Pension Reform Breakdown: Plan Kills COLAs For 19 Years

Pension Reform Breakdown: Plan Kills COLAs For 19 Years

The majority of cost-of-living adjustments (COLAs) would likely be suspended for 19 years and state employees will be forced to enter into a hybrid plan if the pension reform plan proposed by General Treasurer Gina Raimondo and Governor Chafee passes during the General Assembly’s special session.

The plan will reduce the state’s unfunded pension liability by more than $3 billion right away and would put the pension system on track to being almost fully funded by 2042. Raimondo said the plan would also keep taxpayer contributions to the system at the same level for next year (almost $300 million) and save taxpayers nearly $3 billion over the next decade.

If the legislation passes in its current form, most COLAs would be frozen until the pension system was funded at 80 percent. The only exception would be for individuals making less than $20,000 in their pension. In that case, COLAs would be suspended until the system reaches 70 percent.

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Other Key Factors

Under the Rhode Island Retirement Security Act of 2011, state employees and teachers will contribute 8.75 percent out of each pay check toward their retirement, a .75 decrease in what teachers currently pay. The two groups will contribute 3.75 percent of pay toward a pension, for which vesting requirements have been reduced from 10 years to five years of contributing service.

State employees and teachers will also contribute five percent of pay into their own retirement account and the state will contribute an additional one percent to the account.

The plan also increases the current amortization schedule by six years, from 19 to 25 years. According to Raimondo, the state’s actuary has endorsed the use of re-amortization in this instance, as it is coupled with fundamental benefit reform, and a significant decrease in the state’s unfunded liability.

The one tie up is still over municipal pension reform, which will ask cities and towns to design plans to alter their local independent pension systems, but only at the end of current collective bargaining agreements. Because the plans are so different, communities will be asked to propose separate plans for reform. If they fail to do so, the legislation allows for the state to cut municipal aid and intervene.

Legislation Makes System Viable

Raimondo said the proposal will save money and create a more sustainable system.

“The state’s pension system is approximately 48 percent funded and has an unfunded liability of over $7 billion,” she said. “Without reform, the taxpayer contribution into the pension system is projected to double to over $600M next year and to $1 billion in just over 10 years – much of this burden is passed onto municipalities.”

Raimondo said the plan is a step in the right direction for three reasons:

“Our proposed legislation makes the system viable because it will 1) reduce Rhode Island’s unfunded liability by over $3 billion and increase the funding status to over 60 percent immediately; 2) it will save the taxpayer at least $3 billion over the next 10 years, and creates a predictable budget line item for the pension that doesn’t ever spike to unaffordable levels in the future; 3) it will save municipalities approximately $100 million next fiscal year and at least $1 billion in 10 years on the account of reduced contributions into the teachers and municipal systems.

Avedisian Supports Plan

During his speech to the General Assembly Tuesday night, Chafee stressed the need to fix local pension plans, something he has pushed for in recent weeks.

“If you think Central Falls is an isolated case that couldn’t happen again, reconsider,” he said. “A startling number of our municipalities have had unfunded pension obligations essentially on par with Central Falls. In fact, while I don’t want to sound alarmist, other Rhode Island communities currently qualify for state intervention under the municipal receivership statute passed in these chambers.”

Warwick Mayor Scott Avedisian, who raised concerns regarding the local plans, said implementing reform is an important step for the entire state.

“The pension reform that is being proposed will significantly reduce the financial burden on the state’s pension systems and will be a huge improvement from where we are now,” he said. “If the General Assembly approves these measures, it will help to alleviate the increasing pension burdens on our cities and towns – Warwick alone is facing more than $6 million in teacher pension contributions next fiscal year. Implementing meaningful and permanent state pension reform is an important step in our collective efforts to ensure that systems are sustainable for taxpayers and beneficiaries alike, and will help municipalities as they move forward to improve pensions in their own communities.”

Business Community Reactions

Members of the business community agreed with Avedisian. Paul J. Choquette, Jr., Vice Chairman of Gilbane, Inc. praised the plan.

“The time to enact pension reform is now,” he said. 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. I applaud the General Treasurer and Governor for arriving at a solution that will put Rhode Island on the path to security.”

EngageRI, the pension reform group comprised of various business and community leaders across the state, also released a statement of support for the proposal.

“We are thrilled to be here to witness the beginning of the next chapter in Rhode Island history,” said Ed Cooney, Senior Vice President, Nortek and Co-Chairperson of EngageRI. “We fully support the principles upon which this bill was built and look forward to ensuring that the voices of all Rhode Islanders are heard during the legislative process. We want to commend Governor Chafee, Senate President Paiva Weed and Speaker Fox for their commitment to this critical issue. And of course we must recognize the leadership and determination shown by State Treasurer Gina Raimondo for creating the path to reform.”

Laurie White, President of the Greater Providence Chamber of Commerce, said the pension system needs a solution that will allow taxpayer money to go toward other areas. She called reform a “critical issue.”

“Substantive pension reform is among the most critical issues our state has faced in decades. The current taxpayer contribution of $300 million cannot move any higher. Taxpayer funded resources must be invested in higher education, infrastructure, and research and development - the building blocks of economic growth. A solution is needed now to avert sales tax, property tax, personal income tax, tangibles tax, corporate tax and death tax hikes.”

 

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