Government pensions get a makeover
Hybrid saves $275 million in first year
Rhode Island is the most recent state to adopt a hybrid plan to solve its funding issues. In a special session late in 2011, the state legislature approved reform of the pension plan, including a new hybrid structure that touched most of the public sector workforce — teachers, state employees and the state-administered Municipal Employees’ Retirement System (MERS).
As a result of the changes, the state reduced its unfunded liability of nearly $7.3 billion to $4.3 billion and its fiscal year 2013 state and local contribution from $689 million to $414 million, saving nearly $275 million in the first year. It will take effect on July 1, 2012.
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 toward a DB pension, and 5 percent will go toward their individual DC retirement account. The state will contribute an additional 1 percent of each employee’s salary to the DC 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 hybrid proposal, the act 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 be affected. The act ensures that retirees do not lose any COLAs granted prior to July 1, 2012, but suspends future annual COLAs until the Employees’ Retirement System of Rhode Island, the Judicial Retirement Benefits Trust and the State Police Retirement Benefits Trust are funded at greater than 80 percent.
Although the reforms in the act directly affect the plans included in the state-administered MERS, the reforms do not cover locally administered municipal pension plans. However, local officials must review their plans and develop a funding improvement plan if funding is less than 60 percent.
Behind the reform effort is Treasurer Gina Raimondo, whose proposal was ultimately adopted overwhelmingly by the Democrat-dominated state legislature. “The treasurer’s goal was to design a solution that would provide retirement security for plan participants both from the perspective of an appropriate benefit level to ensure a comfortable retirement and at a funding cost to the state that would ensure that future funding levelers were achievable,” Dara Chadwick, Raimondo’s spokesperson, said in an email.
Not surprisingly, the leader of the state’s largest public sector union deplored the changes to the plan. “The burden of the proposed plan is borne on the backs of the working class,” J. Michael Downey, president of Council 94 of the American Federation of State, County and Municipal Workers, said in a news release. “True shared sacrifice would be asking Rhode Island’s richest citizens, those that benefited the most from Bush-era tax cuts, to pay their fair share of the unfunded pension liability.”