State eyes lowering pension fund return rate assumption to 7% from 7.5%

STATE OFFICIALS are lowering the pension funds assumed rate of return to 7 percent from 7.5 percent. / PBN FILE GRAPHIC LISA LAGRECA
STATE OFFICIALS are lowering the pension funds assumed rate of return to 7 percent from 7.5 percent. / PBN FILE GRAPHIC LISA LAGRECA

PROVIDENCE – The R.I. Retirement Board could vote Monday to lower the state pension fund’s assumed rate of return to 7 percent from 7.5 percent, costing state taxpayers an additional $42.2 million in contributions to state employee pensions over the next five years.

The state’s actuary firm, Gabriel Roeder, Smith and Co., is excepted to recommend the state lower its assumed rate of return at the state retirement board meeting on Monday. If approved, the move would follow a trend seen throughout the country, as lackluster returns realized by public funds in recent years have hurt budgets.

The change is the return rate also is expected to add an additional $600 million to the state’s long-term unfunded liabilities.

The state general treasurer, who oversees Rhode Island’s $7.9 billion pension fund, says the upfront costs of lowering the assumed rate of return will total about $42.2 million over the next five years.

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But actuaries tell him the move could end up saving Rhode Island taxpayers $500 million over the next 30 years, as more accurate assumptions will prevent the state from underfunding future benefit costs.

“This is how we avoid going through another pension reform, and it’s the responsible thing to do,” said Evan England, spokesman for General Treasurer Seth Magaziner.

The state last lowered its assumed rate of return from 8.25 percent to its current rate 7.5 percent in 2011, which coincided with then-General Treasurer Gina M. Raimondo-backed state pension reform. Raimondo is now governor of Rhode Island.

State actuaries at the time doubted whether the reduction was enough of a change, and the state retirement board has been considering another reduction since the beginning of the year.

Lowering the assumed rate of return to more accurately align with real numbers is largely viewed as fiscally responsible. But the maneuver is nonetheless controversial.

If the state doesn’t also cut retirement benefits – which Magaziner says it will not – taxpayers pick up the tab from increased costs, and the state’s funded ratio – a measure of assets to cover liabilities – falls.

Indeed, lowering the state’s assumed rate of return by a half a percentage point is excepted to add about $600 million to the state’s long-term unfunded liabilities for state employees and teachers.

The funded ratio currently hovers at 56 percent for state employees and 58.3 percent for teachers, representing the pension system’s two largest plans.

Lowering the assumed rate of return would reduce the funded ratio for state employees to 53.2 percent, and 55.6 percent for teachers, according to state actuaries. At the same time, unfunded liabilities for employees would grow to $2.2 billion from $1.9 billion. For teachers, unfunded liabilities would increase to $3 billion from $2.7 billion.

There will likely be increased costs at the local level, too, as cities and towns also pay a portion of the costs for teachers. Those numbers were not immediately available.

Magaziner says benefits will remain the same, as it would require legislative action to change them. The general treasurer does not believe such cuts are necessary right now.

“Benefits will not be changing. They are not necessary as part of this change, and [Magaziner] would not support them,” England said.

State actuaries are proposing to cut 0.25 percent from the state’s current inflation assumption of 2.75 percent, and another 0.25 percent from its real return assumption.

The recommendations will be made to the state retirement board at 9 a.m. on Monday.

Eli Sherman is a PBN staff writer.

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1 COMMENT

  1. Cut retirement benefits an pensions, starting with people retiring in 5 years receiving the most moderate cuts and those retiring further in the future receiving the most severe cuts to their pensions and benefits.
    This will help ensure that everyone has a fair amount of time to adjust their retirement plans.

    Perhaps also we should see an increase in retirement age for certain departments.