Assembly approves pension reform

Measure to save taxpayers $4 billion over next 24 years

STATE HOUSE – The General Assembly today approved legislation aimed at stabilizing the state’s pension fund to preserve its solvency and protect against enormous increases in taxpayer contribution otherwise expected in the coming years.

The Rhode Island Retirement Security Act passed the House on a vote of 57 to 15 and the Senate with a 35 to 2 vote at a special session called to address the state’s pension crisis. The legislation reduces the state’s unfunded liability of nearly $7.3 billion to $4.3 billion – representing a $3 billion reduction. The act results in improving the funded ratios of the state and teacher pension funds to 60 percent funded, up from 48 percent if no action had been taken. In addition, the legislation reduces total FY 2013 state and local employer contributions from $689 million to $414 million, saving nearly $275 million in FY 2013.

The legislation (
2011-H 6319A as amended, 2011-S 1111 A as amended), was introduced by Speaker of the House Gordon D. Fox and President of the Senate M. Teresa Paiva Weed, and was the subject of more than 29 hours of public testimony during seven joint hearings of the House and Senate finance committees over more than two months, as well as two special sessions of the General Assembly. Drafted in conjunction with General Treasurer Gina M. Raimondo and Gov. Lincoln D. Chafee, the legislation now heads to the governor’s desk. The changes would be effective July 1, 2012.

“The reforms we enacted today simply cannot wait any longer. The unfunded liability of our pension system has spiraled to new depths in recent years, and without these changes, would grow even more dramatically in the very immediate future. These are not simple fixes, they are long-term plans intended to right the ship,” said Speaker Fox. “Addressing this very complex issue involved sacrifice at many levels as well as courage, patience, thoughtfulness and fortitude from our members, the treasurer, the governor, local leaders and those representing the employees this affects, as well as the members of the House and Senate finance committees, who conducted 29 hours of public testimony and made amendments to help craft legislation that is fair, balances the costs and risks between employees and the state and protects the fiscal integrity of the retirement system, the state and municipalities.”

Senate President Paiva Weed said, “Passage of this critical piece of legislation ensures that resources will be available to invest in education, infrastructure and our human services safety net, while protecting the pensions of the future. I believe that we have achieved reforms that are fair to employees, affordable to taxpayers, legally defensible and sustainable over the long-term. I want to thank Chairman Da Ponte and the members of the Senate Finance Committee, who worked tirelessly to develop this legislation, as well as all the members of the Senate and our partners in this process, the House of Representatives, Treasurer Raimondo and Governor Chafee.”

The legislation introduces a hybrid pension structure for all except public safety employees and judges where the intent is to shift risk to the employee through combining the attributes of both the defined benefit and defined contribution plans. Teachers, state employees and the state-administered municipal plans (MERS) would all participate in this new structure.

The act also institutes a proportional retirement eligibility structure for most employees between ages 59 and 67, depending in part on the employee’s current years of service. Those already eligible to retire as of June 30, 2012, would not have their eligibility to do so change. The act ensures that retirees do not lose any COLAs (cost of living adjustments) granted prior to July 1, 2012, but suspends future annual COLAs until the aggregate funded ratio of the Employees’ Retirement System of Rhode Island, the Judicial Retirement Benefits Trust and the State Police Retirement Benefits Trust exceeds 80 percent.

The act establishes a limited, risk-based COLA that is only granted when the pension system is well-funded. The COLA would be equal to the difference between the five-year smoothed investment return and 5.5 percent, calculated to equal no more than 4 percent and not less than zero. The proposed COLA would be applied to the member’s first $25,000 of pension income

An interim COLA would be paid at five year intervals from enactment until the aggregate funded ratio of the Employees’ Retirement System of Rhode Island, the Judicial Retirement Benefits Trust and the State Police Retirement Benefits Trust exceeds 80 percent. In other words, members participating in any of these pension systems would have the COLA return at the same time. The COLA provision was changed from the original proposal given it would have taken 19 years to return.

Said House Finance Committee Chairman Helio Melo, “Addressing the pension liability will do more than stave off an enormous financial burden in the coming years for state and local taxpayers. It will also translate to other savings because it will have a favorable effect on bond ratings as a state and for cities and towns. And, very significantly, it will stabilize and modernize the retirement system so it remains in place for those who will rely on it.”

Senate Finance Committee Chairman Daniel Da Ponte said, “Today’s vote was not easy and should not be celebrated, but it is a vote out of necessity. Today’s vote had to be made to protect the system for current and future retirees, to protect the state’s taxpayers, and most importantly, to protect the state’s economy for future Rhode Island generations. This was not a vote I enjoyed making, but it was necessary in improve Rhode Island’s fiscal health.”

Under the bill, state employees’ overall contribution to their retirement will remain at 8.75 percent of their salary and teachers’ contributions will be reduced to that amount from the current 9.5 percent. Their contributions will be split between the two parts of the new hybrid retirement plan; 3.75 percent of their pay will go towards a defined-benefit pension, and 5 percent will go toward their individual defined contribution retirement account. The state will contribute an additional 1 percent of each employee’s salary to the defined contribution plan. The legislation also reduces the length of time employees must work before they are vested in the pension from 10 years to five. The treasurer’s office has estimated that, under the new hybrid plan, retirees could receive more than 70 percent of their final average salary when they retire, a level that is similar to the retiree benefit under the existing system.

In addition to the reforms included in the legislation, the act amortizes the remaining unfunded liability over a 25-year period. In other words, instead of paying the remaining liability off over the 19 years as is currently scheduled, the act extends that to 25 years.

While the reforms in the act directly impact the plans included in the state-administered Municipal Employees Retirement System (MERS), the reforms do not extend to locally administered municipal pension plans. While many of these plans are also underfunded, their independence and the fact that they are affected by various separate collective bargaining agreements made it difficult to include in these reforms. However, the legislation sets the stage for future reforms to these local plans, requiring these plans to complete actuarial reviews by April 1, 2012. Plans that have funded ratios less than 60 percent would be considered in critical condition and would be required to develop and submit funding improvement plans to a new commission made up of state and local leaders to review and make recommendations.

Information about the bill, as well as video and presentations from the legislative hearings, are available on a special website dedicated to the Assembly’s retirement security effort, A link to the site is also available on the home page of the General Assembly’s Web site,