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Updated: Friday, 14 Oct 2011, 1:23 PM EDT
Published : Friday, 07 Oct 2011, 7:29 PM EDT
PROVIDENCE, R.I. (WPRI) - The "starting point" for the forthcoming Raimondo-Chafee pension bill is a proposal floated last month that would freeze COLAs for more than a decade and create a new hybrid plan for all workers in the state-run system, according to a top Treasury official.
The proposal - prepared by a state actuary based on input from the two leaders' pension advisory group - was detailed Friday afternoon by Deputy Treasurer Mark Dingley at a meeting of the state Retirement Board. It would immediately raise the pension system's funding level from 48% to 62%, he said.
Treasurer Gina Raimondo and Gov. Lincoln Chafee are "taking this as a recommendation," Dingley said. "I call it a starting point, and there's a lot of discussion going on now about what the final proposed legislation will be. ... We received a lot of feedback on this."
It's possible the two will unveil their legislation on the same day the full House and Senate reconvene for the bill to be introduced and referred to their respective finance committees, sources said. One target date had been next Thursday, but that appeared less likely by late Friday as talks continued between Raimondo's office, Chafee's and legislative leaders.
Dingley told WPRI.com the details of the legislation are still very fluid, and he cautioned that the actuary's proposal is by no means the same as what they will actually propose.
The dramatic changes it outlined for the state-run system include a temporary suspension of cost-of-living adjustments (COLAs) and a permanent reduction in their generosity, as well as the transition of all workers into a hybrid plan.
"The significant thing we've done is we've shifted the investment risk to the employee," Dingley said. "Defined-benefit plans are a good design if everything works perfectly. Unfortunately, we haven't had a plan where everything worked perfectly."
"The new program, if it works to perfection, the total benefit by the employee would actually be a little bit higher," he added.
No COLA in bad years
Under the actuary's proposal, COLAs would be suspended until the system is 80% funded, which could take 12 to 15 years. "So it is a long period of suspension," Dingley said.
However, not all retirees would lose their COLAs - employees in one of the 110 different state-managed funds for localities wouldn't see theirs suspended if their fund is above 80%. "It's likely that with these changes a good percentage of these would be over 80% funded," Dingley said. But state workers and teachers would face the freeze.
The structure of the COLA would change, as well.
Currently, the COLA increases the first $35,000 of a pension by up to 3% a year, depending on the inflation rate; the new benefit would increase only the first $12,000 of a pension, indexed for inflation - and only in years when the pension fund's investments earn an adequate amount.
The pension fund assumes its investments will grow by an average of 7.5% each year. Under the actuary's proposal, retirees would get a COLA as long as the fund increases by more than 5.5%. So if the fund rises 7.5% they'd get a 2% COLA that year, and if it rises 9.5% they'd get a 4% COLA. But if it rose by 5.5% or less, they wouldn't get any COLA.
"It's a market-based COLA that adjusts depending on plan performance, targeted at our 7.5% plan assumption," Dingley said. The fund's returns would be calculated based on a five-year average.
Under questioning from Louis Prata, a parks worker in Johnston who represents active municipal workers on the Retirement Board, Dingley acknowledged the proposal would suspend COLAs even for those city and town employees who are paying extra into the fund in order to get one.
"That's like going out and buying something, but you can't have the goods," Prata said. "If you paid for this - give us our money back."
"There is pain all around," Dingley replied, adding that state employees and teachers also pay for their COLAs even though it's not broken out separately in their contributions, which are 8.75% of pay for state workers and 9.5% for teachers.
Hybrid plan shifts risk
The actuary's proposal outlines a "three-legged stool" for public retirement in Rhode Island: a smaller defined-benefit pension like retirees currently get; a 401k-style individual account; and Social Security. Dingley said it would replace about 80% of a worker's income before retirement.
A retiree would get a defined benefit equal to 1% of a retiree's final average salary multiplied by each year he worked, meaning an employee with 40 years of service would get a defined-benefit pension equal to 40% of that.
"A longer-term employee has much greater defined-benefit protection" than a shorter-tenrued one under that structure, Dingley said, while the risk to the state is "much smaller."
The employee would also get his own individual retirement account. He would put 6% of his pension contribution into the account, with the remainder going into the pension fund for the defined-benefit portion. (The combination of the two is what makes it a so-called "hybrid plan.")
Teachers and municipal workers who aren't enrolled in Social Security would have a larger contribution made to their individual account, which the Rhode Island League of Cities and Towns' Dan Beardsley pointed out would mean a higher bill for taxpayers in those local governments affected.
The minimum retirement age for state workers, teachers and general municipal employees to get a full pension would be the same as under Social Security, which is age 67 for a worker who is currently 51 years old. The rules for police and fire employees would differ, but they may face the loss of the so-called "20 and out" rule that lets them collect a full pension after 20 years of service at any age.
Rating agencies watching
Dingley said taxpayers would face higher costs under the actuary's proposal, as well, because it would re-amortize the state's roughly $7 billion unfunded pension liability by stretching out the payment schedule, raising the total cost. They would also need to continue making annual contributions to the fund on par with the current level.
"The important parts of this design are, one, it makes the plan secure so that we improve our funding level significantly right out of the box," Dingley said. "It keeps contributions [from taxpayers and workers] generally level with where they are now. And we think, based on the replacement income comparisons that are in this, that employees can still look forward to what's considered by most standards a very generous retirement benefit."
Dingley said the big three credit-rating agencies in New York - Fitch, Moody's and Standard & Poor's - are keeping a close eye on how Rhode Island deals with the pension problem over the next month. A downgrade from one of them could raise the cost of borrowing for the state.
Johnston's Prata said workers and retirees he speaks with are frustrated with the lack of details that are available on exactly what Raimondo and Chafee will propose, let alone what the General Assembly will wind up passing, despite months of discussion about the pension issue.
"The biggest problem right now is people want to see what legislation is out there," Prata said. "That's the main question that I get continuously from people - when are we going to see it?" Dingley said it should be made public within the next two weeks.
Dingley has worked for the Treasury since 2007, when Frank Caprio was treasurer. Asked how the pension overhaul compares with other projects he's worked on, he paused, then said: "We're working very hard."
Tim White contributed to this report.
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