Pension Reform Case Study: Rhode Island

In 2011, the Rhode Island General Assembly passed a major pension-reform bill that suspended cost-of-living-adjustments for retirees, increased the retirement age and introduced a hybrid defined-benefit/defined-contribution funding system.

Rhode Island has a history of underfunding its pension system. As early as 1993, the net present value of the State Employees’ pension fund represented only about 72 percent of the expected liabilities. The Teachers’ fund was in worse shape. Although funding levels improved through the 1990s, they rapidly deteriorated after 2000.

Some modest attempts were made by the General Assembly to improve the situation in the mid-2000s, such as raising state employees’ minimum retirement age. While these changes slowed the decline of Rhode Island’s pension fund stability, they did not adequately address the unfunded liabilities already built into the system.

In 2011, State Treasurer Gina Raimondo commissioned an independent actuarial assessment of the pension system because of the threat it posed to the state’s finances. This assessment showed an unfunded pension liability of $6.8 billion, implying that the system was less than 50 percent funded relative to its obligations.

Rhode Island Governor Lincoln Chafee and Treasurer Raimondo worked with leaders in the state legislature to highlight the problem and make the case for reform. They also engaged the state’s various communities and key stakeholders before making detailed proposed reforms. The subsequent Rhode Island Retirement Security Act of 2011 (RIRSA) combined conventional methods for adjusting labor contracts with some innovative approaches.

While Rhode Island still faces challenges in the wake of its historic reform effort, the reform effort offers lessons for other states and municipalities facing significant unfunded pension liabilities:

• Policymakers must be determined to drive reform. Attempts at pension reform in Rhode Island did not start with Treasurer Raimondo, but she was the driving force in the development and implementation of the most sweeping change, the RIRSA. Starting with her campaign for the Treasurer’s office, she was a critical voice in educating the public about the need for pension reform.
• Policymakers must realistically assess liabilities. The case for pension reform in Rhode Island was grounded on a realistic assessment of the Employees’ Retirement System of Rhode Island’s unfunded liabilities and a culture of underfunding the pension system. Pension funds must not try to hide their liabilities behind actuarial assumptions that do not align with real performance.
• Coalitions can reduce the complexity of legislative debate. The coalition approach of Gov. Chafee, Treasurer Raimondo, House Speaker Gordon D. Fox and Senate President M. Teresa Paiva Weed ensured that a procedural fight would not hamstring the legislative process of reform. Clear communication over the elements of reform also helped the legislative process avoid a major delay.
• Educating the public matters. In a state with strong support for public-sector unions, the Pension Advisory Group’s approach to holding informational town halls all over the state to hear concerns, answer questions and gather information was helpful in educating the public about the need for and benefits of pension reform.
• There are many roads to $0 unfunded liability. Given the numerous people who have been promised pensions with defined benefits, it would have been enormously challenging to shift everyone immediately to a defined-contribution system. State leaders identified a compromise that allows pension members to retain a significant portion of their promised benefits while also reducing long-term liabilities. The new hybrid system combines a much more limited defined-benefit plan with a defined-contribution plan.
• Pension reform is more than defined-benefit reform: Rhode Island wisely adjusted not only its defined-benefit structure to reduce contribution costs, but also the benefit levels by freezing cost-of-living adjustments in the face of high unfunded liabilities and by raising the retirement age to reduce long-term costs.

It remains to be seen whether the reform effort will achieve the savings projected under the RIRSA plan. But Rhode Island appears to have made significant strides in pension reform as long as its future leaders do not return to past practices, and its experience offers an example for other states and municipalities to learn from.

Attachments

• Pension Reform Case Study: Rhode Island