Fixing Rhode Island’s broken pension system became a personal issue to Nortek Inc. Senior Vice President and Treasurer Edward J. Cooney earlier this year when, facing the soaring cost of obligations to its retirees, the state cut funding for services for people with disabilities.
“I have a special-needs son and I saw the cuts in services to the developmentally disabled community,” Cooney said. “I said it was time to do something about it, to be a voice to help solve the challenges.”
So Cooney helped form an alliance of business and social-service organizations, now called Engage Rhode Island, pushing for a complete overhaul of the state pension system. While not every executive has personal ties to the reform effort, many have joined the push to repair the pension system, making the business community one of the strongest and most important allies of state officials trying to pass a comprehensive pension reform bill this fall.
“The business community has been very supportive, but now is when we really need them to show up,” said Treasurer Gina Raimondo, the primary architect of the overhaul lawmakers are expected to begin debating this week.
The central elements of the bill introduced on behalf of Raimondo and Gov. Lincoln D. Chafee last week freeze the growth of retirement benefits over time while shifting much of the risk in funding the plans from the government to employees through a hybrid defined-benefit and defined-contribution plan.
Of the 14 people whose support for the proposed legislation was cited by Raimondo in a memo introducing the bill, eight were in some way connected with the business community.
“This is a well-thought-out plan which will protect taxpayers, provide for employees, and most importantly allow companies like Gilbane to grow and prosper without the threat of increased taxes, service cuts or a depleted infrastructure,” said Paul Choquette Jr., vice president of the Gilbane Building Co. in the memo.
For many Rhode Island businesses, the scariest part of the pension crisis is the uncertainty it could bring to the state economy if not addressed.
“Pension reform means that the state where we conduct our business will be more stable,” Cooney said. “The current situation puts more pressure on employees to carry more of the burden in property taxes and income taxes. It certainly doesn’t bode well for the economic environment and attracting new employers.”
“Predictability is very important and to the extent that the unfunded liability would result in massive tax increases, reform would put that to rest,” White said. “Who wants to invest in a state where something as extreme as that is a real thing.”
According to a Greater Providence Chamber survey, 90 percent of member business are “paying close attention” to the pension debate, White said.
The bill would raise
the retirement age and suspend annual cost-of-living increases until the state’s outstanding pension obligation is 80 percent funded, a period estimated at around 19 years. Those earning less than $20,000 per year would see the cost-of-living increase partially restored at 70 percent.
The bill would also shift more than half of each employee’s pension contribution from the current defined-benefit plan to a 401(k)-style, defined-contribution plan.
To provide immediate relief to taxpayers and their elected leaders, the bill essentially refinances the pension debt and extends payment over 25 years instead of 19. This re-amortization will lower and “smooth out” payments coming in the next few years, but cost more in the long term, supporters said.
In order to encourage cities and towns with failing retirement plans outside the state system to work toward solutions, the bill requires every community with a liability less than 60 percent funded to come up with a plan by April to restore solvency. If they don’t, the state could cut noneducation local aid.
Chafee, who insisted on measures for shoring up the 36 independent municipal pension plans included in the bill, said going forward those provisions may be the most vulnerable part of the overhaul, but also the most important.
“I think the [nonstate] plans are in the most danger,” Chafee said at a Greater Providence Chamber of Commerce forum on pension reform after the bill was introduced. “I think they are a calamity even more likely to happen.”
Organized labor has already come out against suspending cost-of-living increases, raising the retirement age and state interference with the collective-bargaining process for the independent municipal plans.
The Rhode Island AARP has also come out against the bill for placing “too much burden on the backs of current retirees.”
Raimondo has pointed out that the bill would not reduce the size of the checks any current retirees get, only stop the raises currently scheduled for future pension payments.
As supporters and opponents digest the 201-page bill, already some aspects have become more popular than others.
White said fixing the state system should be the first priority and she would be concerned about the bill being derailed by questions over the independent municipal-plan provisions.
“There is no doubt that the other municipal plans have to be addressed, but it is another layer of complexity that does not have to be placed in the state fix,” White said.
Another aspect of the bill that has been popular with business leaders is the relief it is expected to bring in state and local government budgets, which were looking at large tax increases to absorb the increasing costs of the pension liability in the next fiscal year.
According to Raimondo, if no reforms are made to the system this year, the taxpayer share of pension costs for fiscal 2013, which begins next July, would nearly double from the roughly $300 million line item this year.
Thanks to the benefit cuts and re-amortization, if the proposed bill is passed as written the state line item for pension payments for the next fiscal year would be $353 million, Raimondo told reporters before the formal plan unveiling, a slight decrease from the cost this fiscal year.
Avoiding a pension-related tax increase for next year is a key test for many business leaders judging whether the proposed pension reforms are far-reaching enough.
“The $300 million is a high-water mark; we have been clear that we can’t go beyond $300 million,” White said. “The solution cannot result in tax hikes in any fiscal year going forward. It has to be solved through other aspects, through adjustments.” •
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