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.