An ongoing pension reform effort is likely to result in reduced benefits for 51,000 public workers and retirees. Officials are pondering lowering retirement payments, replacing part of the guaranteed pensions with 401(k)-type accounts, and sharply reducing generous cost-of-living increases enjoyed by retirees. The Rhode Island legislature is expected to consider changes next month during a special session.
Until recently, most states, including Virginia and Maryland, have attacked their pension problems by cutting benefits for new hires while preserving retirement packages for current employees. Others have rolled over their pension debt by taking out loans or papering them over with what some have called unrealistic projections about investment earning and life expectancy.
But with states facing, by one estimate, a combined $3 trillion in unfunded pension liabilities and the economic downturn continuing to dampen government tax revenue, states are beginning to make changes once considered unthinkable — such as cutting pensions for people in retirement.
“If it isn’t illegal, it certainly wouldn’t sit right morally,” said J. Michael Downey, a plumber and president of Rhode Island Council 94 of the American Federation of State, County and Municipal Employees, which represents 8,000 state and local government workers. “They are going to fix this for Rhode Island on the backs of people who have worked their entire lives.”
Last year, South Dakota, Colorado and Minnesota moved to reduce cost-of-living increases for retirees in their public pension systems. Similarly, New Jersey and Maine this year cut cost-of-living increases in their plans. All of those changes have been met with court challenges.
“We want retirees to be financially secure,” said Keith Brainard, research director with the National Association of State Retirement Administrators. “Obviously, if the pension fund becomes insolvent, its ability to continue to pay benefits is imperiled.”
Ballooning pension costs
Pension systems generally finance themselves in three ways: with annual payments from the government; contributions from public employees; and investing in stocks, bonds and other markets.
In Rhode Island, as those investments have failed to live up to predictions, the yearly burden being borne by state and local governments is growing and is beginning to crowd out public services in ways that experts say could soon take hold in other parts of the country.
The cost of funding pensions is one of the fastest-growing items in the Rhode Island budget. The tax dollars going to state pensions more than doubled between 2003 and last year, and the amount is projected to again double to about $615 million by 2013, according to a state report.
The increase in government contributions to the pension system between 2012 and 2013 would be enough to fund a dozen state agencies, including the Department of Environmental Management, the Department of Health and the public defender’s office, the treasurer’s office has said.
As pension costs have increased, Rhode Island has been forced to cut aid — mostly public school funding — to local governments by 8 percent in recent years, and funding for higher education has declined by 5 percent.
The burden is also heavy for participants in Rhode Island’s pension system. Teachers contribute nearly 10 percent of their salaries to pensions, and other employees contribute slightly less. But the generous benefits promised by the government and the huge unfunded liability mean that most of that money goes to keeping up with payments to current retirees. That leaves little for future retirees and endangers the system overall.
Still, union leaders say the cuts being contemplated go too far. They note that generous retirement packages were meant to compensate the relatively low salaries of public workers. They also say the state could simply stretch out the calculation of its pension debt, or stick to more optimistic assumptions for pension investment earnings, to soften the blow on workers and retirees.
Unions also note that the state has raised minimum retirement ages and curbed future benefits.
“The type of things they are talking about now is radical change,” said Robert A. Walsh Jr., executive director of the National Education Association Rhode Island. “If you cut too much, you have taken away the point of a pension.”
Cutting to save
But Raimondo, the state treasurer, who was a Rhodes Scholar, former venture capitalist and daughter of a factory worker, says she is determined to remake the retirement system in a sustainable way. Since taking office this year, she has lowered the expected investment returns for the fund, and she increased the amount of time that retirees were projected to live to give the state a better estimate of how long pension payments need to be made.
Both changes reflected reality, she said, even as they increased the funding gap faced by the state pensions. Now the best way to save pensions, she and other state officials say, is to cut them.
“If we don’t reform pensions, mayors in cities and towns across Rhode Island and across the country might as well start turning in the keys,” said Cranston Mayor Allan W. Fung.
In Cranston, pension costs are pushing the city toward insolvency. A locally managed pension plan for firefighters and police is underfunded by $245 million — nearly equivalent to the city’s entire annual budget. Meanwhile, coming increases to pay for local workers enrolled in state-run pension plans would cost an additional $14 million next July — the combined cost of core services such as trash removal, parks and recreation, and libraries, Fung said.
The mayor says he has ruled out tax increases or service cuts of that magnitude, leaving reducing pensions as the only option.
Making changes that renege on pension promises could be legally perilous, Rhode Island officials said, although they are heartened that judges have upheld the benefit cuts implemented in Colorado and Minnesota. And they think the growing intensity of the crisis might make unions more willing to compromise.
Last month, Central Falls, R.I, a city of 19,000, filed for bankruptcy, in part because its pension costs were unsustainable. The move has led to the retirement checks of 141 former police officers and firefighters being slashed by more than half. At the same time, the retirees — who are enrolled in a locally run pension plan — have been hit with hefty bills for their health-care coverage.
“For years, people have been saying that pensions are underfunded and benefits may have to be cut,” said Raimondo, who is leading the pension reform effort. “But it is no longer a theoretical possibility. It is happening. Now everyone realizes this is really a crisis.”
In Rhode Island, the crisis is more urgent than in most of the United States. The state’s pension system is only 48 percent funded. Meanwhile, Rhode Island has fewer employees paying into the system than retirees collecting retirement benefits.
And, although the average state pension is about $25,900 a year and retired teachers get an average of $41,700 a year, some former workers get more. In some cases, retirees earn close to or more than current workers in similar jobs. Some started collecting after 28 years on the job, regardless of age, even though the retirement age is 62.
In Cranston, the average pension collected by 182 retired firefighters in a locally administered fund is $56,500 — $200 a year more than the average pay earned by the city’s 123 active firefighters, according to Fung’s office. The 172 retired police officers earn an average of $50,400 a year in pensions, $5,000 a year less than the $55,100 average salary earned by the city’s 109 active patrol officers.
“If we don’t put together a workable reform, you are going to see more cities and towns headed toward bankruptcy,” Fung said.