Tiny RI takes on enormous public pension problem

AP News
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Posted: Sep 18, 2011 1:38 PM
Tiny RI takes on enormous public pension problem

Rhode Island is the nation's smallest state. But its pension problem may well be the largest in the land.

The state is on the hook for billions of dollars' worth of pension benefits owed to police officers, firefighters, teachers, judges and state workers. But the money's not there. Projected investment gains never happened. State actuarial projections failed to keep up with public workers who are retiring earlier and living longer.

Estimates put Rhode Island's unfunded liability for public workers' pensions at $7 billion, slightly less than the entire state budget for one year. To make good on promises to public workers, the state must pour more and more into the pension system every year, from $319 million in 2011 to $765 million in 2015 and $1.3 billion in 2028.

Several states including Ohio, Illinois and California face even larger unfunded pension costs, but when Rhode Island's cost is divided among its 1 million residents, it becomes clear that it has one of the weakest pension systems in the nation.

"We kind of go back and forth with Illinois as to who is last," said Treasurer Gina Raimondo, who took office in January and has made the pension problem her top priority. Raimondo and Gov. Lincoln Chafee are working on a pension overhaul bill they hope to submit to lawmakers soon.

The General Assembly plans a special session next month aimed at revamping the retirement system. Public workers will watch closely as lawmakers tinker with retirement benefits that many say they've been counting on for years.

"We have an obligation to defend and protect the benefits our members were promised," said George Nee, president of the Rhode Island AFL-CIO. The union has formed a coalition with other groups that represent public employees to lobby lawmakers during the special session.

Nearly every state has grappled with their own pension predicaments as they face ever more expensive retirement benefits, huge investment losses and recession-induced budget deficits. The Pew Center on the States released a report earlier this year that found states face a collective gap of $1.26 trillion between what they've promised public workers and what they have set aside to meet those promises.

The study found that 40 states have failed to fund their retirement systems at an appropriate level, and concluded that "far too many states are not responsibly managing the bill for their employee's retirement."

States have looked at different ways to rein in pension costs. Lawmakers in 15 states _ including Arizona, Nebraska, Maryland and New Jersey _ voted this year to increase the amount public workers contribute toward their retirement, according to a survey by the National Conference of State Legislatures. Fourteen states voted to raise retirement ages or increase the time an employee must work before being eligible for benefits.

Indiana and Utah now offer 401k-style plans for certain workers alongside old-style pensions.

"States don't have that many choices," said Dean Baker, an economist and co-director of the Center for Economic and Policy Research in Washington. "You have to make the math work. There's no magic formula."

Rhode Island lawmakers _ many of whom were elected with union support _ are keenly aware of the political pressures surrounding the pension debate. They say that while state workers may lose some benefits, they would gain if the pension system is put on a secure footing.

"This is not about us versus them," Raimondo said. "The system we have today isn't secure. It isn't sustainable, and many scenarios show it running out of money."

Here's what's on the table: trim benefits, limit automatic cost-of-living increases, raise retirement ages, require workers to pay more for their own retirement or refinance the state's pension debt to buy time.

Each has a drawback.

Alter benefits too much and some older employees might seek early retirement to keep their existing benefits before the changes take effect, a move which would actually put more of a burden on the pension system. Cuts to benefits would also likely trigger lawsuits from public sector worker unions.

Do too little and lawmakers could be forced to either raise taxes or slash services to find the money to pay pension bills. Raimondo said inaction could also hurt the state's credit rating and make it less attractive for businesses looking to locate or expand in Rhode Island.

Raimondo is looking at proposals to suspend annual cost-of-living increases for retired public workers and to create a hybrid pension system for active workers that would combine a limited pension with a 401k-style account. Employees would keep the pension benefits they've already earned.

Most members of the General Assembly's small Republican minority favor more aggressive cuts to benefits. Sen. Bethany Moura, R-Cumberland, said she favors eliminating automatic cost-of-living increases.

"In the private sector you don't get a raise `just because.' You get a raise because the company is generating the revenue to support it," she said. "Well, the state of Rhode Island is not generating the revenue to support it right now."

Sen. Daniel DaPonte, D-East Providence, favors what he calls a more balanced approach. DaPonte is chairman of the Senate Finance Committee and will play a key role in negotiations over the pension overhaul.

"The goal is to get to a solution that's fair for all," he said. "While everyone may not be thrilled, I'm confident we can get to a solution that's fair, equitable and affordable."