Successful Pension Reform in Rhode Island
In ALEC’s latest publication, Keeping The Promise: State Solutions For Government Pension Reform, former State Senator Dan Liljenquist details how the state of Rhode Island successfully addressed its unfunded pension liabilities in 2011. Prior to the historic 2011 reforms, Rhode Island Representative Jon Brien, Jonathan Williams of ALEC, and the Rhode Island Center for Freedom and Prosperity discussed the state’s $7 billion in unfunded liabilities and the need for pension reform.
With the leadership of Rhode Island General Treasurer Gina Raimondo, the passage of the Rhode Island Retirement Security Act of 2011 aimed to reduce the state’s liabilities and bring the system into solvency. Much of the unfunded liabilities accumulated by the state were the result of years of lavish pension benefits for government employees, combined with overly optimistic estimates of investment returns, which never came to fruition. At its core, however, the primary problem was the state’s use of a defined-benefit pension plan for all government employees, in which retirement benefits are fixed regardless of the market rate of return. This differs from a defined-contribution plan where the employee and the employer both contribute funds to a retirement account, which is invested in the market similar to many 401(k) plans found in the private sector.
In a move currently being considered by many states seeking to control unfunded liabilities, Rhode Island’s 2011 legislation created what is known as a “hybrid plan” for all government employees, except for state police, public safety employees, and judges. All public school teachers and state and municipal employees were moved to the hybrid plan. A hybrid plan is a combines various aspects of a defined-benefit and a defined-contribution plan. The idea behind this reform was to shift some risk and responsibility from the state to the employee.
The act also made several changes to retirees’ cost-of-living-adjustments (COLAs). COLAs were suspended until the retirement system is 80 percent funded, but the act allows for an intermittent COLA every five years. In addition, only the first $25,000 of a pension will be eligible for a COLA, and COLA payments will be limited to no more than 4 percent, depending on investment returns.
Rhode Island pension reform could have gone further, as Michigan did in 1997, by moving all state and local government employees to defined contribution plans—a move that reduced unfunded liabilities up to $4.3 billion. However, Rhode Island’s reforms were certainly a step in the right direction towards more robust, pro-growth pension reform. It is expected that these reforms will allow the Ocean State to reduce their unfunded liabilities by $3 billion and prevent further increases in liabilities. To read more about Rhode Island’s pension reform, please see ALEC’s latest study: Keeping The Promise: State Solutions For Government Pension Reform.