to find savings in what’s become a challenging budget year, the state is offering about 1,000 public employees early-retirement buyouts.
The offer could save the state $6.5 million in the current fiscal year, and $12.3 million in fiscal 2019. But it also adds an estimated $16 million to the unfunded liabilities of the state-employee pension system, according to the state budget office.
To ensure the sudden influx of new retirees doesn’t negatively impact the state’s ability to pay down long-term liabilities, state officials estimate the annual payment to fund the pension system could increase $2.1 million for the next 10 years.
Gov. Gina M. Raimondo’s decision to offer the buyouts evoked sharp criticism from her predecessor, former Gov. Lincoln D. Chafee, who is considering a gubernatorial run against Raimondo.
Chafee wrote in an emailed statement to reporters that he’s concerned the cost shift could jeopardize a legal agreement between the state and its workers dating back to a law passed in 2011.
The agreement, among other things, stipulates the pension system be 80 percent funded – a measure of assets to liabilities – by 2030-31, marking when retirees would start receiving annual increases to benefits dubbed “cost-of-living adjustments,” or COLAs.
‘I am concerned the voluntary-retirement initiative will … further [delay] the COLAs.’
LINCOLN D. CHAFEE, former R.I. governor
“I am concerned the voluntary-retirement initiative will adversely [affect] reaching the 80 percent goal and thus further delaying the COLAs,” Chafee wrote.
The state pension system, known formally as the Employees’ Retirement System of Rhode Island, or ERSRI, comprises six defined-benefit plans and one defined-contribution plan. It serves about 79,664 retired and active state employees, teachers, municipal employees, judges and public-safety officials.
To fund the plan, with assets totaling upward of $8 billion, requires a yearly cash influx from taxpayers, employees and investment gains, which is offset by benefits paid to retirees.
In 2011, then-state Treasurer Raimondo and -Gov. Chafee together championed ameliorating legislation, called the 2011 Retirement Security Act, to reform the state pension system. At the time, the pot of money used to pay retiree benefits was habitually underfunded and heading for insolvency.
The law – which was challenged and eventually settled in court – froze all annual COLAs, stipulating the increases would restart once the plan reached 80 percent funded.
As of June 2016, the last time the system was audited, the funded level for state employees and teachers, representing the system’s two largest plans, totaled 56 percent and 58.3 percent, respectively. According to actuarial tables, the plans are projected to reach 80 percent funded by 2030-31.
“I urge Gov. Raimondo to ascertain whether her early-retirement plan jeopardizes the timely return of our retirees’ COLAs,” Chafee said, adding that the court settlement spells out penalties in the event the agreement is broken.
A spokesman for Raimondo said the governor does not share Chafee’s concerns because the state retirement board would make sure it doesn’t happen.
“Treasurer [Seth] Magaziner has a plan to amortize any additional cost from the retirement incentive so the COLA return date will not be impacted,” said spokesman David Ortiz.
The R.I. Department of Administration – responsible for offering the buyouts – estimates the savings could total $6.5 million in the current fiscal year and increase to $12.3 million during the next. The $2.1 million cost incurred on the pension system would begin in fiscal 2019 and must be approved by the state Retirement Board.
General Treasurer Seth Magaziner oversees the state pension system and chairs the state Retirement Board. Following Chafee’s comments, Magaziner quickly pointed out that his office had “no role in the decision to offer a voluntary retirement incentive.”
But he’s looking at the issue.
“The [Retirement] Board has the ability to … spread the impact of the incentive over a shorter period,” said Evan England, a spokesman for Magaziner. “The treasurer will ask board members to take that action.”
It’s also worth noting the $2.1 million increase is a rough estimate, as a true number requires actuaries to recalculate new totals in relation to a series of assumptions, including investment performance, inflation and life expectancy. That amount has not yet been calculated.
The buyouts, which among other things offer eligible employees up to $40,000 to retire, are accessible based on longevity. Eligible employees have until the first few months of 2018 to decide, depending on how long they’ve worked for the state.
The treasurer’s office is bracing for an influx.
“[Members] should be prepared to experience delays … in coming months as the voluntary retirement incentive is expected to generate a high volume of inquiries and applications in a short period of time,” according to the office.