This week on Newsmakers: Former General Treasurer Frank Caprio.
This week on Newsmakers: Former General Treasurer Frank Caprio.
Engage Rhode Island has raised slightly more than $900,000 …
Treasurer Raimondo is defending the state's pension investment …
Union groups led by the Rhode Island State Association of Fire …
A Superior Court judge handling the labor union's legal …
Updated: Friday, 02 Dec 2011, 2:35 PM EST
Published : Monday, 17 Oct 2011, 7:22 PM EDT
PROVIDENCE, R.I. (WPRI) - With Gov. Lincoln Chafee and Treasurer Gina Raimondo promising a "once-and-for-all" solution to Rhode Island's pension problems, WPRI.com reporter Ted Nesi - who's been covering the debate all year - breaks down how we got here and what's at stake. Click the links for more on specific topics.
This is all really confusing. What's the basic explanation of the pension problem?
It's pretty simple, actually. Rhode Island has promised government employees billions of dollars in retirement benefits, but hasn't set aside nearly enough money to pay for them. There is a $7.3 billion shortfall in the state-run system and a $2.1 billion shortfall at the local level – so about $9.4 billion statewide. That's a lot of money for a small state, more than the entire annual state budget.
Yikes. So all of a sudden we need to come up with $9.4 billion?
No, luckily. The state and cities and towns will have to pay that money out over decades. (It includes everybody from 90-something retirees to newly hired workers in their 20s who won't actually start collecting their pension for another 40 years.) We're talking about a long-term liability, sort of like a mortgage – you know you have to pay $300,000 for your house, but you have 30 years to come up with the money.
It sounds like we have a long time to deal with the problem then. Why are Treasurer Raimondo and others making such a big deal out of it?
Accounting rules say governments should save money in advance to fund the pension benefits they owe, so each year taxpayers and workers contribute money to the pension fund. The size of the annual contribution is rising fast, to a level the treasurer says is unaffordable for Rhode Island.
There are only a few ways to reduce the size of the contribution due each year – you can shovel more money into the pension fund; cut benefits to make the long-term shortfall smaller; or stretch out the time frame for closing the shortfall, sort of like refinancing a mortgage.
There are pros and cons to each approach, and that's what everyone is arguing about right now.
But why is it suddenly such a big problem this year? It's not like we just created the pension system.
That's true – the pension system was created way back in 1936 by Gov. T.F. Green (the guy they named the airport after). But though the pension problem itself isn't a new one in 2011, the size of the problem is – because the numbers changed.
Huh? What happened?
When Raimondo took office in January, she said she didn't trust the estimates of the shortfall in the state-run pension system. She ordered fresh studies of the problem. When the number-crunchers reported back in April, they said she was right – retirees are living longer, pensions are costing more and the investment outlook isn’t as rosy as they'd thought. Bottom line: The shortfall exploded from $4.9 billion to $7.3 billion.
That's a lot of money. But nobody in my family is going to get a pension. Why should I care?
Here's the thing - the huge increase in the pension shortfall caused a domino effect.
A much bigger shortfall in the pension fund means taxpayers have to make much bigger contributions each year to close the gap. The money has to come from somewhere - it could be higher taxes or it could be reductions in how much we can spend on other things government does, like libraries, schools and health insurance for the poor. Cranston Mayor Allan Fung has warned particularly loudly that pension costs are going to crowd out a lot of other priorities starting next year if the system isn't changed.
How much money are we talking about?
In 2010, taxpayers put $303 million into the pension fund. The new estimates increased the bill exponentially, to $615 million in 2012 and $1 billion within a decade.
That's a lot of money – the entire state budget is less than $8 billion this year – and coming up with it would require tax increases or deep cuts in other parts of the budget unless other steps are taken to reduce the shortfall.
And that brings us to where we are today – Governor Chafee and Treasurer Raimondo are sending lawmakers a bill that proposes a bunch of steps to reduce the size of the pension shortfall, so that taxpayers won't have to put as much money into the fund each year.
What are they going to suggest?
Now that the bill has been released, we can isolate the four main things they're looking at: (1) COLAs, (2) the retirement age, (3) a hybrid plan and (4) "reamortization."
Let's take them one at a time. What are COLAs?
"COLAs" is short for cost-of-living adjustments. Just like with Social Security, retirees' pension checks increase each year to keep up with the cost of living.
The Raimondo-Chafee bill proposes that retirees get no COLAs for 12 years if their pension is worth $20,000 or less and 19 years if their pension is worth more than $20,000. And when COLAs do come back, they'll be tied to how well the pension fund's investments are performing – you won't get a COLA if the fund had a bad year.
Fifteen years, huh? That seems like a long time.
It is. The possibility of a COLA freeze is really making people who would be affected nervous.
It's also something that would affect people who are already retired, not just people who are still working. That's controversial – changing benefits for people who have already finished working puts the state on shakier legal ground. The unions have already challenged earlier changes to COLAs, and they won the first round in court recently. But state officials say they're going to press forward despite that.
Why would they change retirees' benefits? Can't they just change what current workers or new hires get?
That gets to the heart of the current problem. Since 2005, the General Assembly has actually changed the pension system a lot for people who haven't retired yet - the benefit is less generous. But much of the state's problem is the shortfall left behind from retirees who are already done working and are now collecting a pension.
The vast majority of the deposit Rhode Island taxpayers put into the fund each year now isn't for people who actually work for the government today; it's to help pay for the pensions of people who retired years ago or are far along in their careers. Raimondo often says the problem can't be solved by only targeting recently hired workers and new employees.
OK. How about the retirement age?
Right now, a state worker can get a full pension at age 62 if he or she has worked 29 years ( it used to be less). The treasurer and the governor want to make the retirement age for a full pension the same as under Social Security, which would be 67 for a worker born in 1960 or later.
Workers who are eligible to retire by June 30, 2012, wouldn't have the age changed. Workers near retirement but not eligible by then would get the option of retiring under the old retirement age, with a reduced pension benefit.
And a "hybrid plan"?
It has nothing to do with a Toyota Prius or a Chvey Volt. Government pensions are still the traditional kind – a regular guaranteed check, paid out like a salary, for life. The worker collects the same amount regardless of how well the pension fund's investments did or any other factor. The current rules give a worker up to 75 percent of his average late-career salary.
A hybrid plan would change that. There would still be a guaranteed benefit, but it would be smaller and capped at, say, 40 percent of salary. But workers would also get a new individual investment account, like many private-sector workers now do with their 401k plans. The money in there would boost their retirement income alongside the smaller guaranteed benefit.
What the heck is "reamortization"?
"Reamortization" is actually a pretty simple concept – it's usually compared to refinancing a mortgage. (The cool kids just call it "ream.")
To comply with accounting rules, the state (like most governments) has a 30-year payment schedule in place to close the shortfall in the pension fund – again, like a mortgage. That sets out the amount taxpayers need to deposit annually to close the shortfall. The current schedule's clock started in 1999, and the state has 19 years to go.
"Reamortization" would restart the clock next year on a new 25-year schedule, so the state could spread its payments out over a longer period of time. The downside is, we're taking seven more years to pay off our liability, which is more expensive in the long run. The upside is, we don't have to put as much money in each year.
Basically, reamortization doesn't change the size of the pension fund's shortfall, but it does put less stress on the annual budget.
So if they make those changes, will the pension problem be solved?
Not right away, but it will put us on the right track.
If the bill passes in full, the treasurer's office says the state-run system's shortfall would immediately shrink frorm $7.3 billion to $4.1 billion. That would make the system 62% funded. Then, as the changes phased in and taxpayers continued making their contributions, it would get to be fully funded by the year 2042 - if the state sticks to the plan.
How do retirees and unions feel about all this?
It's safe to say there's a lot of frustration out there. Union leaders acknowledge the pension system has a funding problem, but they see this plan as being much harsher on retirees and workers than it is on taxpayers. It's been suggested that taxes should be raised, particularly on higher-income Rhode Islanders, to make up for more of the shortfall and reduce how much pain retirees feel.
Retirees also say it's not their fault the pension system is in trouble, that they've always made their required contributions and now the state isn't keeping up its end of the bargain. There's some truth to that. The state didn't start putting the full amount of cash needed into the fund until 1986, half a century after it was created – and even after that the General Assembly has often found ways around paying the bill.
Raimondo says she's sympathetic to retirees' concerns, but the money just isn't there. And others have pointed out there were fewer complaints from unions in the 1980s, when lawmakers approved a host of changes – from COLAs to lower retirement ages – that made pensions more lucrative even though they weren't properly funded.
So what happens now?
Raimondo and Chafee presented their proposal to the General Assembly, and now the lawmaking process kicks off.
The House and Senate's finance committees will hold hearings on the bill over two weeks to get testimony from experts and the public. If they vote to send the legislation to their colleagues, the full House and Senate will hold their own debates about the bill and vote on it. That could happen by mid-November, depending on how long the hearings take, and lawmakers can try to amend the bill if they want to change it.
That's also something to keep in the back of your head – Chafee and Raimondo can propose legislation, but members of the General Assembly can change it as much as they want (though Raimondo has warned major changes could mess up their entire plan). So the bill could change significantly once it's in the General Assembly's hands.
If both the House and the Senate pass identical versions of the pension legislation, it will then go to Governor Chafee, who can sign it into law, veto it, or do nothing, which means it would still become law, just without his signature.
So if all goes according to plan and the governor winds up signing a new pension law, will the process be over?
Last time lawmakers made major changes to the pension system – in 2009 and then 2010 – unions took them to court to block the changes, and the unions won the first round in court last month. The outcome of that case – which is now before the Rhode Island Supreme Court – could determine whether lawmakers are allowed to make the sweeping reductions in pension benefits that are expected to pass.
It's possible a new pension law – if one passes – could be challenged in court, too. State officials have said the litigation could drag on for years.
You mentioned at the beginning that $7.3 billion of the pension shortfall is in the state-run system, but there's another $2.1 billion in cities and towns. What's the difference?
The picture gets a little complicated with cities and towns' pensions. Let's take it piece by piece.
The easiest piece is teachers. All public-school teachers in Rhode Island are enrolled in the state-run pension system. The cost of their pensions is split – the school district pays 60% and the state pays 40%. (It used to be 50-50, but the state pushed more of it onto school districts during the banking crisis.) Any version of the Raimondo-Chafee plan will include them.
Then there's the Municipal Employees Retirement System, known as MERS. That system is state-run but not state-funded – cities and towns pay the full cost of pensions for their employees in the system (unlike with teachers) but management of benefits and investments is left to the state.
Most of the pension plans enrolled in MERS are in solid financial shape – much better than the state employees or teachers systems. But not all communities are enrolled in MERS.
Those that aren't in MERS have their own independent plans, which are run by the city or town on its own. (They're sometimes called "non-MERS plans" or "locally run plans.") There are 36 of these independent local plans in Rhode Island, and many of them are in rough financial shape – 24 are classified as being "at risk" of running out of money. (Central Falls' two plans basically ran out of money last month.) That's where the extra $2.1 billion pension shortfall is – in these local plans.
What to do about those 36 locally run/non-MERS plans – and how much authority state lawmakers have over them – emerged as a major sticking point in the last days before the pension bill came out. But the final proposal includes a section that would push communities to deal with the non-MERS plans and punish them if they don't.
(Oh, and then there are also outside pension plans that cities and towns help pay for, like the extra union pension plan Providence contributes to for members of Local 1033 on top of their regular city pension. Don't ask.)
How many people get a pension? How much are they worth?
There are 11,421 retired state employees who collect a pension. Most of them get a basic pension – known as a "service" pension – and the average one is worth $25,887 a year.
There are 10,213 retired teachers who collect a pension. Most of them get a basic pension, and the average one is worth $41,735 a year.
The numbers are murkier for state police and judges, because their pensions weren't made part of the state-run system until 1987 and 1990, respectively. The city and town numbers vary significantly.
Don't forget that pensions are taxed in Rhode Island, unlike in some others states, including Massachusetts.
This is such a mess. Who's fault is it?
One thing you learn when you spend months reporting on the pension crisis – there aren't a lot of heroes in this story.
Politicians made promises without funding them and ignored the problem for years while increasing spending or lowering taxes. Unions signed off on those deals in good times and didn't always push to get money put aside for their members' benefits. And voters didn't pay close attention to the problem when it was growing.
Are other states in trouble? Is Rhode Island alone in this?
Far from it. Illinois is usually held up as the poster child for really poor pension policies. President Obama's home state has kicked the can down the road over and over, borrowing money to fund benefits now and failing to make regular deposits to its fund. New Jersey got in trouble with the SEC for misstating its pension accounting, too.
But not everyone did such a bad job. New York – another liberal Northeast state with a heavy union presence, like Rhode Island – has managed to keep its pension system well-funded over the years.
Unfortunately, it's too late for Rhode Island to follow the Empire State's good example. Still, it's safe to say Rhode Island is at the forefront in taking a comprehensive approach to dealing with a huge pension shortfall, and that's why our efforts are getting a lot of attention nationally.
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