PROVIDENCE – The nonpartisan Rhode Island Public Expenditure Council says the state desperately needs pension reforms such as those proposed by Gov. Donald L. Carcieri in order to control the taxpayers’ rising tab for contributions to the state retirement system.
In an analysis of the state pension system released today, RIPEC also argues that state leaders should consider switching from a defined-benefit pension plan to a defined-contribution system – similar to the 401(k) accounts common in the private sector – that would reduce cost risks for the state.
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“These and other reforms are intended to address how to reduce cost and the unfunded liability and ought to be seriously considered,” RIPEC said in its 29-page report, “Comments on Your Government: Rhode Island’s State Pension System,” one in a series of special publications from the public policy research group. “Without the reforms, state and local governments will not be able to control one of the major budget drivers they face in the coming years.”
Last month, Carcieri proposed doing away with the 3 percent annual cost-of-living adjustment (COLA) that Rhode Island currently guarantees to participants in the state pension system throughout their retirement. He also wants to set a minimum state retirement age of 59. Currently, state employees and public school teachers need only to work at least 28 years; or after reaching 60, they can retire with as little as 10 years on the job.
The Carcieri administration has said those changes and a proposed reduction of state and local contributions to the pension fund in the last five months of the fiscal year would save $96.1 million this year — although some officials doubt those numbers now — and more in future years.
RIPEC appears to agree with the governor’s proposals, noting that the state’s annual contribution to the pension system has continued to rise.
According to the RIPEC, the state’s annual required contribution for pensions was 5.9 percent of general revenue expenditures in fiscal 2007, up from 4.6 percent in fiscal 1997.
Meanwhile, the funding ratio for the Employee’s Retirement System of Rhode Island – the ratio of a pension plan’s assets to its liabilities – has fallen to 57.5 percent, while the funding ratio for the teachers’ portion of the pension fund has fallen to 55.4 percent, RIPEC said. Those numbers are down from 77.5 percent and 74 percent, respectively, in 1996. By comparison, RIPEC said, the aggregate funding ratio of major pension plans nationwide is 86 percent.
The state pension system has an estimated unfunded liability of about $5 billion. General Treasurer Frank T. Caprio – who also serves as chairman of the state retirement system – has said the state contributes about $350 million per year, as part of a plan to fully fund the pension system in about 20 years.
In comparison with other public-employee pension benefits in New England state, RIPEC said in its report, those the Ocean State appear to be “more generous,” in part because of the state’s 3 percent annual COLA increases and its earlier retirement age.
In one of several calculations by an actuarial consultant, RIPEC found that a Rhode Island public school teacher retiring at 55, with 30 years of service and a $70,000 final average salary, would receive an immediate annual benefit of $46,200. Maine would pay the six-state region’s second-highest starting pension under the same parameters, giving such a teacher an initial retirement benefit of $37,275.
The governor’s proposed changes initially were slated to take effect on April 1. But critics have charged that – like the changes in health care coverage for retirees that took effect last fall (READ MORE) – they would create a mass exodus among public employees and teachers already eligible for retirement.
And in its report today, RIPEC warned state leaders that they must consider the impact on employment of any proposed revisions to the state pension system. “Any changes to the pension system should give consideration to the affordability and sustainability of the state’s pension fund and include an evaluation of the overall impact on the state’s pension contribution in out-years,” the public-policy group wrote. “For example, the reduction in work force produces payroll savings to the state. However, when payroll significantly declines, as it has for state employees since June 30, 2007, the scheduled contribution rate does not produce the expected amortization payments. This shortfall in payments must then be funded in the future.”
“In addition, any reform of the pension system should also evaluate the effect on state employees and on the state’s ability to deliver services,” RIPEC added. “The concept of vesting and its impact upon employees of the state as they make employment decisions needs to be carefully considered.”
The Rhode Island Public Expenditure Council is an independent, nonprofit and nonpartisan public policy research and education organization dedicated to the advancement of effective, efficient and equitable government in Rhode Island. For more information, including the latest RIPEC reports, visit www.ripec.com.
