November 9, 2015

Rhode Island Solves Pension Crisis and Without Raising Taxes

(Photo courtesy AFSCME)
Rhode Island dealt with its pension crisis, although
workers and retirees ended up with reduced benefits.
By William S. Bike

THOSE WHO think that Illinois’s public sector pension crisis is too big to solve need only look to another state, Rhode Island, to see that the problem is not intractable—although the solutions have been tough for Rhode Island public workers and retirees to take.

RHODE ISLAND Governor Gina M. Raimando, a Democrat, recently finished a four-year pension overhaul that she started when she was State Treasurer, without raising taxes or issuing pension obligation bonds.

IN 2010, according to the Pew Center on the States, Rhode Island’s public pension plans were only 49% funded and considered the worst in the nation. (Two years later, in 2012, Illinois’ public pensions, in contrast to Rhode Island’s would be only 39% funded.)

ELECTED STATE Treasurer in 2010, Raimando persuaded the legislature to pass reforms that cut some benefits, delayed retirements, suspended cost-of-living increases, and required public workers to trade in part of their traditional defined-benefit pension plans for more risky like 401(k)-like plans.

UNION LEADERS initially fought the changes, but ultimately dropped their opposition after they negotiated more favorable terms with Raimando, who was elected Governor in 2014. The pension reforms also survived lawsuits by workers and retirees.

STILL, MUCH of the medicine was tough to take. Public retirees’ annual increases are gone, and there now is some risk of loss of benefits due to market downturns. To soften the blow, a court settlement gave one-time payments to current retirees who were losing cost of living adjustments.

THOSE ANNUAL cost of living adjustments, which used to be 3% per year, are suspended until the Rhode Island system is at least 80% funded. When COLAs resume, they will apply only to the first $25,000 of a retiree’s pension. Pension credits earned through 2012 remain the same, but those earned in subsequent years are smaller. The retirement age for which Rhode Island retirees earned a full pension used to be 62; now retirement age is pegged to the Social Security retirement age.

RHODE ISLAND pension reform contained many provisions that workers and retirees objected to, but financial experts agree that the system is now on a firm financial footing and no longer is in danger of bankruptcy.

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