The full House is scheduled to convene on Thursday, November 17, at 2 p.m. and the full Senate at 4 p.m. to consider the revised legislation.
A House and Senate Fiscal presentation describing the revised bill can be viewed below.
Governor Lincoln D. Chafee and General Treasurer Gina M. Raimondo both addressed the General Assembly on the legislation. Click here to read Governor Chafee's remarks, and click here to read Treasurer Raimondo's.
Redesigning the state pension system is in the interest of every Rhode Islander and is critical to moving toward a thriving economy. The Rhode Island Retirement Security Act of 2011 (RIRSA) is the culmination of months of thoughtful, fact-based analysis focused on creating a healthy pension system that is affordable, sustainable and secure for retirees, employees and taxpayers. The RIRSA design has been rigorously stress-tested through actuarial and legal analyses, and has been discussed with a wide range of stakeholders across the state.
RIRSA is designed to provide a secure retirement for all 66,000 members of our state retirement system. The legislation is comprehensive—addressing regular and disability benefits, and many loopholes—and modernizes the state-administered pension system. It is designed to provide a similar level of retirement benefits as the current system, within a structure that shares the market risk more evenly between taxpayer and employee.
RIRSA ensures that the pension system is well-funded, and that the new design encompasses safeguards that will prevent the annual pension line item in the state budget from spiking to unaffordable levels in the future. It shifts the current cost burdens, which are now most heavily concentrated on the backs of taxpayers and younger employees, across all stakeholders. It will stabilize the state-administered pension system once and for all, and with its self-correcting mechanisms, will avoid the need for subsequent reforms.
Without immediate reforms, impacts on the state’s finances include:
Doubling of taxpayer costs next year to over $600 million next year and more than $1 billion in just over 10 years – with much of this increase passed onto municipalities, which pay for 60 percent of teacher pensions
Significant increases in both state taxes and local property taxes, coupled with painful budget cuts
Increased risk that the pension fund will run out of money before many current employees reach retirement
A downgrading of state and municipal bond ratings, causing the cost of borrowing for infrastructure projects to rise
Passage of RIRSA will:
Immediately reduce the unfunded liability of Rhode Island’s pension system by more than $3 billion and increase the funding status to over 60 percent
Maintain the current levels of taxpayer contributions to the pension system for the next year (approximately $300 million)
Save taxpayers at least $3 billion over the next decade
Save municipalities approximately $100 million in the next year alone through decreased contributions to the teacher pension and the MERS pension systems and at least $1 billion over the next decade
Lower the cost of borrowing (with stronger bond ratings) enabling the state to invest in other key initiatives.
Components of RIRSA Benefit Design
Creation of a defined benefit and defined contribution plan
Moving to a combined defined benefit and defined contribution plan spreads the market risk of the system across both taxpayers and employees. Going forward, employees and teachers will pay a smaller amount of their paychecks into the defined benefit system, and will also contribute into their own retirement accounts.
Under RIRSA, state employees and teachers will contribute 8.75 percent out of each pay check toward their retirement (note, that today state employees contribute 8.75 percent and teachers contribute 9.5 percent, so this represents a decrease of 0.75 percent for teachers from what they currently contribute today).
Under RIRSA, state employees and teachers will contribute 3.75 percent of pay toward a pension, for which vesting requirements have been reduced from 10 years to five years of contributing service. They will also contribute five percent of pay into their own retirement account and the state will contribute an additional one percent to this account. This structure creates a portable benefit, which employees can take with them, regardless of where they work. Combining these two structures ensures that employees could receive more than 70 percent of their final average pay in retirement - a similar benefit level to what they receive in the current system.
For most employees, the new retirement age will match their Social Security age. However, provisions are included to accommodate those close to retirement, as well as those eligible to retire. For those already eligible to retire, their retirement age remains the same. For those 52 years old and vested who can now retire prior to age 62, the new retirement age is 62.
The COLA is one of the most expensive aspects of the current pension system (continuing to pay a COLA without enough investment earnings will eventually deplete the pension fund). RIRSA suspends the COLA until the system is healthy and at actuarially acceptable funding levels. This is a system-wide suspension, impacting all state employees, teachers, judges, municipal employees and public safety employees, including the state police. Once the system reaches healthy funding levels, a reduced COLA, tied to investment performance, will automatically return.
Protecting Pension Benefits
RIRSA includes a new set of provisions that adds protections for employee pensions, similar to the federal Pension Protection Act. The legislation also clarifies that pension assets can only be used for the exclusive benefit of members. RIRSA creates Retirement Board fiduciary standards similar to those imposed under ERISA including continuing education requirements. Also, if the Board makes a decision contrary to the advice of the plan’s actuary, the Governor and General Assembly are notified.
RIRSA includes re-amortization as a tool to smooth taxpayer payments, avoiding uneven tax spikes in certain future years. The legislation increases the current amortization schedule by just six years, from 19 to 25 years. The state’s actuary has endorsed the use of re-amortization in this instance, as it is coupled with fundamental benefit reform, and a significant decrease in the state’s unfunded liability.
Independent Municipal Plans
Independent municipal plans are pension plans outside of the state-administered pension system. RIRSA sets a path for cities and towns to tackle these faltering plans. While there are significant legal and financial challenges associated with each individual plan, RIRSA provides a set of tools to guide municipalities. Since there is no one-size fits all solution the state must be thoughtful in its approach and work closely with cities and towns.
Joint Session of the House and Senate
October 18, 2011
Today I join with General Treasurer Raimondo to present our proposal for comprehensive pension reform in Rhode Island.
I’d like to thank Speaker Fox and Senate President Paiva Weed for convening this session, and for their leadership and their desire to take on this important issue.
I also applaud the General Treasurer and members of the Pension Advisory Group for their tireless efforts to raise public awareness about Rhode Island’s pension crisis.
This august body before me solved the credit union crisis. You solved the workers’ compensation crisis. And I am confident that this body is up to the challenge of solving today’s pension crisis.
We all want economic prosperity for Rhode Island. However, our $7 billion unfunded pension liability hangs like a cloud over the state – causing uncertainty for economic development, threatening to crowd out state spending on other important government initiatives, and pushing many of our cities and towns to the brink of insolvency.
Rhode Island’s fiscal situation is part of a larger global and national economic crisis. The prolonged recession and the losses of the stock market have put an extreme burden on our state pension fund. Changes must be instituted. If we fail to act, the state will have to pay an additional $100 million next year in new pension contributions.
• $100 million that could be going toward educating our young people.
• $100 million that could be used to fix our roads and bridges.
• $100 million less in taxes for Rhode Islanders.
But this is about more than just dollars. It’s about people.
I recently met with a woman from Warwick whose son, John, is significantly impaired by autism. His behavioral problems have been challenging for her and her family. After years of searching to find the proper environment for John, where he could be safe and receive help, they were successful. She and her husband visit him daily in a group home, where he receives support and works to achieve a level of independence. But she came to my office recently to tell me that any further reductions in state programs that provide help to John and children like him might force her to institutionalize him.
Think about the recent demonstrations here at the State House – thousands of people circling this magnificent building – by those who have been devastated by developmental disability cuts. Some of them are even here with us tonight. If we do not act, if we do not address the pension crisis, we will all be affected. But none more so than John and his family and those Rhode Islanders with similar struggles. A civil society should care for those with the greatest need.
The plan that the Treasurer and I present today is a comprehensive, long-term approach to Rhode Island’s pension challenges. The fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer.
Let me make this point very clear: our proposal asks each of the three main interested parties to do their share to comprehensively address this problem. Everyone must share in the sacrifice.
To preserve retirement security for those not yet retired, we are asking current retirees to suspend cost of living increases until our pension system is returned to better financial health.
Current employees will retain whatever accrued benefits they have earned, but will move into a hybrid system with a defined contribution component, similar to what the federal government has had since 1983. I have long advocated for a hybrid plan that will help minimize taxpayer risk and will allow employees some flexibility in how they would like their contributions invested. I have strongly urged the adoption of a hybrid retirement system, and even campaigned on it, because I had this benefit as a U.S. Senator and Federal employee.
Finally, all Rhode Islanders will continue to play an important role – but not through new taxes: rather, through a financing plan known as reamortization to repay our existing liabilities over a longer period of time.
Our proposal, which General Treasurer Raimondo will explain in greater detail in a few minutes, spreads the needed reform over all affected populations without asking one single group to shoulder the entire burden.
I have here with me a Providence Journal article from May 30, 2005, in which Scott Mayerowitz, citing growing momentum among state leaders, wrote: “This appears to be the year for pension reform.” Again, May 30, 2005 – 6.5 years ago.
The largest threat to having this story repeat itself would be our failure to comprehensively address pension reform. We all know that there are dangerously underfunded municipal pension plans. As Governor of this great state and captain of the ship, I clearly see these icebergs ahead. If you have any doubts, please read Auditor General Dennis Hoyle’s September 2011 report on municipal pensions. This study is a thorough and very sobering analysis detailing our deeply troubled independent municipal pension funds.
Honest, comprehensive reform means a top-to-bottom effort that doesn’t simply ignore these local plans because they aren’t operated by the state. We can’t have true pension reform if our cities and towns are neglected.
The Auditor General recently determined that 24 of Rhode Island’s independent municipal pension plans are in grave danger because of inadequate funding levels.
These include Coventry Police at 16.5%, Cranston Police & Fire at 15.8%, and Smithfield Police at 11.4%. And it is important to bear in mind that these estimates are based on overly optimistic figures for rate of return and mortality expectations, so in reality some are even less adequately funded.
I believe that these debts represent the most alarming aspect of Rhode Island’s pension crisis, with many of the municipal plans in far worse shape than the state system. To ignore the pension crisis gripping our cities and towns would be dishonest and closing our eyes to reality. Failure to address these problems now threatens to leave the local property taxpayer bearing all the burden down the road.
We in this room have three choices when it comes to these crumbling plans:
• We can do nothing at all, and wait for the painful situation we have experienced with Central Falls to replicate itself in communities across the state.
• We can pass legislation that doesn’t touch the local plans, and return here soon to take up this issue again.
• Or we can address them now in a comprehensive pension reform package that ensures financial stability for our municipalities and the citizens of our state.
If you think Central Falls is an isolated case that couldn’t happen again, reconsider. A startling number of our municipalities have had unfunded pension obligations essentially on par with Central Falls. In fact, while I don’t want to sound alarmist, other Rhode Island communities currently qualify for state intervention under the municipal receivership statute passed in these chambers.
Allow me to repeat that: other Rhode Island communities currently qualify for state intervention.
I know that you don’t want to hear these words, just as I don’t want to be uttering them. But I also don’t want to have to appoint receivers to take over these cities and towns, receivers who will have no choice but to impose drastic cuts, such as those Judge Flanders has imposed in Central Falls.
By taking decisive steps now, we can avoid future disasters for other municipalities and their retirees. After consulting with mayors and town administrators from across the state, as well as municipal employee and public safety unions, our reform plan proposes an independent review of all municipal pension plans to accurately determine the scope of the existing liabilities.
We must then focus our efforts on the plans funded below 60% -- 5% lower than what is considered “critical” by the Federal government’s Pension Protection Act. Of the 24 locally administered plans considered at risk by the Auditor General, there are 20 below this level of 60%, a number that could grow with more accurate figures.
The plan that the General Treasurer and I present to you tonight respects collective bargaining by giving retirees, union representatives, and municipalities the chance to collectively negotiate their own remediation plan. If this fails, however, the state may withhold aid from those municipalities that do not make sufficient pension contributions. Further, plans at less than 60% would experience a freeze in retiree COLAs until they reach solvency.
This is the same approach we are using with the state system and it ensures that communities move expeditiously to shore up their endangered funds. City and town administrators and councils can then continue to collaborate with municipal union leaders and retirees to develop a plan to improve the system’s funding levels.
I know that in recent years cities and towns have had to grapple with dramatic reductions in state aid, a factor that has exacerbated many of these underlying fiscal issues. But I come from the local level, as a former City Council member and Mayor, and I want to be there to protect the property taxpayer and to help our communities succeed. Even in this past historically difficult budget year, I proposed $17 million in new funding to address the municipal pension crisis, and in the coming years I am committed to continuing that trend of support for our cities and towns.
Members of the House and Senate: many of you know first-hand that that the steps we’re proposing today are not easy. You have been through pension reform before. You have been here in 2005. You have been here in 2009.
Changes to the pension plans are always tumultuous. None of us want to be back here doing this again.
Those of you who were here during those years know the difficulties of what we’re putting before you. You know the pitfalls and the political ramifications. You know the inevitable opposition.
But leadership requires being honest about the challenges we face. Leadership calls for all of us to have the courage to take on not only those issues that are easily resolved, but those that are complicated and difficult. I believe that if we work together now to pass truly comprehensive reform, we can avoid coming back to take up this issue again and again. But more importantly, we can enact genuine reform that returns our state, cities, and towns to fiscal stability.
Today we are poised to put this era of uncertainty behind us and enter a new period of enduring prosperity. Mark my words: the single most effective way that we can market Rhode Island is to get our fiscal house in order. We must eliminate our structural deficit and comprehensively fix our pension system.
It is to confront challenges such as this that many of us were called to public service – to make the best choices for our constituents, to govern wisely, and to leave a better Rhode Island for our children.
All of us – Republicans, Democrats, and independents – have an opportunity today to ensure a brighter future for our state.
I know that you can get this job done. You have taken on tough challenges before. Not because it was easy or politically convenient, but because it was the right thing to do for our great state.
And it is for that same reason that I am asking you to join with me and the General Treasurer today, in a spirit of honesty and cooperation, to take decisive action. The General Treasurer and I urge you to adopt comprehensive pension reform.
Good afternoon. Thank you Governor.
Thank you to Speaker Fox and Senate President Paiva Weed. Your leadership on this issue has made today a reality. Your commitment to this process has been unwavering and will result in a stronger Rhode Island.
And thank you all for being here and for your service to the people of our state.
The process bringing us here today has been exhaustive – and sometimes exhausting. Over the past 10 months, we have engaged in a robust public dialogue on the condition of our state-administered pension system, one that has revealed that overhauling this system is in everyone’s best interest.
We have all played a role in charting this new course to our decades old problem. Our statewide debate is rooted in facts not political rhetoric, and has been absent of finger pointing or casting blame. The focus is on finding real solutions to a real fiscal problem. Everyone has participated, state employees, retirees, labor, business, social services, and everyday Rhode Islanders.
I’ve crisscrossed our state listening to you and I’ve been inspired by the number of people who care so deeply about this issue. Everywhere I go, I am stopped by your constituents, families, friends, neighbors, at – the grocery store, church, the soccer field and even the beach – everyone wants to talk pensions. Most say keep up the fight. Some ask how changes will impact them or their loved ones. But everyone pleads for fairness.
Each conversation is different, but one message is clear: The people of Rhode Island are demanding serious action on this issue – the very action that you are now poised to take– for our state, our families and our future.
The legislation we are proposing today represents the culmination of months of listening. Listening to you and learning from your past reform efforts. Listening to labor and business leaders. Listening to retirement and investment experts and, listening to people who make our state what it is, people like…
Larry Fish who runs Pier Cleaners in Wakefield. In the last three years Larry was forced to lay-off seven yearround employees and cut back on seasonal employees, to keep his doors open. Every day he drives down Main Street in Wakefield seeing vacant store fronts. He understands that supporting business development is key to keeping communities vibrant and that is why he so strongly urges pension reform.
There is Cathy Silva of Warwick, a single mother of three children, two with developmental disabilities. Cathy also works in the service provider community. She visited me with her children - because she’s scared that without pension reform she will face more program cuts and she knows first-hand how painful those cuts will be for her family and other families like hers.
There is John Ward, the Woonsocket City Council President, who has told me about the fiscal challenges his city faces and the tough choices they are forced to make like a surcharge on garbage collection, eliminating all day kindergarten and turning off every other street light. Without pension reform John knows he faces more tough choices like municipal layoffs and further cuts.
There is Brian McDonald, a young educator and father in North Kingstown. He talked to me about the inequity of our current pension system for younger employees. Brian knows that the majority of his weekly pension payments go to pay for the benefits of current retirees and he worries that the pension will run out of money by the time he reaches retirement, and he’ll be left with nothing.
I’ve also heard from countless retirees, like Jim Baker, a proud veteran of WW2 and the Korean War. Jim worked 40 years for the state and told me that giving up his COLA would be doing his part in order to get our great state back in financial order.
When we began, most thought meaningful pension reform was out of reach. The problem was too complex and the politics too challenging. But strong leadership, and the public will to build a stronger Rhode Island has prevailed, and now you are poised to enact comprehensive pension reform that fixes our problem and balances the interests of all these Rhode Islanders.
The legislation we propose today will strengthen and modernize the retirement system to ensure that retirement benefits earned are there for our hard working employees. It will create a system that is affordable, sustainable and secure for retirees, employees and taxpayers.
As you know, the state’s pension system is approximately 48 percent funded and has an unfunded liability of over $7B. Without reform, the taxpayer contribution into the pension system is projected to double to over $600M next year and to $1 billion in just over 10 years – much of this burden is passed onto municipalities.
The current underfunded system places the burden most heavily on the taxpayers and younger employees.
The consequences of not passing this bold reform affect all of us, there will be significant tax increases, painful budget cuts, and a pension fund that could run out of money before many of today’s employees reach retirement.
Our proposed legislation makes system viable because it will
• Reduce Rhode Island’s unfunded liability by over $3 billion and increase the funding status to over 60 percent immediately.
• It will save the taxpayer at least $3 billion over the next 10 years, and creates a predictable budget line item for the pension that doesn’t ever spike to unaffordable levels in the future.
• It will save municipalities approximately $100 million next fiscal year and at least $1 billion in 10 years on the account of reduced contributions into the teachers and municipal systems.
This legislation was carefully crafted to spread change across all stakeholders. No one group bears a disproportionate burden and all public employees will be impacted, no groups have been left out.
• It is designed to be fair to retirees and those with the longest service because it protects earned benefits and does not increase the retirement age for those already eligible to leave their jobs.
• It is fair to active employees because it creates a secure and sustainable retirement system and will provide them with a similar benefit level as now, but gives them more control.
• Is fair to taxpayers because it holds steady the current costs of the pension system and won’t require tax increases or service cuts in order to fund the pension.
There are four aspects of this legislation that represent a fundamental shift in the retirement system’s design:
• First, moving to a combined defined benefit and defined contribution plan spreads the market risk of the system across both taxpayers and employees. Going forward, employees and teachers will pay a smaller amount of their paycheck into the defined benefit system, and will also contribute into their own individual retirement accounts.
• Second, increasing the retirement age. For most employees, the new retirement age will match the age they are eligible for Social Security. But provisions have been included to safeguard those now closest to retirement and eligible to retire.
• Third, suspending the cost-of-living adjustment until the system is healthy. It is one of the most expensive aspects of the system. The COLA will automatically return when the plan is at a healthy funding level and will be tied to investment returns, this reform ensures that we never again pay a COLA we cannot afford.
• Fourth, adding a new set of provisions that adds protections for employee pensions, similar to the federal Pension Protection Act and clarifies that pension assets can only be used for the exclusive benefit of members. The provisions in this section are designed to remove future pension decisions from the political process going forward. It is designed to remove from the political process as much as possible going forward.
Our legislation also provides a set of tools and a path to guide municipalities who are faced with faltering independent plans outside of the state system. There are significant legal and financial challenges associated with each individual plan and there is no one-size fits all solution and it would be a mistake to mandate one. This bill sets out a clear path with strict guidelines to ensure that our independent municipal plans take immediate action to put these plans on a road to solvency.
We are all disappointed to be faced with this massive problem that was created long ago. But it is our obligation to act today. It is our responsibility to commit to a reform that fixes this problem once and for all.
This is a historic opportunity for our state. Failing to act is not an option. But action will take courage, and require us to put solutions ahead of politics and put the longer term view ahead of shortcuts.
State employees and taxpayers alike, no matter where we stand on this issue, we stand together in envisioning a future with well-funded, flourishing public schools and colleges.
A future with a secure retirement system structured to attract the best and brightest to serve in our government.
And a future where businesses can thrive and create new jobs because we have competitive and predictable tax rates.
None of this vision is possible without fundamentally restructuring our public retirement systems.
Passing this legislation will send a signal to the rest of the nation that Rhode Island is a state to follow.
Your work here will become a beacon for others to learn from.
Recently, a veteran State House employee approached a member of my staff with a note for me. The message was clear, it read: “The road to convenience leads to collapse, but the road to sacrifice leads to greatness.”
It is time for each of us to strive for greatness – we owe it to that state employee, to Larry, Cathy, John, Brian, and Jim, to our children and grandchildren and the future of our state. This is your moment to put Rhode Island on a secure and prosperous path.